Aly Energy Services, Inc. - Quarter Report: 2009 September (Form 10-Q)

t66629_10q.htm

United States

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

Period Ended September 30, 2009.

o 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 33-92894

PREFERRED VOICE, INC.


Delaware		75-2440201
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

6500 Greenville Avenue
Suite 570
Dallas, TX		75206
(Address of Principal Executive		(Zip Code)
Offices)

	(214) 265-9580
(Registrant’s Telephone Number, including area code.)

	Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last report.)

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 the filing requirements for at least the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	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 o No x

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Common Stock, $ 0.001 Par Value – 6,130,184 shares as of November 9, 2009.

INDEX

Preferred Voice, Inc.


Part I.	Financial Information	1

Item 1.	Financial Statements	1

	Balance Sheets - September 30, 2009 and March 31, 2009.

	Statements of Operations - Three Months Ended September 30, 2009 and 2008 and Six Months Ended September 30, 2009 and 2008.

	Statements of Cash Flows - Six Months Ended September 30, 2009 and 2008.

	Notes to Financial Statements - September 30, 2009.

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4T.	Controls and Procedures	15

Part II.	Other Information	15

Item 1.	Legal Proceedings	15

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Securities and Use of Proceeds	15

Item 3.	Defaults upon Senior Securities	15

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits and Reports on Form 8-K	16

Signatures		17

PREFERRED VOICE, INC.

CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2009 AND MARCH 31, 2009

	September 30,		March 31,
	2009		2009
	(unaudited)		(audited)

Assets

Current assets:
Cash and cash equivalents	$	295,733	$	466,187
Accounts receivable, net of allowance for doubtful
accounts of $0 and $10,269, respectively		602,362		654,111
Inventory		24,787		37,641
Prepaid expenses		-		7,500
Current portion deferred loan cost		-		4,214

Total current assets	$	922,882	$	1,169,653

Property and equipment:
Computer equipment	$	494,355	$	484,898
Furniture and fixtures		22,317		22,317
Office equipment		19,271		19,271

	$	535,943	$	526,486
Less accumulated depreciation		397,056		371,254

Net property and equipment	$	138,887	$	155,232

Other assets:
Capitalized software development costs, net of accumulated
amortization of $1,253,394 and $1,249,024, respectively	$	4,533	$	8,904
Deposits		4,485		29,485
Trademarks and patents, net of accumulated
amortization of $43,926 and $39,915, respectively		65,060		67,566

Total other assets	$	74,078	$	105,955

Total assets	$	1,135,847	$	1,430,840

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

	September 30,			March 31,
	2009			2009
	(unaudited)			(audited)

Liabilities and stockholders' equity (deficit)

Current liabilities:
Accounts payable	$	191,644		$	218,571
Accrued vacation		11,402			4,314
Accrued payroll and payroll taxes		93			5,044
Accrued interest		7,118			35,100
Accrued operating expenses		10,400			-
Deferred revenue		19,167			56,917
Current portion debentures payable - net of discounts		1,511,250			2,000,504

Total current liabilities	$	1,751,074		$	2,320,450

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		20,481,148			20,481,148
Accumulated deficit		(21,100,999	)		(21,375,382	)
Treasury stock - 4,500 shares at cost		(1,506	)		(1,506	)

Total stockholders' equity (deficit)	$	(615,227	)	$	(889,610	)

Total liabilities and stockholders' equity (deficit)	$	1,135,847		$	1,430,840

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

PREFERRED VOICE, INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

	Three months			Six months			Three months			Six months
	ended			ended			ended			ended
	September 30,			September 30,			September 30,			September 30,
	2009			2009			2008			2008
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net sales	$	1,058,673		$	2,156,797		$	953,499		$	1,913,672

Cost of sales		561,562			1,104,421			517,591			1,025,356

Gross profit	$	497,111		$	1,052,376		$	435,908		$	888,316

General and administrative expenses	$	347,182		$	677,054		$	473,564		$	860,347

Income (loss) from operations	$	149,929		$	375,322		$	(37,656	)	$	27,969

Other income (expense):
Interest expense	$	(48,166	)	$	(100,939	)	$	(55,967	)	$	(111,767	)

Total other income (expense)	$	(48,166	)	$	(100,939	)	$	(55,967	)	$	(111,767	)

Income (loss) from operations
before income taxes	$	101,763		$	274,383		$	(93,623	)	$	(83,798	)

Provision for income taxes		-			-			-			-

Net income (loss)	$	101,763		$	274,383		$	(93,623	)	$	(83,798	)

Per share amounts:
Income (loss) from operations	$	0.017		$	0.045		$	(0.015	)	$	(0.014	)

Net income (loss)	$	0.017		$	0.045		$	(0.015	)	$	(0.014	)

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

PREFERRED VOICE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

	2009			2008
	(unaudited)			(unaudited)

Cash flows from operating activities:
Cash received from customers	$	2,208,546		$	2,144,825
Cash paid to suppliers and employees		(1,749,863	)		(1,836,887	)
Interest paid		(81,925	)		(15,046	)

Net cash provided by operating activities	$	376,758		$	292,892

Cash flows from investing activities:
Capital expenditures	$	(10,962	)	$	(19,815	)

Net cash used by investing activities	$	(10,962	)	$	(19,815	)

Cash flows from financing activities:
Repayment of notes payable	$	(536,250	)	$	-

Net cash provided (used) by financing activities	$	(536,250	)	$	-

Net (decrease) increase in cash and cash equivalents	$	(170,454	)	$	273,077

Cash and cash equivalents:
Beginning of period		466,187			283,220

End of period	$	295,733		$	556,297

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

	2009			2008
	(unaudited)			(unaudited)

Reconciliation of net income (loss) to net cash provided (used)
by operating activities:

Net income (loss)	$	274,383		$	(83,798	)

Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization	$	38,398		$	52,209

Changes in operating assets and liabilities:
Decrease in accounts receivable		51,749			231,153
Decrease (increase) in inventory		12,854			(1,732	)
Decrease in prepaid expenses		7,500			-
Decrease in deposits		25,000			-
(Decrease) increase in accounts payable		(26,927	)		38,042
Decrease in deferred revenue		(37,750	)		(28,750	)
Increase in accrued expenses		31,551			85,768

Total adjustments	$	102,375		$	376,690

Net cash provided by operating activities	$	376,758		$	292,892

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

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 enhanced 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, 2009, Form 10K and should be read in conjunction with the financial statements for the three and six months ended September 30, 2009, contained herein.

The financial information included herein as of September 30, 2009, and for the three and six-month periods ended September 30, 2009 and 2008, 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, consisting of ringback digital signage and their related components was $24,787, 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.

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.

PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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

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 $2,736 and $18,870 as of September 30, 2009 and March 31, 2009, respectively.

Capitalized software development

The Company is dependent on internally developed software to provide all of its services. As required by the Software Topic of the FASB Accounting Standards Codification, 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 rules defined by the Revenue Recognition Topic of the FASB Accounting Standards Codification. 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.

PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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

Income or loss per share

The Company adopted the provisions of the Earnings Per Share Topic of the FASB Accounting Standards Codification. This standard replaces 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 gain from operation for the three and six months ended September 30, 2009 and 2008, no computation of diluted EPS has been performed.

Income per share for the three months and six ended September 30, 2009 and 2008, respectively, is based on the weighted average number of shares outstanding of 6,130,184 for all periods.

Income taxes

For income taxes, the Company applies the rules defined by the Income Taxes Topic of the FASB Accounting Standards Codification. 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

For trademarks and patents, the Company applies the rules defined by the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification. Trademarks and patents are recorded at cost and amortization is computed on the straight-line method over the identifiable lives of the trademarks and patents. 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.

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.

Stock-based compensation

For stock-based compensation, the Company applies the rules defined by the Compensation - Stock Compensation Topic of the FASB Accounting Standards Codification. This statement 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 recognized during the three months and six months ended September 30, 2009 and 2008 was $-0- for all periods.

PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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

Subsequent events

In May 2009, the FASB issued new authoritative guidance for subsequent events. Such authoritative guidance establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this statement sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This authoritative guidance is effective for the interim or annual financial periods ending after June 15, 2009. On June 30, 2009, the Company adopted the authoritative guidance for subsequent events. Such adoption did not have a material impact on the Company’s condensed consolidated financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 12, 2009.

Recent accounting pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning the organization of authoritative guidance under U.S. GAAP. This new guidance created the FASB Accounting Standards Codification (“Codification”). The Codification has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification became effective for the Company in the quarter ended September 30, 2009. As the Codification is not intended to change or alter existing U.S. GAAP, it did not have any impact on the Company’s condensed consolidated financial statements. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards.

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 and subsequently extended to December 31, 2009, (the “Debentures”), to a group of institutional and high net worth investors. The company has repaid $663,750 of the principal balance to the Debenture holders leaving an outstanding balance of $341,250. All but $35,000 of the debentures have been extended to December 31, 2009. The Debentures pay an interest rate of 6% on an annual basis and are convertible into 682,500 shares of the Company’s common stock at a price of $0.50 per share. 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 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 was 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 was amortized over the original three-year term of the Debentures as additional interest expense. The loan costs incurred on the issuance of the Debentures amounted to $2,430.

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 and subsequently extended to September 29, 2010 (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.

PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note C - Convertible debt and warrants (continued):

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, 2009 and 2008, and $23,498 for three months ended September 30, 2009 and 2008.

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, 2009 and 2008 and $2,107 for the three months ended September 30, 2009 and 2008.

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, 2009, the Company had outstanding warrants to purchase 5,291,072 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, 2009, 5,291,072 shares of common stock were reserved for that purpose.

Common stock reserved

At September 30, 2009, shares of common stock were reserved for the following purposes:

	Exercise of stock warrants and debt conversion			9,316,429
	Exercise of future grants of stock options and stock
	appreciation rights under the 2000 stock option plan			844,133

				10,160,562

PREFERRED VOICE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note E - Commitments:

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

Year ending
March 31,	Amount

2009	$	43,318
2010		461
2011		-
2012		-
2013		-

	$	43,779

Total rent expense charged to operations was $31,282 and $31,694 for the six months ended September 30, 2009 and 2008, respectively, and $15,641 and $15,273 for the three months ended September 30, 2009 and 2008.

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-K for the fiscal year ended March 31, 2009. 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 9, 2009 we had five carrier customers providing ringback service through our My Phone Services Suite platform with a possible 7 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.

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 gain of $274,383 or $.045 per share, for the six-month period ended September 30, 2009, compared to a net loss of $83,798 or $0.014 per share, for the six-month period ended September 30, 2008. For the three-month period ended September 30, 2009, we recorded a net gain of $101,763, or $.017 per share compared to a net loss of $93,623 or $.015 per share for the three-month period ended September 30, 2008.

Total Sales

Total revenue for the six-month period ended September 30, 2009, was $2,156,797 compared to $1,913,672 for the six-month period ended September 30, 2008. Total revenue for the three-month period ended September 30, 2009, was $1,058,673 compared to $953,499 for the three-month period ended September 30, 2008. 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, 2009 was $1,104,421 compared to $1,025,356 for the six-month period ended September 30, 2008. Cost of sales for the three-month period ended September 30, 2009 was $561,562 compared to $517,591 for the three-month period ended September 30, 2008. 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, 2009 were $677,054 compared to $860,347 for the six-month period ended September 30, 2008. Selling, general and administrative expenses for the three-month period ended September 30, 2009 were $347,182 compared to $473,564 for the three-month period ended September 30, 2008. We expect that selling, general and administrative expenses will remain steady through fiscal year 2010, 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. There were no software development costs capitalized for the periods ended September 30, 2009 or 2008. The amortization of capitalized software development costs for the periods ended September 30, 2009 and 2008 was $8,382 and $16,419, respectively.

Other Income and Expense

Interest expenses for the six-month period ended September 30, 2009 were $100,939 compared to $111,767 for the six-month period ended September 30, 2008. Interest expenses for the three-month period ended September 30, 2009 were $48,166 compared to $55,967 for the three-month period ended September 30, 2008.

Income Taxes

As of September 30, 2009, we had cumulative federal net operating losses of approximately $20.3 million, which can be used to offset future income subject to federal income tax through the fiscal year 2029. 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, 2009 were approximately $295,733, a decrease of $170,454 from $466,187 at March 31, 2009. 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, 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. The balance of these debentures at September 30, 2009 was $341,250.

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, 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

Management projects working capital needs to be approximately $1,440,000 over the next twelve months for corporate overhead and equipment purchases to continue to deploy services to carrier customers. Additionally, the Company has $1,511,250 of debentures due on or before September 30, 2010. Management believes that current cash and cash equivalents and cash that may be generated from operations will not be sufficient to meet both the anticipated capital requirements and the debenture repayment on their maturity date. Management believes that it can negotiate extensions on the debentures which will allow them to meet working capital needs from anticipated operating cash flows as well as extinguish some portion of the debentures due. Such projections have been based on revenue trends from current customers and customers which are already under contract utilizing the revenue rates that have been experienced over the past six months with currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. If the Company cannot renegotiate extensions on the debenture maturity dates or operating projections are not realized it may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduction of current overhead.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required by smaller reporting companies.

Item 4T. 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, 2009 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.

On July 17, 2009, a Texas court issued a ruling that the 608 Patent was unenforceable. Ring Plus may appeal the Texas ruling, and therefore the parties in this action have agreed to stay the case against Preferred Voice pending the outcome of the Texas case.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009. If any of those factors were to occur, they could materially adversely affect the Company’s financial condition or future results, and could cause its actual results to differ materially from those expressed in its forward-looking statements in this report. The Company is aware of no material changes to the Risk Factors discussed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009.

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

a) 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

(b) Reports of Form 8-K

None.

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 12, 2009		/s/ Mary G. Merritt
Date		Mary G. Merritt
		Chairman and Chief Executive Officer
		(Principal Executive Officer)