Item 1: Business
Background of the Company
We integrate and market enhanced services to phone companies, to complement their overall package of voice services. Our Global Application Platform (GAP) is designed as a best-in-class architecture that can be leveraged to provide additional services as they are developed. This base architecture supports a multi-switch/multi-vendor environment on a basic platform that can scale for a small regional carrier to a larger national carrier’s network. The GAP system successfully integrates both speech and non-speech recognition applications within the same platform. The system is designed to utilize standard industry hardware and a microprocessor-based computing system, with a Windows 2000-series server operating system that fits into a standard rack that can be placed in the phone company’s switch room or can be remotely accessed through a telephony network.
We were incorporated in Delaware in 1992 under the name of Direct Connect, Inc. and began operations in the telecommunications industry under the name of Preferred Telecom, Inc. in April 1994. We began as a long distance telecommunications carrier with a variety of enhanced services; however, in February 1997 we sold a number of assets, including our end-user customer base to Brite Voice Systems, Inc. We have since focused on enhanced telephone services that feature speech recognition technology and end-user entertainment and personalization features. We believe that there are larger market opportunities in offering enhanced services to phone companies.
The Market and Market Strategy
Our current marketing efforts are focused on cellular telephone service providers. The cell phone market has grown from approximately 69 million subscribers in 1998 to approximately 285.6 million subscribers as of December 2009, and as prices for cellular use drop, cellular use is becoming affordable to more economic segments of the population. Wireless phones are now a mass-market consumer device with an overall wireless penetration rate of 91% of the U.S. population. These companies are already offering some enhanced services to their subscribers, such as voice and picture messaging, e-mail reading, short message services, voice activated services, and personalized entertainment content. In order to remain competitive, however, cell phone companies need to provide their subscribers more enhanced services. We believe that our GAP system, with its unique variety of integrated services, provides a solution to satisfy this need.
Our Market Strategy
We utilize personal sales calls to contact and market our GAP system and services to phone companies. We utilize trade shows as a means to present our product and to network with our potential customers. The principal elements of our strategy to achieve a leading position in the telecommunications enhanced services market are as follows:
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Target Tier II and Tier III carriers. We believe that our experience in providing enhanced services positions us strongly in carrier markets with subscriber bases of less than 10 million. Our ability to interconnect with various types of switches and billing formats gives us the opportunity to serve these carriers efficiently and economically.
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Continue to enhance our phone company customer relationships. We consider our relationships with our phone company customers to be strategic. Our long-term revenue sharing agreements allow us to plan a joint, strategic deployment of services to a contracting phone company’s subscribers.
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Develop strategic alliances. We are working to establish strategic relationships with other companies around the nation to broaden our services and provide our customers with additional services that we do not currently provide. Our hosted network approach has allowed us to centralize operations and provide services to numerous phone companies from one location eliminating the need for our equipment to always be collocated at each phone company’s site.
·
Technological enhancements. We believe that we provide high quality, reliable enhanced services to consumers through phone companies. We intend to continue to develop services that we believe will enhance the services we are already providing or for which we believe there is a viable market.
Primary Market
Cell Phone Companies. Of the approximately 700 cellular telephone markets in the United States, there are approximately 400 rural service areas and 300 metropolitan service areas that have multiple cell phone companies serving the same markets. Cell phone companies are the primary market in which we have focused our marketing efforts, offering these phone companies with a revenue sharing opportunity. We focus on these markets because the phone companies in these markets have an existing subscriber base.
We believe that our revenue sharing agreements whereby we provide service equipment at or below cost and then share revenues generated from the different services provided by the carrier to their subscriber base is a cost effective way for phone companies to provide enhanced services.
The cell phone companies who contract with us are responsible for billing and collecting revenue generated from the GAP system’s enhanced services. However, our GAP system can produce subscriber information for marketing or billing use. In addition, we assist each phone company in marketing the services by providing various co-branded advertising materials we have designed and by training the contracting cell phone company’s sales force and customer service staff. As of June 11, 2010, we are providing enhanced services to 9 carrier’s subscribers and generating revenues for the cell phone companies and us.
Standard Company Contract. We use a combined software license and marketing agreement with each of our carrier customers. The software license agreement grants each contracting phone company a license to use our software and all subsequent improvements to the software in the carrier’s local calling areas. We retain title to the software and require that those who contract with us keep all information related to the software confidential.
The agreement has provisions to remain in effect for up to ten years. Most of our agreements are for an initial three year term which automatically renews unless cancelled by either party on 60 days’ notice prior to the anniversary date of the agreement after the initial term. In our marketing agreement, we agree to initiate service after a testing period by which the carrier can evaluate the service within its network. If we are unable to cure any material deficiency of the service then either we or the contracting phone company may terminate the contract on thirty (30) days’ written notice. If neither notice of problems nor an acceptance certificate is provided to us by the end of the phone company’s thirty (30) day testing period, then the contracting phone company is deemed to have accepted the GAP services.
The agreement provides for revenue sharing in which the split ranges from seventy percent (70%) to thirty percent (30%) depending on the service and the amount of revenue obtained by the phone company through sale of our services to their subscribers. The cell phone company pays us either a percentage of the revenues received from the phone company’s subscribers for the services we offer in that area or a minimum amount for each of its subscribers subscribing to our services.
Once the participating carrier has accepted the services, it must use its best efforts to promote the sale of our services and applications to its subscribers. The contracting cell phone companies are responsible for billing and collection on the services, but we and those with whom we contract jointly agree on the pricing of those services. The phone companies with whom we contract agree that they will not install any system, for testing or otherwise, that competes with our GAP services in the area designated under the marketing agreement. We agree to provide marketing materials, technical support and training to our partners and their personnel. We also provide in the marketing agreement that we may provide services directly to our own subscribers in the contracting phone companies’ designated areas. Our marketing agreements are subject to termination by either party on standard events of default, such as breach of the agreement or insolvency.
Our Product and Services
The Platform
The Global Application Platform (GAPSM) is a unified platform integrating telecommunications applications, subscriber web interfaces, billing and provisioning interfaces, and intelligent networking technology. The GAP system can be integrated with a variety of switches from manufacturers including Nortel, Lucent, Motorola, Ericsson, and others. Voice channels on the GAP can operate with T1 and E1 trunks or higher density links. Signaling and call control are accomplished using SS7, AIN/WIN, CAMEL, RLT, IS-41, ISDN PRI 2 B-Channel Transfer, and traditional signaling methodologies. The GAP system can be collocated at a carrier switch site or services can be provided through our hosted network system located in Allen, Texas. To facilitate the integration of services offered over the network with a carrier’s existing infrastructure, we have developed several call management and subscriber maintenance programs. Our call management program provides for the collection, analysis and reporting of call data by service offering. This data can be used to provide the carrier and service provider with information regarding empirical user trends, network usage and service functionality, all of which are necessary to the parties’ technical and marketing analysis of the network services.
Platform Services
In September of 2004 we introduced our web enabled suite of services that we call My Phone Services Suite. Our bundled service suite was designed to address the growing trend to personalize all aspects of telecommunications. The suite has a core network based address book that is integrated with such services as Rockin’ Ringback, RemindMe, Push-2-Connect, SmartLine, and Voice Activated Dialing. According to Strategy Analytics, the personalization sector will command 8% of the global data revenues of $189 billion by 2009. These products are continuously being added to or improved to include elements that improve the subscriber’s experience. The bundling feature of the suite was created to address the fact that no one application will work for all subscribers. Each subscriber will prefer and utilize various features of each application differently. The applications can be customized, combined, and configured to meet each carrier’s needs. As of June 11, 2010, only Rockin Ringback was being provided by any of our carrier customers.
Rockin’ Ringback™ This service allows you to entertain callers while they wait! Rockin’ Ringback™ lets subscribers send a message through music - before a call is even answered. This network-based service allows subscribers to replace the familiar ‘ring, ring’ that callers normally hear with a popular song, personalized message or even an advertisement. Ringbacks can be specified by caller, group, and by time of day. The service includes an integrated store where subscribers shop from thousands of tunes created especially for ringback use.
Voice Activated Dialing Speech recognition service that may be accessed by a telephone subscriber that allows the subscriber to speak a name, number or location from his or her personal directory or a common directory. The system then routes the call to the appropriate party. There is also an option for the disabled to access the system. By lifting the receiver or turning on the speakerphone and waiting three seconds, the telephone switch will automatically activate the system, and the system will prompt the subscriber to speak a name, number or location to be dialed.
Smart Line This application allows a subscriber to receive calls at any phone. The subscriber must notify the VIP system of a change in his or her location by giving it voice commands. A name from the subscriber’s voice dialing directory can be used as the new “locate” phone number. Incoming calls for the subscriber are routed to the pre-programmed “locate” phone number. That phone number can be either local or long distance, as required. The Smart Line may also be used to screen calls allowing the subscriber to take the incoming call or forward it to voice mail.
Push-2-Connect™ Application that provides for reservationless conferencing on-demand. Seamless integration with the user’s network address book allows for customized grouping and naming conventions so that multiple contacts can be dialed simultaneously.
Remind Me This application allows the subscriber to schedule a message that is delivered to the subscriber on a predetermined date and time on a one time or recurring basis.
EMMA the Perfect Receptionist. Our software provides telephone subscribers with the first remote accessed automated attendant service. Emma answers the subscriber’s phone with a custom greeting and listens as a caller speaks a name, department, or location listed in the subscriber’s voice dialing directory then routes the call to the person, department or location requested. On outbound calls, EMMA uses the same procedure to dial a phone number from a subscriber’s directory upon a speech command such as “Call John.”
Digital Signage. Our digital signage offering provides for a turn-key solution utilizing in-store touch screens and customizable interactive content design to engage customers while they are shopping in a cellular telephone retail store.
Competition
The enhanced services market is competitive and marked by rapid technological innovations. We expect competition to continue to increase as wireless, local, and competitive local telephone companies seek to offer their customers, the subscribers, enhanced services and to distinguish themselves from other phone companies. Many of our current competitors have longer operating histories, greater name recognition, established subscriber bases and substantially greater financial, technical, marketing, sales and other resources than us. We believe that the principal factors affecting competition in the enhanced services market are ease of use, overall technical performance, price and reliability. The market for our products and services is constantly evolving, and we may not be able to compete successfully against current and potential future competitors.
Major competitors in the ringback service arena are RealNetworks, LiveWire Mobile, Alcatel, Comverse Technologies, and Lucent. Even though we are much smaller and have substantially less resources than these other providers we believe we have competitive viability with carriers because we were the first provider of a ringback service in the United States.
Customer Service
We train contracting phone companies’ customer service employees to be able to answer standard questions related to the varying services we provide through the GAP system, from product selection to individual product help. We assist contracting phone companies if there are problems with the GAP system platform through our 24 hour, 7day a week technical support line. In addition, our systems are redundant where possible, but in the case of a component failure back-up components, such as the telephony cards that help operate the system, are inventoried for overnight shipment and replacement. We believe that this high level of customer service and technical support will help us market the system to a greater number of telephone companies.
Dependence on one or a few major customers
During the year, approximately sixty-five percent of the Company’s revenue consisted of sales and installation of ringback service equipment to one carrier customer. In May, the Company was advised that this customer would be canceling its service possibly as soon as August of 2010. Loss of this customer will create a material adverse effect on the Company. The sales and marketing team is aggressively marketing its services to existing and prospective customers but the ability to replace the revenue from this one customer will be difficult in the short term.
Employees
As of June 11, 2010, we had 11 full time employees. None of our employees is represented by a labor organization. We maintain various employee benefit plans and we believe we have excellent relations with our employees.
Patents, Trademarks and Copyright
The Preferred Voice name and logo, the GAP system, the SAM peripheral and the names of products and services we offer are trademarks, registered trademarks, service marks or registered service marks that we own. We rely on a combination of trade secret, copyright and non-disclosure/confidentiality agreements to protect our proprietary rights in our software and technology. There can be no assurance that such measures are or will be adequate to protect our proprietary technology. Furthermore, there can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.
Our software is licensed to contracting phone companies under license agreements containing provisions prohibiting the unauthorized use, copying and transfer of the licensed program. Policing unauthorized use of our products will be difficult, and any significant piracy of our products could materially and adversely affect our financial condition and results of operations.
We have received registered trademarks from the United States Patent and Trademark Office for the following: Preferred/telecom, Preferred Voice, Secure Card, Use Your Voice, BusinessConnect, Rockin’ Ringback Safety Talk, and Adback. We have received notice of allowance on our U. S. Patent Applications “Method and Apparatus That Provides a Reusable Voice Path in Addition to Release Link Functionality for Use with a Platform Having a Voice Activated Front End” and “ System Access Modules for Use with a Telecommunications Switch, a Telephony Server System and a Method of Enabling a Communications Session”.
We have applied for patents on our Group Plan Manager, Method of Customizing In-band Signaling for a Communication in Progress, a Method of Identifying a Subscriber to a Calling Party and a Tone Sequence Applicator Employing Either Method. We have not yet received confirmation of issuance of such.
Core Technology and System Enhancement
We have spent the last ten years developing and enhancing our proprietary software in conjunction with differing hardware platforms and development of switch integration to create our GAP system. We continually evaluate and adjust our GAP system. The ever changing telephony and computer industry requires companies like ours to continue developing new or improved methods to process applications and as new technology emerges new processes are created to better deploy our services. In the past three fiscal years we achieved the conversion to our high-density database structure that will allow for a very efficient and scalable network based service deployment platform, we completed the integration of web-enabled services in our My Phone Services Suite, we deployed the first ringback service through a telephony carrier in the United States and we have installed and tested our ringback service in a Tier II multi-switch carrier network. We currently have seven employees in our software/hardware development and deployment department.
Item 1A:
Item 1A: Risk Factors
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 1B:
Item 1B: Unresolved Staff Comments
None
Item 2:
Item 2: Properties
Our executive offices are located in Dallas, Texas. We lease 2,712 square feet of space in a facility as a tenant. The term of the lease is through December 31, 2012 and the rent is presently $3,503 per month.
Item 3:
Item 3: 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.
Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.
Item 4:
Item 4: Removed and Reserved
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Common Stock is listed on the OTC Electronic Bulletin Board under the symbol “PRFV”. The following table indicates the quarterly high and low bid price for the Common Stock on the OTC Electronic Bulletin Board for the fiscal years ending March 31, 2010 and March 31, 2009. Such inter-dealer quotations do not necessarily represent actual transactions and do not reflect retail mark-ups, mark-downs or commissions.
OTC ELECTRONIC BULLETIN BOARD BID PRICE
On June 11, 2010, the closing bid price of the Common Stock as reported on the OTC Electronic Bulletin Board was $.20.
The number of holders of record of the Company’s common stock as of June 11, 2011 was 286 as reported by our transfer agent. This number does not include an undetermined number of stockholders whose stock is held in “street” or “nominee” name.
We have not declared or paid any cash or other dividends on the Common Stock to date for the last two (2) fiscal years and have no intention of doing so in the foreseeable future.
We did not repurchase any of our equity securities during the fourth quarter of fiscal 2010.
Recent Sales of Unregistered Securities not previously reported on the Company’s 10-QSB
None
Item 6.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis constitutes forward-looking statements for purposes of the Securities Act and the Exchange Act and as such involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect”, “estimate”, “anticipate”, “predict”, “believes”, “plan”, “seek”, “objective” and similar expressions are intended to identify forward-looking statements or elsewhere in this report. Important factors that could cause our actual results, performance or achievement to differ materially from our expectations are discussed in detail in Item 1 above. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by such factors. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Notwithstanding the foregoing, we are 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 our 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.
On November 13, 2006, the Board of Directors approved a 1 for 5 reverse stock split of its common stock. All references in this report to the number of shares of common stock, loss per share, and market price per share have been retroactively restated to reflect the reverse stock split.
The following discussion should be read in conjunction with the Financial Statements, including the notes thereto.
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. From 1997 until early 2005, we focused on the development of voice activated telecommunications services that would allow any consumer the ability to “dial” their calls using their voice. In the last five years we have focused our efforts on service applications that relate to the delivery of content to end users.
Our initial introduction to mobile entertainment led us to research the viability of 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 June 11, 2010 we had nine carrier customers providing My Phone Services Suite service in their marketplace. Our systems structure is a robust data base system which will allow for scalability and addition of new services to our platform in shorter development cycles than were possible under our previous structure. Revenue from this product 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.
For the past three years a major portion of the Company’s revenue, approximately 65% has been from one customer. In early May this customer gave notice that it would be canceling its contract. If the Company does not replace the income provided by this customer, it will be forced to drastically reduce its current marketing efforts and its operating expenses.
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;
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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 currently provide our services to phone companies through sale and installation of equipment and revenue sharing agreements that provide revenue splits ranging from seventy four percent (74%) to forty percent (40%) depending on the amount of revenue obtained by the phone company through sale of our services to their subscribers. We license our software to contracting phone companies as we found that the revenue sharing arrangement embodied in our form Marketing Agreement could potentially provide a higher rate of return on investment to us over the life of our standard contract.
We recorded net income of $736,589, or $.12 per share, for the fiscal year ended March 31, 2010, compared to a net income of $43,617, or $.01 per share, for the fiscal year ended March 31, 2009, and a net loss of $747,816, or $.12 per share, for the year ended March 31, 2008.
Total Revenue
Total revenue for the fiscal year ended March 31, 2010 was $4,827,761 compared to $4,007,014 and $3,541,586 for the fiscal years ended March 31, 2009 and 2008 respectively. The increase of revenue reflects continued increase of sales in our ringback and content services.
We anticipate that revenues from the My Phone Services Suite will decline for the year ended March 31, 2011 with the loss of our major customer.
Cost of Sales
Cost of sales for the fiscal year ended March 31, 2010 was $2,621,598 compared to $2,038,081 and $2,043,454 for the fiscal years ended March 31, 2009 and 2008, respectively. For each of the fiscal years reported, costs consisted of installed equipment, network infrastructure costs, such as collocations, connectivity, system access, long-distance, depreciation and amortization, and content costs to third parties. We believe costs of sales for network infrastructure will continue to remain steady through the next fiscal year as we utilize current capacity but will increase gradually if and when new customers are added.
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal year ended March 31, 2010 were $1,318,554 compared to $1,699,903 and $1,881,043 for the fiscal years ended March 31, 2009 and 2008, respectively. The decrease from 2009 to 2010 and from 2008 to 2009 was from an overall reduction in excess capacity.
We expect that selling, general and administrative expenses will decline as we make adjustments for the loss of our major customer.
Interest Expense
Interest expense for the fiscal year ended March 31, 2010 was $140,314 compared to $223,266 and $366,644 for the fiscal years ended March 31, 2009 and 2008, respectively. During 2010, a total of $46,996 of the interest expense related to amortization of loan discount value assigned to the warrants issued in the September 29, 2006 offering. During 2009, a total of $93,992 of the interest expense related to amortization of loan discount value assigned to the warrants issued in the September 29, 2006 offering. During 2008, a total of $236,464 of the interest expense relates to: (i) $142,472 of amortization of loan discount value assigned to the warrants issued in the March 31, 2005 offering, and (ii) $93,992 of amortization of loan discount value assigned to the warrants issued in the September 29, 2006 offering.
Core Technology Enhancements Software Applications and Hardware
We have not expensed any research and development costs for any of the periods stated on our financial statements, but we have accumulated costs of $1,381,474 which have been amortized down to $77,541 for enhancement of our core software and hardware technology as of March 31, 2010.
Other Income and Expense
We have recognized income from the sale of excess equipment of $1,687, and $1,739, respectively, for the fiscal years ended March 31, 2010 and 2008. We recognized a loss from the destruction of a digital sign unit of $2,147 for the fiscal year ended March 31, 2009. We also recognized an impairment expense on digital sign equipment of $12,393 for the fiscal year ended March 31, 2010.
Income Taxes
As of March 31, 2010, we had cumulative federal net operating losses of approximately $19.4 million, which can be used to offset future income subject to federal income tax through the fiscal year 2030. 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 March 31, 2010 were $600,647, an increase of $134,460 from $466,187 at March 31, 2009.
Net cash provided from operating activities was $1,094,243 for the year ended March 31, 2010 compared to net cash used for operating activities of $310,242 for the year ended March 31, 2009. Net cash used for investing activities was $23,783 for the year ended March 31, 2010 compared to cash used in investing activities of $29,775 for the year ended March 31, 2009. Net cash used for financing activities was $936,000 for the year ended March 31, 2010 compared to net cash used by financing activities of $97,500 for the year ended March 31, 2009.
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 $.50 for an aggregate of $1,170,000.
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 10,000 5-year warrants to purchase a share of Common Stock, $.001 par value per share, of the Company at an exercise price of $.60 for an aggregate of $975,000.
On May 18, 2004, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we closed an offering of 220 units consisting of Ten Thousand (10,000) shares of the common stock of the Company and a warrant to purchase Five Thousand shares of common stock at a purchase price of $5,000 per unit for an aggregate of $1,100,000.
Due to uncertainties regarding loss of its major customer and how well new customer contracts that the Company just launched will produce new revenue, it is difficult for management to project the Company's revenue performance, operating profits or loss, or cash requirements for more than a few months.
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 $1,140,000 over the next twelve months for corporate overhead to continue to deploy services to carrier customers. Additionally, as of May 31, 2010, the Company has $865,800 of debentures due on or before September 29, 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.
Critical Accounting Policies
Our accounting policies are fully described in Note B to our financial statements. The following describes the general application of accounting principles that impact our consolidated financial statements.
Our results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debt, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data
PREFERRED VOICE, INC.
FINANCIAL STATEMENTS
MARCH 31, 2010, 2009 and 2008
Independent Auditors’ Report
Financial Statements
Balance Sheets
Statements of Operations
Statement of Stockholders’ Equity (Deficit)
Statement of Cash Flows
Notes to Financial Statements
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with our accountants on accounting and financial disclosures.
Item 9A(T).
Item 9A(T). Controls and Procedures
Evaluation of disclosure controls and procedures. We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the "1934 Act"), under the supervision and with the participation of our Chief Executive Officer, who is also our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act. Based on this evaluation, the Chief Executive Officer concluded that as of March 31, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting. The Company's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
An internal control material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention of those responsible for oversight of the company's financial reporting.
Management of the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company's management concluded that its internal control over financial reporting was effective as of March 31, 2010.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting. The Company has made no changes in its internal control over financial reporting in connection with its fourth quarter 2010 evaluation that would materially affect, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The Board of Directors currently consists of two (2) people. Directors serve until the next annual meeting and until their successors are elected and qualified. The following table sets forth information about all of our Directors and executive officers and all persons nominated or chosen to become such:
Name
Mary G. Merritt
Age
Office
Director, Chief Executive Officer, Executive VP-Finance and Secretary/Treasurer
Year First
Elected Director
Scott V. Ogilvie Director
Ms. Merritt is a founder of Preferred Voice and has been a director since May 1994. She has served as Chief Executive Officer since February 2005, Chief Operating Officer from May 2004, and has served as Executive Vice President - Finance and Secretary/Treasurer since inception. She served as President of Star of Texas, Inc., from 1989 to May 1994. She also served as Controller of United Medicorp for several months during 1992. Ms. Merritt is a certified public accountant and was employed by Ernst & Whinney from 1981 to 1989.
Mr. Ogilvie was elected as a director of Preferred Voice in February 20, 2000. Mr. Ogilvie is a Managing Director with Capital Investment Company and has been so since September of 2000. From January 1998 to 2000, Mr. Ogilvie was employed by Classic Residence by Hyatt as Managing Director of Development-Western Division. From 1993 through 1998, Mr. Ogilvie was a partner in the John Buck Company, a full service real estate brokerage, development and property management company. Mr. Ogilvie is the sole member of our Audit Committee.
We are not aware of any “family relationships” (as defined in Item 401(c) of Regulation S-­B promulgated by the SEC) among directors, executive officers, or persons nominated or chosen by us to become directors or executive officers.
Except as set forth above, we are not aware of any event (as listed in Item 401(d) of Regulation S-B promulgated by the SEC) that occurred during the past five years that are material to an evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person of the company.
The Board of Directors has determined that Mr. Ogilvie is “independent” as such term is defined by the listing standards of Nasdaq and the rules of the SEC. Ms. Merritt is not “independent” since she is an employee of the Company.
Compliance with Section 16(a) of the Exchange Act
Due to our status as a Section 15(d) reporting company, our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities are not required to file with the SEC reports of ownership and changes in ownership of Preferred Voice's equity securities pursuant to Section 16(a) of the Securities Exchange Act of 1934.
Code of Ethics
The Board of Directors has adopted a code of business ethics that applies to its directors, officers and management employees generally. A copy of this code of business ethics may be obtained, at no cost, by writing or telephoning the Company at Preferred Voice, Inc., 6500 Greenville Avenue, Suite 570, Dallas, Texas 75206, 214-265-9580, Attn: Secretary.
Audit, Nominating and Compensation Committees
Mr. Ogilvie is currently the only member of the Audit Committee. The Board of Directors has determined that Mr. Ogilvie is qualified as a “financial expert” under the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC. The Company does not currently have either a Nominating or Compensation Committee.
Item 11.
Item 11. Executive Compensation
The following tables set forth the compensation paid by the Company to our executive officers during the fiscal years ended March 31, 2010 and 2009.
Annual Compensation
(1) Ms. Merritt has served as Chief Executive Officer since February, 2005.
Outstanding Equity Awards at Fiscal Year-End Table
We have not granted any stock awards other than as stock options. The following table reflects all option awards outstanding at March 31, 2010 to our executive officers:
Equity Compensation Plan
Compensation of Directors
We do not currently pay any cash fees to our directors, but we pay directors' expenses in attending board meetings. During the year ended March 31, 2010, no director expenses were reimbursed.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of June 11, 2010, the name and number of shares of the Company’s common stock, par value $0.001 per share, held of record by (i) each of the directors and named executive officers of the Company, (ii) beneficial owners of 5% or more of our common stock; and (iii) all the officers and directors as a group. Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table.
Beneficial Ownership (1), (2)
Name of Beneficial Owner
Number of
Shares
Percentage
*
Less than one percent (1%).
1)
SEC rules provide that, for purposes hereof, a person is considered the “beneficial owner” of shares with respect to which the person, directly or indirectly, has or shares the voting or investment power, irrespective of his/her/its economic interest in the shares. Unless otherwise noted, each person identified possesses sole voting and investment power over the shares listed, subject to community property laws.
2)
Based on 6,130,184 shares outstanding on June 11, 2010. Shares of common stock subject to options that are exercisable within 60 days of June 11, 2010, are deemed beneficially owned by the person holding such options for the purposes of calculating the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage of any other person.
3)
Includes 93,857 shares issuable upon exercise of warrants, 179,133 issuable upon exercise of employee stock options, 63,429 shares issuable upon conversion of notes, and 6,000 shares held by minor children.
4)
Includes 58,000 shares issuable upon exercise of warrants.
5)
Includes 800,000 shares issuable upon exercise of warrants held by Hidden River, LLC for which Mr. Parker has voting power over the shares.
6)
Includes 292,857 shares issuable upon exercise of warrants and 211,429 shares issuable upon conversion of notes. JMG Capital Partners’ address is 11601 Wilshire Blvd, Suite 2180, Los Angeles, California 90025. JMG Capital Partners has advised us that Jonathan M. Glaser is the member-manager of JMG Capital Management, LLC, which is the general partner of JMG Capital Partners, and is the natural person with sole voting power over the shares held by JMG Capital Partners.
7)
Includes 292,857 shares issuable upon exercise of warrants and 211,429 shares issuable upon conversion of notes. JMG Triton Offshore Fund Ltd.’s address is Citco Building, Wickhams Cay, Road Town, Tortola, British Virgin Islands. We have been informed by JMG Triton Offshore Fund Ltd. that Jonathan M. Glaser is the member-manager of Pacific Assets Management, LLC, which is the general partner of JMG Triton Offshore Fund Ltd., and he is the natural person who has sole voting power over the shares held by JMG Triton Offshore Fund Ltd.
8)
Includes 100,000 shares issuable upon exercise of warrants, and 148,000 shares issuable upon conversion of notes, 727,057 shares held in Mr. Emerson’s retirement accounts and 250,000 shares issuable upon exercise of warrants held in Mr. Emerson’s retirement accounts, 2,000 shares held by Emerson Partners, 100,000 shares issuable upon exercise of warrants held by Emerson Partners, 148,000 shares issuable upon conversion of notes issued to Emerson Partners, for which Mr. Emerson has voting power over the shares held by Emerson Partners, 100,000 shares issuable upon exercise of warrants held by Emerson Family Foundation, and 148,000 shares issuable upon conversion of notes issued to Emerson Family Foundation, for which Mr. Emerson has voting power over the shares held by Emerson Family Foundation.
9)
Includes 314,286 shares issuable upon exercise of warrants and 317,143 shares issuable upon conversion of notes. Bristol Investment Fund, Ltd’s address is Caledonian House, Jennett Street, Georgetown, Grand Cayman, Cayman Islands. Bristol Capital Advisors, LLC ("BCA") is the investment advisor to Bristol Investment Fund, Ltd. ("Bristol"). As manager of BCA and a director of Bristol, Paul Kessler has voting and investment power over the shares held by Bristol. Mr. Kessler disclaims beneficial ownership of such shares.
10)
Includes 185,292 shares issuable upon exercise of warrants, 130,000 shares held by The Runnels Family Trust, 285,714 shares issuable upon exercise of warrants held by The Runnels Family Trust and 274,857 shares issuable upon conversion of notes issued to The Runnels Family Trust, 327,259 shares held by High Tide, LLC, 200,000 shares issuable upon exercise of warrants held by High Tide, LLC and 148,000 shares issuable upon conversion of notes issued to High Tide, LLC for which Mr. Runnels has sole voting power over the shares held by High Tide, LLC and 272,456 held by T.R. Winston & Company Incorporated and 79,351 issuable upon exercise of warrants held by T.R. Winston & Company Incorporated for which Mr. Runnels has voting power over the shares held by T.R. Winston & Company Incorporated .
11)
Includes the shares described in footnotes 3 and 4.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
None
See Item 9 above for information concerning director independence.
Item 14.
Item 14. Principal Accountant Fees and Services
Our independent auditors, Philip Vogel & Co., P.C., have no direct or indirect interest in the Company and have been the Company’s Independent Registered Public Accounting Firm since 1995. The following table sets forth the fees billed and estimated fees for professional audit services provided by such firm for the fiscal years ended March 31, 2010 and 2009:
(a)
Includes fees for services related to the audits of our annual financial statements and the reviews of our interim financial statements and assistance with SEC filings.
(b)
Includes fees for services related to transaction due diligence and consultations with respect to compliance with Section 404 of the Sarbanes-Oxley Act.
(c)
Includes fees for services related to tax compliance, preparation and planning services (including U.S. federal, state and local returns) and tax examination assistance.
Our Audit Committee established a policy whereby the outside auditors are required to seek pre-approval on an annual basis of all audit, audit-related, tax and other services by providing a prior description of the services to be performed. For the year ended March 31, 2010, 100% of all audit-related services were pre-approved by the Audit Committee, which concluded that the provision of such services by Philip Vogel & Co., P.C. was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.
Item 15.
Item 15. Exhibits
(a)
Exhibits
Exhibit Number
Description of Exhibit
3.1(1)
Certificate of Incorporation, filed on August 3, 1992 with the Secretary of State of Delaware (Exhibit 3.1)
3.2(1)
Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware (Exhibit 3.2)
3.3(1)
Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware (Exhibit 3.3)
3.4(2)
Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware (Exhibit 3.5)
3.5(3)
Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware (Exhibit 3.5)
3.6^
3.7(1)
Certificate of Amendment, filed on April 27, 2007with the Secretary of State of Delaware (Exhibit 3.1)
Bylaws of the registrant (Exhibit 3.4)
10.1(4)
Form of Warrant Certificate and Schedule of Warrant Certificates (Exhibit 10.1)
10.2(6)
Form of Subscription Agreement between Preferred Voice, Inc. and certain purchasers of Preferred Voice, Inc. common stock (Exhibit 10.1)
10.3(6)
Form of Warrant Certificate (Exhibit 10.2)
10.4(6)
Warrant No. 122 issued to Stifel, Nicolaus & Company, Inc. (Exhibit 10.3)
10.5(5)
Second Amendment to Lease between Dallas Office Portfolio, L.P., as successor in interest to Greenville Avenue Properties, Ltd. and Preferred Voice, Inc. (Exhibit 10.3)
10.6(1)
Preferred/telecom, Inc. 1994 Stock Plan for Incentive and Non-Qualified Stock Options (Exhibit 10.5)
10.7(7)
10.8(8)
10.9(8)
10.10(9)
10.11(10)
10.12(11)
2000 Stock Plan for Incentive Stock Options and Other Equity Participation (Exhibit 10.1)
Form of Subscription Agreement by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)
Form of Warrant Certificate, issued by Preferred Voice, Inc. pursuant to the Subscription Agreement filed as Exhibit 10.9 hereto (Exhibit 10.2)
Patent License Agreement by and between Preferred Voice, Inc. and KoninKlijkePhilips Electronics N.V.*(Exhibit 10.2)
Form of Subscription Agreement, by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)
Form of Subscription Agreement, by and between Preferred Voice, Inc. and certain signatories thereto (Exhibit 10.1)
23^
Consent of Philip Vogel & Co. PC
31.1^
32.1^
Section 302 Certification
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_____________
^ Filed herewith.
(1)
Incorporated by reference to the exhibit shown in parenthesis to our Registration Statement on Form S-1, filed with the Securities and Exchange Commission on June 15, 1995.
(2)
Incorporated by reference to the exhibit shown in parenthesis to Amendment No. 1 to our Registration Statement, filed with the Securities and Exchange Commission on August 7, 1995.
(3)
Incorporated by reference to the exhibit shown in parenthesis to our Annual Report on Form 10-KSB for the period ended March 31, 1999, filed by us with the Securities and Exchange Commission.
(4)
Incorporated by reference to the exhibit shown in parenthesis to our Registration Statement on Form SB-2, filed with the Securities Exchange Commission on March 8, 2001
(5)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 15, 2000.
(6)
Incorporated by reference to the exhibit shown in parenthesis to our Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000, filed by us with the Securities and Exchange Commission.
(7)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 7, 2001.
(8)
Incorporated by reference to the exhibit shown in parenthesis to our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001, filed by us with the Securities and Exchange Commission.
(9)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 21, 2001.
(10)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 18, 2004.
(11)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 24, 2005.
(12)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 5, 2005.
(13)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 1, 2005.
(14)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 25, 2006.
(15)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 3, 2006.
(16)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 15, 2006.
(17)
Incorporated by reference to the exhibit shown in parenthesis to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 23, 2009.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned thereto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Mary G. Merritt
Mary G. Merritt
Chairman and Chief Executive Officer
(Principal Executive Officer) Secretary, Treasurer, Executive Vice President of Finance and Director (Principal Financial and Accounting Officer)
June 21, 2010
/s/ Scott Ogilvie
Scott Ogilvie
Director
June 21, 2010
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
and Shareholders
Preferred Voice, Inc.
We have audited the accompanying balance sheets of Preferred Voice, Inc. as of March 31, 2010 and 2009, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years ended March 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Preferred Voice, Inc. as of March 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended March 31, 2010, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
PHILIP VOGEL & CO. PC
Certified Public Accountants
Dallas, Texas
June 17, 2010
PREFERRED VOICE, INC.
BALANCE SHEETS
MARCH 31, 2010 AND 2009
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
PREFERRED VOICE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008
The accompanying notes are an integral part of these statements.
PREFERRED VOICE, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008
The accompanying notes are an integral part of these statements.
PREFERRED VOICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2010, 2009 AND 2008
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
PREFERRED VOICE, INC.
NOTES TO 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:
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
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.
The Company maintains cash balances at a financial institution located in Dallas, Texas, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
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.
The Company estimates the allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay.
Inventory
Inventory, consisting of ringback platforms and their related components was $-0- and $12,854 and digital signage and their related components was $12,393 and $24,787 for the years ended March 31, 2010 and 2009 respectively. Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
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.
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
The useful lives of property and equipment for purposes of computing depreciation are as follows:
Depreciation expense for the years ended March 31, 2010, 2009 and 2008 was $49,824, $60,541, and $85,574, respectively.
Capitalized software development
The Company has adopted the provisions of the Software Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) to account for its internally developed software costs since the Company is dependent on the software to provide the enhanced services. Under the provisions of the Software Topic, 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.
During the years ended March 31, 2010, 2009 and 2008, software development costs capitalized were $10,182, $-0-, and $8,224, respectively. The amortization of capitalized software development costs for the years ended March 31, 2010, 2009 and 2008 was $6,973, $20,997, and $70,509, respectively.
The estimated aggregate amortization expense for capitalized software development costs for each of the five succeeding fiscal years is as follows:
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 the Intangibles - Goodwill and Other Topic of the FASB ASC, which addresses financial accounting and reporting for acquired goodwill and other 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. The Company tested its intangible assets for impairment as of March 31, 2010 and found no event or changes in circumstance that have impaired its intangible assets.
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
The amortization of trademarks and patents for the years ended March 31, 2010, 2009 and 2008 was $8,022, $7,989, and $7,652, respectively.
The estimated aggregate amortization expense for trademarks and patents for each of the five succeeding fiscal years is as follows:
Advertising expense
The Company expenses advertising costs when the advertisement occurs. Total advertising expense amounted to $-0- for the years ended March 31, 2010, 2009 and 2008.
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.
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 that reflects its opinion of amounts that 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.
During the years ended March 31, 2010, 2009 and 2008, approximately $3,132,746 (65%), $2,458,790 (61%), and $1,843,144 (52%), respectively, of the Company’s total sales were derived from one customer. At March 31, 2010 one customers balance of approximately $306,200 (51%), for March 31, 2009 one customer’s balance of approximately $501,800 (75%), for March 31, 2008 two customer’s balances of approximately $552,412 (86%) accounted for a material portion of accounts receivable.
In May 2010, the Company was advised its largest customer would be cancelling its service possibly as soon as August of 2010.
Revenue recognition
For recognizing revenue, the Company applies the provisions of the Revenue Recognition Topic of the FASB ASC. 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.
Note B - Summary of significant accounting policies (continued):
During the years ended March 31, 2010 and 2009, the majority of the Company’s revenue consisted of platform sales, ringback service sales, and entertainment content sales. The Ringback product is a service that allows for the playing of a song, message, or other audible during the usual “ring ring” heard until a phone is answered.
The amount of sales by product segment for the years ended March 31, 2010, 2009 and 2008 was as follows:
Income taxes
Income taxes are accounted for under the asset and liability method. 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.
The current and deferred tax provision in the financial statements includes consideration of uncertain tax positions in accordance with the Income Taxes Topic of the FASB ASC. Management believes there are no significant uncertain tax positions, so no adjustments have been reported from the adoption of the Income Taxes Topic of the FASB ASC. The Company is no longer subject to income tax examinations by the Internal Revenue Service for years prior to 2007.
Stock based compensation
The Company recognizes compensation costs related to stock-based payment transactions (i.e. granting of stock options and warrants) in the financial statements in accordance with the Stock Compensation Topic of the FASB ASC. With limited exceptions, the amount of compensation cost is 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. Stock-based compensation expense recognized for the year ended March 31, 2010, 2009 and 2008 was $-0-, $-0-, and $297,601 respectively. As of March 31, 2010, there were no unrecognized compensation costs related to non-vested share-based compensation arrangements. Disclosures required by this statement are in Notes F and G.
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
Income or loss per share
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, such as stock options, warrants, convertible preferred stock and convertible debentures, were exercised or converted into common stock. For 2010, 2009 and 2008, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Loss per share is based on the weighted average number of shares outstanding of 6,130,184, for each of the years ended March 31, 2010, 2009 and 2008.
Recent accounting pronouncements
In May 2009, the FASB issued new accounting guidance on subsequent events that 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. The Subsequent Events Topic, 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. The pronouncement was effective for interim or annual financial periods ending after June 15, 2009. The adoption of this statement did not have a material effect on the Company’s financial statements.
In February 2010, the FASB amended its guidance on subsequent events to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events, for both issued and revised financial statements. This amendment alleviates potential conflicts between the FASB’s guidance and the reporting rules of the SEC. Our adoption of this amended guidance, which was effective upon issuance, had no effect on our financial condition, results of operations, or cash flows.
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. As of January 31, 2010, the Debentures were paid in full. The Debentures paid an interest rate of 6% on an annual basis. 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 original expiration date was March 31, 2009 but was extended to March 31, 2011 as part of the note extension agreement.
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 was amortized over the original three-year term of the Debentures as additional interest expense. Amortization for the years ended March 31, 2010, 2009 and 2008, was $-0-, $-0-, and $142,472, respectfully. The loan costs incurred on the issuance of the Debentures amounted to $2,430.
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note C - Convertible debt and warrants (continued):
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. As of March 31, 2010, there was an outstanding balance due of $1,111,500. The Debentures pay an interest rate of 6% on an annual basis and are convertible into 3,175,714 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 exercisable through September 29, 2011.
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 was amortized over the original three-year term of the Debentures as additional interest expense. Amortization for the year ended March 31, 2010, 2009 and 2008 was $46,996, $93,992 and $93,992, respectively.
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 was amortized over the original three-year term of the debentures as financing cost. Amortization for the year ended March 31, 2010, 2009 and 2008 was $4,214, $8,428 and $8,428, respectively.
On March 2, 2009, 800,000 warrants were issued in exchange for consulting services provided to the Company. 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 $77,870 has been recorded as consulting fees.
Note D - Common stock:
Stock purchase warrants
At March 31, 2010 the Company had outstanding warrants to purchase 5,135,072 shares of the Company's common stock at prices that ranged from $0.50 per share to $0.75 per share. The warrants are exercisable at any time and expire through September 29, 2011. At March 31, 2010, 5,135,072 shares of common stock were reserved for that purpose.
Common stock reserved
At March 31, 2010, shares of common stock were reserved for the following purposes:
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note E - Employee stock option plans:
2000 Plan
On September 29, 2000, the Company adopted an incentive stock option and other equity participation plan (“2000 Plan”) which permits the issuance of stock purchase agreements, stock awards, incentive stock options, non-qualified stock options and stock appreciation rights to selected employees and independent contractors of the Company. The 2000 Plan reserved 400,000 shares of common stock for grant and provides that the term of each award be determined by the committee of the Board of Directors (Committee) charged with administering the Plan. In February 2006, the Committee revised the plan to reserve 1,000,000 shares of common stock for grant. These stock options vest over a period of one to two years and expire five years from the grant date. Any options that are unexercised at expiration and priced above market value are extended for an additional year if the employee is employed at the date of expiration.
Under the terms of the 2000 Plan, options granted may be either nonqualified or incentive stock options, and the exercise price, determined by the Committee, may not be less than the fair market value of a share on the date of the grant. Stock appreciation rights granted in tandem with an option shall be exercisable only to the extent the underlying option is exercisable and the grant price shall be equal to the exercise price of the underlying option. At March 31, 2010, options to purchase 814,133 shares at an exercise price of $0.60 to $1.25 per share were outstanding. No stock appreciation rights had been granted at March 31, 2010.
As of March 31, 2010, 41,667 options have been exercised, 426,995 have been forfeited, 109,550 expired, 814,133 remain outstanding, and 814,133 were vested and exercisable. At March 31, 2010, the remaining weighted average contractual life was 1.5 years.
Employee warrants
As of March 31, 2010, none of the employee warrants have been exercised or forfeited, 947,000 expired, 196,000 remain outstanding, and 196,000 were vested and exercisable. At March 31, 2010, the remaining weighted average contractual life was approximately 0.2 years. Employee warrants may be extended for an additional year after expiration if the employee is still employed with the Company at the expiration date.
Note F - Information related to employee stock options and warrants:
The Company used the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by our stock price as well as other assumptions. The following weighted-average assumptions were used in the pricing model:
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note F - Information related to employee stock options and warrants (continued):
Following is a summary of the stock award and incentive plans:
Following is a summary of warrants issued to employees:
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note G - Stock warrants:
During the years ended March 31, 2010, 2009 and 2008, the Company issued -0-, 800,000, and -0-warrants to a service provider at an exercise price of $0.50. The warrants can be exercised at any time and expire on June 30, 2011.The Company accounts for warrants issued to non-employees at fair value of the warrants at the grant date. For the years ended March 31, 2010, 2009 and 2008, the Company recognized $-0-, $77,870, and $-0-, respectively, as compensation expense and $-0- as stock issuance cost during the years ended March 31, 2010, 2009 and 2008 related to warrants issued to non-employees.
As of March 31, 2010, none of the total warrants issued to non-employees for goods and services have been exercised; none have been forfeited; 363,607 have expired; and 967,143 remain outstanding, of which 967,143 were vested and exercisable. At March 31, 2010, the remaining weighted average contractual life was approximately 1.3 years.
For the years ended March 31, 2010, 2009 and 2008, the Company issued -0- warrants, in connection with stock offerings and therefore, no expense was recognized by the Company during the years ended March 31, 2010, 2009 and 2008.
As of March 31, 2010, 204,499 of the total warrants issued for stock offerings have been exercised; none have been forfeited; 431,493 have expired; and 3,971,928 remain outstanding, of which 3,971,928 were vested and exercisable. At March 31, 2010, the remaining weighted average contractual life was approximately 0.9 years.
The per share weighted-average fair value of warrants granted to non-employees in exchange for goods and services was determined using the Black Scholes Option-Pricing Model. The following weighted-average assumptions were used in the pricing model:
Following is a summary of warrants issued to non-employees in exchange for goods and services:
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note G - Stock warrants (continued):
The following is a summary of warrants issued in connection with stock and debenture offerings:
Following is an overall summary of the stock warrants activity, including warrants issued to employees (see Note F):
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note H - Income taxes:
The Company uses the liability method of accounting for income taxes. Under the liability method, a provision for income taxes is recorded based on taxes currently payable on income as reported for federal income tax purposes, plus an amount which represents the change in deferred income taxes for the year.
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax-reporting basis of the Company's assets and liabilities. The major areas in which temporary differences give rise to deferred taxes are accounts receivable, accrued liabilities, start-up expenditures, accumulated depreciation, and net operating loss carry-forwards. Deferred income taxes are classified as current or non-current depending on the classification of the assets and liabilities to which they relate. Deferred income taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the years in which the temporary differences are expected to reverse.
The provision for income taxes as of March 31 consists of:
The provision for income taxes for the years ended March 31, 2010, 2009 and 2008, differs from the “expected” tax benefit (computed using the 34% U.S. federal corporate rate to income before income taxes) as follows:
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note H - Income taxes (continued):
Deferred tax (liabilities) assets as of March 31 consist of the following:
The Company has recorded a valuation allowance amounting to the entire deferred tax asset balance because of the Company's uncertainty as to whether the deferred tax asset is realizable. However, if the Company is able to utilize the deferred tax asset in the future, the valuation allowance will be reduced through a credit to income.
The Company has available at March 31, 2010, a net operating loss carry-forward of approximately $19,450,000, which can be used to offset future taxable income through the year 2030. Utilization of net operating loss carry-forwards in the future may be limited if changes in the Company’s stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code.
Note I - Commitments:
The Company leases its office facilities and some office equipment under operating leases expiring through December 2012. Following is a schedule of future minimum lease payments required under the above operating leases as of March 31, 2010:
Total rent expense charged to operations was $45,890, $55,327, and $55,654, for the years ended March 31, 2010, 2009 and 2008, respectively.
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note J - Legal Proceedings:
In February, 2008, the Company was 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 the Company has violated the 608 Patent, preliminary and permanent injunctions, an order that the Company destroy all infringing items, and money damages in a sum according to proof at trial. The Company does not believe that they infringe the 608 Patent and believes it has 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.
Note K - Going concern:
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has suffered significant operating losses in past years. As shown in the accompanying financial statements, the Company has only shown a profit of $736,589 and $43,617 for the years ended March 31, 2010 and 2009, respectively while it incurred net loss of $747,816 for the year ended March 31, 2008. The Company had positive cash flow from operations of $1,094,243 and $310,242 for the years ended March 31, 2010 and 2009, respectively but experienced negative cash flows from operations of $130,777 for the year ended March 31, 2008. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. Management’s plans in regard to this matter are described below.
Management projects working capital needs to be approximately $1,140,000 over the next twelve months for corporate overhead to continue to deploy services to carrier customers. Additionally, the Company has $1,111,500 of debentures due on or before September 29, 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. Due to uncertainties regarding loss of its major customer and how well new customer contracts that the Company just launched will produce new revenue, it is difficult for management to project the Company's revenue performance, operating profits or loss, or cash requirements for more than a few months. 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.