Aly Energy Services, Inc. - Quarter Report: 2008 September (Form 10-Q)

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PREFERRED VOICE, INC.

CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2008 AND MARCH 31, 2008

		September 30,				March 31,
		2008				2008
		(unaudited)				(audited)
Assets
Current assets:
Cash and cash equivalents		$	556,297			$	283,220
Accounts receivable, net of allowance for doubtful
accounts of $0 and 0, respectively			407,057				638,210
Inventory			86,299				84,567
Current portion deferred loan cost			8,428				8,428
Total current assets		$	1,058,081			$	1,014,425
Property and equipment:
Computer equipment		$	588,751			$	572,392
Furniture and fixtures			22,317				22,317
Office equipment			19,271				19,271
		$	630,339			$	613,980
Less accumulated depreciation			452,766				421,190
Net property and equipment		$	177,573			$	192,790
Other assets:
Capitalized software development costs, net of accumulated
amortization of $1,240,459 and $1,228,026, respectively		$	17,470			$	29,902
Deposits			34,485				34,485
Noncurrent portion deferred loan cost, net of accumulated
amortization of $16,856 and $12,642, respectively			-				4,214
Trademarks and patents, net of accumulated
amortization of $35,912 and $31,926, respectively			68,232				68,763
Total other assets		$	120,187			$	137,364
Total assets		$	1,355,841			$	1,344,579

 

See independent accountants’ review report.

The accompanying notes are an integral part of these financial statements.

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		September 30,				March 31,
		2008				2008
		(unaudited)				(audited)
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable		$	283,595			$	245,553
Accrued vacation			4,808				7,859
Accrued payroll and payroll taxes			11,833				19,735
Accrued interest			84,825				35,100
Deferred revenue			14,667				43,417
Current portion debentures payable - net of discounts			2,051,008				975,000
Total current liabilities		$	2,450,736			$	1,326,664
Long-term liabilities:
Debentures payable - net of discounts		$	-			$	1,029,012
Commitments and contingencies (Note E)
Stockholders' equity (deficit):
Common stock, $.001 par value;
100,000,000 shares authorized; 6,130,184
and 6,130,184 shares issued, respectively		$	6,130			$	6,130
Additional paid-in capital			20,403,278				20,403,278
Accumulated deficit			(21,502,797	)			(21,418,999	)
Treasury stock - 4,500 shares at cost			(1,506	)			(1,506	)
Total stockholders' equity (deficit)		$	(1,094,895	)		$	(1,011,097	)
Total liabilities and stockholders' equity (deficit)		$	1,355,841			$	1,344,579

 

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PREFERRED VOICE, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

 

		Three months				Six months				Three months				Six months
		ended				ended				ended				ended
		September 30,				September 30,				September 30,				September 30,
		2008				2008				2007				2007
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Net sales		$	953,499			$	1,913,672			$	861,214			$	1,683,264
Cost of sales			517,591				1,025,356				474,554				973,654
Gross profit		$	435,908			$	888,316			$	386,660			$	709,610
General and administrative expenses		$	473,564			$	860,347			$	499,358			$	951,509
(Loss) income from operations		$	(37,656	)		$	27,969			$	(112,698	)		$	(241,899	)
Other income (expense):
Interest expense		$	(55,967	)		$	(111,767	)		$	(91,522	)		$	(182,857	)
Gain on sale of assets			-				-				1,305				1,739
Total other income (expense)		$	(55,967	)		$	(111,767	)		$	(90,217	)		$	(181,118	)
Loss from operations before income taxes		$	(93,623	)		$	(83,798	)		$	(202,915	)		$	(423,017	)
Provision for income taxes			-				-				-				-
Net loss		$	(93,623	)		$	(83,798	)		$	(202,915	)		$	(423,017	)
Per share amounts:
Loss from operations		$	(0.015	)		$	(0.014	)		$	(0.03	)		$	(0.07	)
Net loss		$	(0.015	)		$	(0.014	)		$	(0.03	)		$	(0.07	)

 

 

See independent accountants’ review report

The accompanying notes are an integral part of these financial statements.

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PREFERRED VOICE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

 

		2008				2007
		(unaudited)				(unaudited)
Cash flows from operating activities:
Cash received from customers		$	2,144,825			$	1,589,159
Cash paid to suppliers and employees			(1,836,887	)			(1,540,105	)
Interest paid			(15,046	)			(70,474	)
Net cash provided (used) by operating activities		$	292,892			$	(21,420	)
Cash flows from investing activities:
Capital expenditures		$	(19,815	)		$	(43,739	)
Proceeds from sale of assets			-				26,481
Net cash used by investing activities		$	(19,815	)		$	(17,258	)
Cash flows from financing activities:
		$	-			$	-
Net cash provided (used) by financing activities		$	-			$	-
Net increase (decrease) in cash and cash equivalents		$	273,077			$	(38,678	)
Cash and cash equivalents:
Beginning of period			283,220				446,055
End of period		$	556,297			$	407,377

 

See independent accountants’ review report

The accompanying notes are an integral part of these financial statements.

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		2008				2007
		(unaudited)				(unaudited)
Reconciliation of net loss to net cash provided (used)
by operating activities:
Net loss		$	(83,798	)		$	(423,017	)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization		$	52,209			$	116,674
Amortization of debenture discount			46,996				118,233
Gain on sale of assets			-				(1,739	)
Compensation recognized from issuance of stock options			-				177,108
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			231,153				(94,105	)
(Increase) decrease in inventory			(1,732	)			11,230
Increase in accounts payable			38,042				96,680
Decrease in deferred revenue			(28,750	)			-
Increase (decrease) in accrued expenses			38,772				(22,484	)
Total adjustments		$	376,690			$	401,597
Net cash provided (used) by operating activities		$	292,892			$	(21,420	)

 

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PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note A - General organization:

Preferred Voice, Inc. (the "Company") is a Delaware corporation incorporated in 1992.  On February 25, 1997, the Company’s stockholders approved changing the name of the Company to better reflect the nature of the Company’s business. The Company commenced business on May 13, 1994, and was in the development stage until August 1, 1995.  The Company provides voice recognition services to the telecommunications industry throughout the United States and maintains its principal offices in Dallas, Texas.

Note B - Summary of significant accounting policies:

Basis of presentation

The accounting policies followed by Preferred Voice, Inc. are set forth in the Company’s financial statements that are a part of its March 31, 2008, Form 10KSB and should be read in conjunction with the financial statements for the three and six months ended September 30, 2008 and 2007, contained herein.

The financial information included herein as of September 30, 2008, and for the three and six-month periods ended September 30, 2008 and 2007, has been presented without an audit, pursuant to accounting principles for the interim financial information generally accepted in the United States of America and the rules of the Securities and Exchange Commission.  The Company believes that the disclosures are adequate to make the information presented not misleading.  The information presented reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the period.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include all amounts due from banks with original maturities of three months or less.

Inventory

Inventory, consists of ringback platforms and their related components was $53,359 and digital signage and their related components was $32,940, is stated at the lower of cost or market.  Cost is determined using the first-in, first-out method.

Concentration of business, market and credit risks

In the normal course of business, the Company extends unsecured credit to its customers with payment terms generally 30 days.  Because of the credit risk involved, management provides an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete nonperformance by the Company’s customers, the maximum exposure to the Company is the outstanding accounts receivable balance at the date of nonperformance.

Receivables and credit policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.   Unpaid accounts receivable with invoice dates over 30 days old bear no interest.

Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days are considered delinquent.

 

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PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note B - Summary of significant accounting policies (continued):

Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice.

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of amounts that will not be collected.  Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on an assessment of current creditworthiness, estimates that portion, if any, of the balance that will not be collected.  Accounts receivable past 90 days due are $53,878 and $64,707 as of September 30, 2008 and March 31, 2008, respectively.

Capitalized software development

The Company has adopted the provisions of FASB No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, to account for its internally developed software costs since the Company is dependent on the software to provide the voice recognition services.  Under the provisions of FASB No. 86, costs incurred prior to the product’s technological feasibility are expensed as incurred.  The capitalization of software development costs begins when a product’s technological feasibility has been established and ends when the product is available for use and released to customers.  Capitalized software development costs include direct costs incurred subsequent to establishment of technological feasibility for significant product enhancements.  Amortization is computed on an individual product basis using the straight-line method over the estimated economic life of the product, generally three years.

Property and equipment

The cost of property and equipment is depreciated over the estimated useful lives of the related assets.  Depreciation is computed on the straight-line method for financial reporting purposes and the double declining method for income tax purposes.

Maintenance and repairs are charged to operations when incurred.  Betterments and renewals are capitalized.

The useful lives of property and equipment for purposes of computing depreciation are as follows:

Computer equipment	5 years
Furniture and fixtures	5 years
Office equipment	5 years

Fair value of financial instruments

The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  Financial instruments included in the Company’s financial statements include cash and cash equivalents, trade accounts receivable, other receivables, other assets, notes payable and long-term debt.  Unless otherwise disclosed in the notes to the financial statements, the carrying value of financial instruments is considered to approximate fair value due to the short maturity and characteristics of those instruments.  The carrying value of long-term debt approximates fair value as terms approximate those currently available for similar debt instruments.

Revenue recognition

For recognizing revenue, the Company applies the provisions of SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition which was issued in December 2003.  In most cases, the services being performed do not require significant production, modification or customization of the Company’s software or services; therefore, revenues are recognized when evidence of a completed transaction exists, generally when services have been rendered.  In situations where the Company receives an initial payment for future services, the Company defers recognition of revenue, and recognizes the revenue over the life of the respective contract.  SAB No. 104 codified, revised and rescinded certain sections of Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, in order to make this interpretive guidance consistent with current authoritative accounting guidance and SEC rules and regulations.

 

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PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note B - Summary of significant accounting policies (continued):

Loss per share

The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.  SFAS No. 128 reporting requirements replace primary and fully-diluted earnings per share (EPS) with basic and diluted EPS.  Basic EPS is calculated by dividing net income or loss (available to common stockholders) by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Since the Company incurred a loss from operations for the periods ended September 30, 2008 and 2007, no computation of diluted EPS has been performed.

Loss per share for the three and six months ended September 30, 2008 and 2007, respectively is based on the weighted average number of shares outstanding of 6,130,184 for both periods.

Income taxes

Income taxes are accounted for using the liability method under the provisions of SFAS 109, Accounting for Income Taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates that will apply in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Trademarks and patents

Trademarks and patents are recorded at cost.  Amortization is computed on the straight-line method over the identifiable lives of the trademarks and patents.  The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, effective for periods beginning January 1, 2002, and thereafter.  SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.  Specifically, the statement addresses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition, as well as how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.  The statement requires intangible assets to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and that a loss shall be recognized if the carrying amount of an intangible exceeds its fair value.

Impairment of long-lived assets and long-lived assets to be disposed of

The Company adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for periods beginning January 1, 2002 and thereafter.  SFAS 144 replaces SFAS 121, Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed Of, and, among other matters, addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  SFAS 144 retains the basic provisions of SFAS 121, but broadens its scope and establishes a single model for long-lived assets to be disposed of by sale.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from these estimates.

 

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PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note B - Summary of significant accounting policies (continued):

Reporting comprehensive income and operating segments

The Company has adopted the provisions of SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.  SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources. SFAS No. 131 establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements has had no impact on the Company’s financial position, results of operations, cash flow or related disclosures.

Stock-based compensation

Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.  This statement now requires the Company to recognize compensation costs related to stock-based payment transactions (i.e. granting of stock options and warrants to employees) in the financial statements.  With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued.  In addition, liability awards will be remeasured each reporting period.  Compensation cost will be recognized over the period that an employee provides services in exchange for the award.   Compensation expense of $-0- and $177,108  was recognized for the six months ended September 30, 2008 and 2007, respectively, and $-0- and $89,658  for the three months ended September 30, 2008 and 2007, respectively.

Note C - Convertible debt and warrants:

On March 31, 2005, the Company closed a Securities Purchase Agreement and issued $975,000 in principal amount of 6% Convertible Debentures due March 31, 2008, subsequently extended to December 31, 2008,  (the "Debentures"), to a group of institutional and high net worth investors.  The Debentures pay an interest rate of 6% on an annual basis and are convertible into 1,950,000 shares of the Company’s common stock at a price of $0.50 per share at which time the authorized shares increases to 65,000,000 shares.  The Company recorded the intrinsic value of the beneficial conversion of $257,500 as interest expense as the shareholders approved an increase in its authorized shares to 100,000,000 shares on April 27, 2006.  The investors also received warrants to purchase an additional 975,000 shares of common stock with an exercise price of $0.60 per share.

The Company has allocated the proceeds from the issuance of the Debentures to the warrants and the Debentures based on their relative fair market values at the date of issuance.  The value assigned to the warrants of $427,416 has been recorded as an increase in additional paid in-capital.  The assignment of a value to the warrants results in a loan discount being recorded for the same amount.  The discount is being amortized over the original three-year term of the Debentures as additional interest expense.  Amortization was $-0- and $71,236 for the six months ended September 30, 2008 and 2007 respectively and $-0- and $35,618 for three months ended September 30, 2008 and 2007 respectively.

On September 29, 2006, the Company closed a Securities Purchase Agreement and issued $1,170,000 in principal amount of 6% Convertible Debentures due September 29, 2009 (the "Debentures"), to a group of institutional and high net worth investors.  The Debentures pay an interest rate of 6% on an annual basis and are convertible into 3,342,857 shares of the Company’s common stock at a price of $0.35 per share.   The investors also received warrants to purchase an additional 1,671,429 shares of common stock with an exercise price of $0.50 per share.

The Company has allocated the proceeds from the issuance of the Debentures to the warrants and the Debentures based on their relative fair market values at the date of issuance.  The value assigned to the warrants of $281,977 has been recorded as an increase in additional paid-in capital.  The assignment of a value to the warrants results in a loan discount being recorded for the same amount.  The discount is being amortized over the original three-year term of the Debentures as additional interest expense.    Amortization was $46,996 for the six months ended September 30, 2008 and 2007 and $23,498 for three months ended September 30, 2008 and 2007.

 

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PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note C - Convertible debt and warrants (continued):

 167,143 warrants were issued in exchange for consulting services provided for in the issuance of the Securities Purchase Agreement.  These warrants are exercisable at price of $0.50 per share and were valued using the relative fair market value at the date of issuance.  The value assigned to the warrants of $25,285 has been recorded as deferred loan cost and is being amortized over the original three-year term of the debentures as financing cost.  Amortization was $4,214 for the six months ended September 30, 2008 and 2007 and $2,107 for the three months ended September 30, 2008 and 2007.

Note D - Common stock:

On November 13, 2006, the Board of Directors approved a 1 for 5 reverse stock split of its common stock.  All references in the accompanying financial statements to the number of shares of common stock and loss per share have been retroactively restated to reflect the reverse stock split.

Stock purchase warrants

At September 30, 2008, the Company had outstanding warrants to purchase 4,591,072 shares of the Company's common stock at prices which ranged from $0.50 per share to $0.85 per share.  The warrants are exercisable at any time and expire through September 29, 2011.  At September 30, 2008, 4,591,072 shares of common stock were reserved for that purpose.

Common stock reserved

At September 30, 2008, shares of common stock were reserved for the following purposes:

Exercise of stock warrants and debt conversion			9,883,929
Exercise of future grants of stock options and stock
appreciation rights under the 2000 stock option plan			869,133
			10,753,062

Note E - Commitments:

The Company leases its office facilities and office equipment under operating leases expiring through June 30, 2009.  Following is a schedule of future minimum lease payments required under the above operating leases as of March 31, 2008:

 

Year ending
March 31,		Amount
2009		$	55,505
2010			13,876
2011			-
2012			-
2013			-
		$	69,381

 

Total rent expense charged to operations was $31,694 and $30,451 for the six months ended September 30, 2008 and 2007, respectively, and $15,273 and $15,230 for the three months ended September 30, 2008 and 2007.

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Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth herein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations" and those set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Form 10-KSB for the fiscal year ended March 31, 2008.  Notwithstanding the foregoing, the Company is not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the Exchange Act as long as the Company’s stock is classified as a penny stock within the meaning of Rule 3a51-1 of the Exchange Act.  A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.

Overview

We began operations in May 1994 as a traditional 1+ long-distance reseller.  Recognizing the declines in telecommunications service prices and the decreasing margins being experienced in long distance sales, we decided to sell our long distance customer base and assets in early 1997.  Originally we focused on the development, testing, and deployment of voice activated telecommunications services that would allow any consumer the ability to “dial” their calls using their voice.  Even though we believe voice activated products have viability in the telecommunications arena, we have concentrated our last two years of development efforts on the growing trend in mobile entertainment.

We first contracted with a leading content provider to distribute their library of downloadable wireless games, picture messages, graphics and ring-tones.  Our first content project was launched on June 18, 2004 with a full turnkey solution for the carrier that includes secure customer login from the carrier website, viewing of content, download of content, and creation of a billing record for the carriers billing system.  This initial introduction to mobile entertainment led us to research the viability of additional personalized entertainment services that could be delivered through our network. On October 22, 2004 we announced the first commercial launch of a ringback service in the United States with the launch of our Rockin’ Ringback service.  Our personalized ringback service provides a network-based personalized service that enables users to choose an audio file that callers will listen to while the phone is ringing.  We believe that since we already have a relationship with the carrier and are integrated with these carriers customer service departments and billing departments that we have an opportunity to introduce new products with minimal integration effort.  We will continue to research and either develop or acquire additional services that can be deployed through our platform.  As of November 3, 2008 we had five carrier customers providing ringback service through our My Phone Services Suite platform with a possible 4.5 million addressable customer base.

Our system structure is a robust data base system which will allow for scalability and the addition of new services to the platform in shorter development cycles than were possible under our previous structure.  On September 15, 2004 we announced the release of “My Phone Services Suite”, which incorporates our network address book, network voice dialing, Push2Connect, and Rockin Ringback services into one user-centric service that allows the subscriber to personalize the look and feel of their communications service especially for their personality. Revenue from these new products is expected to be slow with no guarantees of market and/or customer acceptance. We also believe that we will continue to see increased competition that along with many other factors may have an impact on the company and its products.

The implementation of our business plan is subject to risks inherent in the establishment and deployment of technology.  In order for us to succeed, we must:

	●	secure adequate financial and human resources to meet our requirements, including adequate numbers of technical support staff to provide service for our phone company customers;
	●	establish and maintain relationships with phone companies;
	●	make sure the GAP system works with the telephone switches of all of the major manufacturers;
	●	achieve user acceptance for our services;
	●	generate reasonable margins on our services;
	●	continue to deploy and install GAP systems on a timely and acceptable schedule;
	●	respond to competitive market developments;
	●	mitigate risk associated with our technology by obtaining patents and copyrights and other protections of our intellectual property; and
	●	continually update and add to our product offerings to meet the needs of consumers.

 

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Failure to achieve these objectives could adversely affect our business, operating results and financial condition. Increased competition from other providers of similar services can and have impacted our business.

Results of Operations

We recorded a net loss of $83,798 or $.014 per share, for the six-month period ended September 30, 2008, compared to a net loss of $423,017 or $0.07 per share, for the six-month period ended September 30, 2007. For the three-month period ended September 30, 2008, we recorded a net loss of $93,623, or $.015 per share compared to a net loss of $202,915 or $.03 per share for the three-month period ended September 30, 2007.

Total Sales

 

Total revenue for the six-month period ended September 30, 2008, was $1,913,672 compared to $1,683,264 for the six-month period ended September 30, 2007. Total revenue for the three-month period ended September 30, 2008, was $953,499 compared to $861,214 for the three-month period ended September 30, 2007. Revenues in both periods consisted of revenue sharing receipts from our customer phone companies and billing our direct end-users for individual services.

We anticipate that revenues from the My Phone Services Suite to continue to build gradually as new customers to the service integrate and market the product to their subscriber base.

Cost of Sales

Cost of sales for the six-month period ended September 30, 2008 was $1,025,356 compared to $973,654 for the six-month period ended September 30, 2007. Cost of sales for the three-month period ended September 30, 2008 was $517,591 compared to $474,554 for the three-month period ended September 30, 2007. Cost of sales consisted of content licensing fees, costs for equipment sold to customers, network infrastructure such as collocations, connectivity, system access and long distance to end-users during both periods.

Selling, General and Administrative

 

Selling, general and administrative expenses for the six-month period ended September 30, 2008 were $860,347 compared to $951,509 for the six-month period ended September 30, 2007. Selling, general and administrative expenses for the three-month period ended September 30, 2008 were $473,564 compared to $499,358 for the three-month period ended September 30, 2007.  We expect that selling, general and administrative expenses will remain steady through fiscal year 2009, such expenses to include costs related to the number of employees, office space requirements and general overhead.

Core Technology Enhancements Software Applications and Hardware

The capitalization of software development costs begins when a product’s technological feasibility has been established and ends when the product is available for general release to customers.  Capitalized software development costs include direct costs incurred subsequent to establishment of technological feasibility for significant product enhancements. During the periods ended September 30, 2008 and 2007, software development costs capitalized were $3,456 and $4,319 respectively.  The amortization of capitalized software development costs for the periods ended September 30, 2008 and 2007 was $16,419 and $56,521 respectively.

Other Income and Expense

During the periods ended September 30, 2008 and 2007, the Company made a sale of excess equipment that generated one-time net revenue of $-0- and $1,739 respectively.

 

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Income Taxes

As of September 30, 2008, we had cumulative federal net operating losses of approximately $20.8 million, which can be used to offset future income subject to federal income tax through the fiscal year 2028.  Net operating loss limitations may be imposed if changes in stock ownership of the company create a change of control as provided in Section 382 of the Internal Revenue Code of 1986.

Liquidity and Capital Resources

 

Our cash and cash equivalents at September 30, 2008 were approximately $556,297, an increase of $273,077 from $283,220 at March 31, 2008.  We have relied primarily on the issuance of stock, convertible debentures and warrants to fund our operations since January of 1997 when we sold our long-distance resale operation.

On March 31, 2005, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we completed the sale of 97.5 units (“Units”) with each Unit consisting of a 3-year, 6% Convertible Debenture in the principal amount of $10,000.00, and 50,000 5-year warrants to purchase a share of Common Stock, $.001 par value per share, of the Company at an exercise price of $.12 for an aggregate of $975,000.

On September 29, 2006, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we completed the sale of 117 units (“Units”) with each Unit consisting of a 3-year, 6% Convertible Debenture in the principal amount of $10,000.00, and 14,286 5-year warrants to purchase a share of Common Stock, $.001 par value per share, of the Company at an exercise price of $.10 for an aggregate of $1,170,000.

Due to uncertainties regarding a number of new customer contracts that are in the Company's sales pipeline, it is difficult for management to project the Company's revenue performance, operating profits or loss, or cash requirements beyond the next twelve months.  Even though the Company has been able to secure additional financing to provide current working capital, there is no assurance that the Company will be able to generate the required revenues to sustain its current working capital requirements or to raise additional debt or equity capital that may be required to meet its objectives in the future.  The Company's challenging financial circumstances may make the terms, conditions, and cost of any available capital relatively unfavorable. If additional debt or equity capital is not readily available, the Company will be forced to further scale back its operations, including its efforts to complete new sales. The Company's short term needs for capital may force it to consider and potentially pursue other strategic options sooner than it might otherwise have desired. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability of and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Future Obligations

We project our working capital needs to be approximately $1,600,000 over the next twelve months for corporate overhead and equipment purchases to continue to deploy our services to carrier customers.  Management believes that current cash and cash equivalents and cash that may be generated from operations will be sufficient to meet these anticipated capital requirements and to finance marketing initiatives for the next twelve months.  Such projections have been based on revenue trends from current customers and customers which are currently in trial utilizing the revenue rates that we have experienced over the past six months with our currently installed customers and projections from trial carrier models and projected cash requirements to support installation, sales and marketing, and general overhead.  We may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduce our current overhead.  However, any projections of future cash needs and cash flows are subject to substantial uncertainty.  If further funding is required, and we are unable to secure such funding, we would be forced to rely on existing cash and cash from operations which would greatly impact our ability to complete our product development and product rollout until such time as necessary funds are secured.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The disclosure is not applicable because we are a smaller reporting company.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.  The Chief Executive Officer, who also acts as our Chief Financial Officer, of the Company has evaluated 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 quarter covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the Chief Executive Officer of the Company has concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.

Due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation and currently, does not consider the benefits to merit the cost of these resources.

Changes in internal controls.   There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended September 30, 2008 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting.

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.

In February, 2008, we were sued by Ring Plus, Inc. in the United States District Court for the Central District of California alleging infringement of its U.S. Patent No. 7,006,608 (the “608 Patent”) which pertains to ringback tone replacement methods and algorithms. Ring Plus, Inc. is seeking declaratory judgment that we have violated the 608 Patent, preliminary and permanent injunctions, an order that we destroy all infringing items, and money damages in a sum according to proof at trial.  We do not believe that we infringe the 608 Patent and we believe we have meritorious defenses to the action.

Item 2.	Unregistered Sales of Securities and Use of Proceeds
None.
Item 3.	Defaults upon Senior Securities.
None.
Item 4.	Submission of Matters to a Vote of Security Holders.
None
Item 5.	Other Information.
None
Item 6.	Exhibits
Exhibit
Number	Exhibit Description
31.1	Certification of Chief Executive Officer and Chief Financial Offier
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements 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.

	PREFERRED VOICE, INC.
November 11, 2008	/s/ Mary G. Merritt
Date	Mary G. Merritt
	Chairman and Chief Executive Officer
	(Principal Executive Officer)