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| PTSC.OB > SEC Filings for PTSC.OB > Form 10-K on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Annual Report
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING FUTURE EVENTS AND PERFORMANCE OF OUR COMPANY. YOU SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, BECAUSE THEY ARE ONLY PREDICTIONS BASED ON OUR CURRENT EXPECTATIONS AND ASSUMPTIONS. MANY FACTORS COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THESE FORWARD-LOOKING STATEMENTS. YOU SHOULD REVIEW CAREFULLY THE RISK FACTORS IDENTIFIED IN THIS REPORT AS SET FORTH BELOW AND UNDER THE CAPTION "RISK FACTORS." WE DISCLAIM ANY INTENT TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT ACTUAL EVENTS OR DEVELOPMENTS.
Overview
In June 2005, we entered into a series of agreements with TPL and others to facilitate the pursuit of unlicensed users of our intellectual property. We intend to continue our joint venture with TPL to pursue license agreements with unlicensed users of our technology. We believe that utilizing the option of working through TPL, as compared to creating and using our own licensing team for those activities, avoids a competitive devaluation of our principal assets and is a prudent way to achieve the desired results as we seek to obtain fair value from users of our intellectual property.
With the proceeds generated by these licensing efforts, we are undertaking to make investments in technologies, and acquisitions of companies operating in the electronics technology market sector which may include i) selective expansion of our intellectual property portfolio, ii) pursuit of strategic minority investments in certain early-stage revenue or technology ventures that represent a technology or capability of interest to us, and iii) acquiring entire companies.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. We believe the following critical accounting policies affect our most significant estimates and judgments used in the preparation of our consolidated financial statements.
1. Revenue Recognition
Historically we recognized revenue from the sale of our microprocessor chips upon shipment to the customer, at which time title transferred and we had no further obligations. We discontinued the sale of our microprocessor chips during the first fiscal quarter of 2009. Revenue from technology license agreements is recognized at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), and the customer is provided with the licensed technology, if applicable. Fees for maintenance or support are recorded on a straight-line basis over the underlying period of performance.
PDSG sells software and services to end users primarily through relationships
with systems integrators and prime contractors. PDSG recognizes revenue in
accordance with AICPA Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition, and all related amendments and interpretations. PDSG's revenue is
derived primarily from the following sources: (i) software licensing,
(ii) related professional services, and (iii) post contract customer support
("PCS") agreements. PCS agreements typically include software updates, on a when
and if available basis, and telephone and internet access to technical support
personnel. Software updates provide customers with rights to unspecified
software product upgrades and to maintenance releases and patches released
during the term of the support period. Revenue for support services is
recognized on a straight-line basis over the support period.
When a sale involves multiple elements, PDSG allocates the entire fee from the arrangement to each respective element based on its Vendor Specific Objective Evidence ("VSOE") of fair value and recognizes revenue when each element's revenue recognition criteria are met. VSOE of fair value for each element is established based on the price charged when the same element is sold separately. PDSG has not yet demonstrated VSOE for the professional services that are rendered in conjunction with its software license sales. Accordingly, we have combined their presentation on our consolidated statements of income under the caption "License and service revenue".
The majority of PDSG's contracts with customers, including systems integrators and prime contractors, are multiple element arrangements which contain professional services that are considered essential to the functionality of the other elements of the arrangement. PDSG accounts for revenue on these arrangements according to the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under SOP 81-1, PDSG recognizes revenue based on progress towards contract completion measured by actual hours incurred in relation to the estimate of total expected hours. PDSG measures SOP 81-1 revenues by applying the contract-specific estimated percentage of completion to the total contract amount for software and professional services. PDSG routinely updates the estimates of future hours for agreements in process and reports any cumulative effects of such adjustments in current operations. PDSG immediately recognizes any loss expected on these contracts when it is projected that a loss is probable.
In certain situations where PDSG's customer contracts contain acceptance criteria or other conditions that are deemed adverse to the probability of collection, revenues recognized are limited to the amount of cash already collected.
Holocom recognized revenue upon shipment of its product or upon receipt of its product by the customer when shipped FOB destination and recognized revenue on its short-term installation contracts as time and materials costs were incurred.
Holocom maintained agreements with stocking distributors. These agreements provided for a limited product warranty for a period of one year from the date of sale to the end user. The warranty did not cover damage to the product after it had been delivered to the distributor. Holocom's stocking distributor agreements also allowed limited rights to periodic stock rotation. These rotation rights allowed for the exchange of a percentage of distributor inventory for replacement products of the distributor's choosing. At April 30, 2009, the date of deconsolidation, Holocom had evaluated the potential for rotated product and had provided for the estimated impact in the accounting records.
2. Assessment of Contingent Liabilities
We are involved in various legal matters, disputes, and patent infringement claims which arise in the ordinary course of our business. We accrue for any estimated losses at the time when we can make a reliable estimate of such loss and it is probable that it has been incurred. By their very nature, contingencies are difficult to estimate. We continually evaluate information related to all contingencies to determine that the basis on which we have recorded our estimated exposure is appropriate.
3. Stock Options and Warrants
On June 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment, which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
In November 2005, FASB issued FASB Staff Position ("FSP") No. FAS 123R-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards ("FAS 123R-3"). We have elected to adopt the alternative transition method provided in FAS 123R-3. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R).
Stock-based compensation expense recognized during the period is based on the
grant date fair value of the portion of share-based payment awards ultimately
expected to vest during the period in accordance with the provisions of SFAS No.
123(R). As stock-based compensation expense recognized in the consolidated
statements of income is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The estimated average
forfeiture rate for the fiscal years ended May 31, 2009, 2008 and 2007, of
approximately 5% was based on historical forfeiture experience and estimated
future employee forfeitures.
4. Income Taxes
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that a substantial majority of the deferred tax assets recorded on our consolidated balance sheet will ultimately be recovered. However, should there be a change in our ability to recover the deferred tax assets; the tax provision would increase in the period in which we determined that the recovery was not probable.
Additionally, we adopted Financial Accounting Standards Board, ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, or FIN 48, on June 1, 2007, the first day of fiscal 2008. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under FIN 48 we may only recognize tax positions that meet a "more likely than not" threshold.
5. Investments in Affiliated Companies
We have a 50% interest in PDS. We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee's Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statements of income in the caption "Equity in earnings of affiliated companies".
We have a 38.9% interest in Talis. We account for our investment using the equity method of accounting pursuant to paragraph 8 of SOP 78-9, Accounting for Investments in Real Estate Ventures (which has applicability to non-real estate accounting matters as well). Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statements of income in the caption "Equity in earnings of affiliated companies".
We own 37.1% of the preferred stock of Avot. This investment is accounted for at cost since we do not have the ability to exercise significant influence over the operating and financial policies of Avot.
We own 100% of the preferred stock of Holocom. This investment has historically been accounted for at cost since we do not have the ability to exercise significant influence over the operating and financial policies of Holocom. Due to a re-consideration event on May 1, 2009, this investment is carried at cost plus the effects of deconsolidation of this variable interest entity on our May 31, 2009 balance sheet.
We review our investments in these affiliated companies to determine whether events or changes in circumstances indicate that the carrying amounts may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near term prospects of the investees. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss.
The inability of Avot to meet its business plan, to raise capital, and the general economic environment were indicators of impairment on our investment, accordingly at May 31, 2009, management obtained a third party valuation of Avot from Vantage Point Advisors, Inc. Based on the results of the valuation, it was determined that our investment in Avot was impaired by approximately $867,000. We have recorded this as an impairment of investment in affiliated company on our consolidated statement of income for the fiscal year ended May 31, 2009.
6. Variable Interest Entity
On March 27, 2007 we entered into an 18 month revolving line of credit with Holocom for a maximum amount of $500,000 which matured on September 27, 2008. The line of credit was paid in full on August 31, 2008. During July 2008, Holocom obtained a credit facility from a third party which we guaranteed. The line of credit and the subsequent guaranty by us caused us to have a variable interest in Holocom, a variable interest entity, as we had determined that we were the primary beneficiary as we absorbed more than half of the variable interest entity's expected losses. FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46") as modified by FASB in December of 2003 ("FIN 46(R)"), required us to consolidate Holocom as long as we were deemed to be the primary beneficiary.
On May 1, 2009 the third party credit facility expired. Due to this reconsideration event, we have determined that under FIN46(R) we no longer qualify as the primary beneficiary as we no longer provide the sole source of financing for Holocom and as such we are no longer required to consolidate Holocom's assets and liabilities in our financial statements. The results of Holocom's operations from March 27, 2007 through the date of the reconsideration event are included in our consolidated statements of income for the fiscal years 2009, 2008 and 2007.
Our guaranty of the third party credit facility remained in effect until Holocom paid the debt in full. On April 30, 2009, the balance on the credit facility was $290,000 and on May 27, 2009 Holocom paid the debt in full.
7. Business Combinations and Intangible Assets Including Goodwill
We account for business combinations using the purchase method of accounting and accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Due to the time it takes to obtain pertinent information to finalize the acquired company's balance sheet, it may be several quarters before we are able to finalize the initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Identifiable intangible assets with finite lives are amortized over their estimated useful lives on a straight line basis. Goodwill and intangible assets are tested for impairment on an annual basis, or sooner if an indicator of impairment occurs.
The inability of PDSG to meet its business plan and the general economic environment were indicators of potential impairment on our goodwill and intangible assets, accordingly at May 31, 2009, management obtained a third party valuation of PDSG's goodwill and intangibles from Vantage Point Advisors, Inc. Based on the results of the valuation, it was determined that goodwill was impaired by approximately $236,000. We have recorded this as an impairment of goodwill on our consolidated statement of income for the fiscal year ended May 31, 2009.
RESULTS OF OPERATIONS
Comparison of fiscal 2009 and 2008
Consolidated:
May 31, 2009 May 31, 2008
Revenues:
Product sales and other $ 4,761,271 $ 3,708,218
License and service revenue 593,451 -
Total revenues 5,354,722 3,708,218
Cost of sales:
Product sales and other 2,136,264 1,510,450
License and service revenue 287,911 -
Amortization of purchased intangibles 661,761 -
Total cost of sales 3,085,936 1,510,450
Gross profit $ 2,268,786 $ 2,197,768
Segment Results:
May 31, 2009 May 31, 2008
Holocom: Dollars % of Revenue Dollars % of Revenue
Revenues - Product sales and other $ 4,709,491 100.0% $ 3,649,898 100.0%
Cost of sales 2,136,264 45.4% 1,510,450 41.4%
Gross profit $ 2,573,227 54.6% $ 2,139,448 58.6%
PDSG:
License and service revenue $ 593,451 100.0% $ - -
Cost of sales 287,911 48.5% - -
Amortization of purchased intangibles 661,761 - - -
Gross loss $ (356,221 ) - $ - -
PTSC:
Revenues - Product sales and other $ 51,780 100.0% $ 58,320 100.0%
Cost of sales - - - -
Gross profit $ 51,780 100.0% $ 58,320 100.0%
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Holocom
During the eleven months ended April 30, 2009 and twelve months ended May 31, 2008, we recorded sales amounting to approximately $4,709,000 and $3,650,000, respectively, by our consolidated variable interest entity, Holocom, with cost of sales amounting to approximately $2,136,000 and $1,510,000, respectively. The increase in sales for Holocom during the eleven months ended April 30, 2009 as compared to the twelve months ended May 31, 2008 is primarily due to the expansion of Holocom's distributor network and addition of product sales to new customers.
PDSG
We acquired Crossflo on September 1, 2008, the assets of Verras Medical, Inc. ("Verras") on December 1, 2008 and the Vigilys business line on March 27, 2009 all of which were combined into PDSG. Revenue consists of software licenses and related services relating to PDSG's CDX data agent product and services provided by PDSG to medical facilities utilizing the Sherlock™ software tool. Cost of sales includes the direct time of PDSG employees on each project as well as outside contractors. Included in cost of sales is approximately $662,000 of amortization expense on purchased intangible assets.
PTSC
During the fiscal year ended May 31, 2009 and 2008, we recognized maintenance fee revenues totaling approximately $18,700 and $25,000 in connection with an agreement with AMD Corporation during the 2005 fiscal year. The agreement called for maintenance fees totaling $100,000 connected with a license agreement for our Ignite technology; the license fee revenue was recognized as revenue evenly over the four year period of the license, the four year period ended in February 2009.
In addition during the fiscal year ended May 31, 2009 and 2008, we recorded sales of approximately $33,000 and $33,000, respectively, from the sale of microprocessor chips that we no longer market. Inventory associated with the sales of these microprocessor chips is carried at zero value. Our final sales of microprocessor chips occurred during the quarter ended August 31, 2008.
Consolidated
Our revenues increased from approximately $3,708,000 for the fiscal year ended May 31, 2008 to approximately $5,355,000 for the fiscal year ended May 31, 2009. Our revenue amounts do not include income of approximately $19,926,000 and $10,193,000, respectively, from our investment in PDS and losses of approximately $8,400 and $488,000, respectively, from our investment in Talis for the fiscal year ended May 31, 2008 and 2009, respectively.
May 31, 2009 May 31, 2008 Research and development $ 510,848 $ -
PDSG
Research and development costs consist of PDSG's payroll and related expenses
for software engineers as well as outside contractors retained to assist in the
development of PDSG's software products. For the fiscal year ended May 31, 2009,
approximately $1,500 of non-cash compensation was recorded in connection with
vesting of employee stock options in accordance with SFAS 123(R).
Consolidated:
May 31, 2009 May 31, 2008
Selling, general and administrative $ 8,561,938 $ 6,964,861
Segment Results:
May 31, 2009 May 31, 2008
Holocom:
Selling, general and administrative $ 2,081,507 $ 1,997,009
PDSG:
Selling, general and administrative $ 2,540,519 $ -
PTSC:
Selling, general and administrative $ 3,939,912 $ 4,967,852
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Holocom
Selling, general and administrative expenses increased from approximately $1,997,000 for the twelve months ended May 31, 2008 to approximately $2,082,000 for the eleven months ended April 30, 2009. The increase consisted of approximately $38,000 relating to payroll, bonuses and related expenses, approximately $29,000 for meals and internal events, approximately $37,000 for royalty payments under the Earn Out Agreement, and approximately $62,000 for legal and professional expenses. For the eleven months ended April 30, 2009, approximately $6,000 of non-cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R). These increases were offset by a decrease in travel and related expenses of approximately $73,000.
PDSG
We acquired Crossflo on September 1, 2008, the assets of Verras on December 1, 2008 and the Vigilys business line on March 27, 2009 all of which were combined into PDSG. Selling, general and administrative expenses for the fiscal year ended May 31, 2009 consist of approximately $1,742,000 of payroll and related expenses for the sales and administrative employees, approximately $141,000 of travel and related expenses for the sales employees, approximately $44,000 for sales commissions, approximately $190,000 for consultants, and approximately $110,000 for rent expense. For the fiscal year ended May 31, 2009, approximately $47,000 of non-cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R).
PTSC
Selling, general and administrative expenses decreased from approximately $4,968,000 for the fiscal year ended May 31, 2008 to approximately $3,940,000 for the fiscal year May 31, 2009. The decrease consisted of approximately $811,000 in legal and accounting expense, primarily due to a settlement with a former officer of cash and stock in the prior fiscal year, a decrease in general legal matters, approximately $111,000 in public and investor relations expenses, approximately $28,000 in consulting expenses and approximately $45,000 in D&O insurance expenses. These decreases were offset by increases in payroll and related expenses of approximately $177,000 related to officer bonuses, and approximately $14,000 in travel and related expenses. For the fiscal year ended May 31, 2009, approximately $364,000 of non-cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R) as compared to approximately $503,000 for the fiscal year ended May 31, 2008.
Consolidated
Selling, general and administrative expenses increased from approximately $6,965,000 for the fiscal year ended May 31, 2008 to approximately $8,562,000 for the fiscal year ended May 31, 2009, primarily due to the acquisition of PDSG.
May 31, 2009 May 31, 2008 Settlement and license expense $ - $ 836,400
PTSC recorded settlement and license expenses amounting to approximately $836,000 for the fiscal year ended May 31, 2008 relating to royalties payable resulting from an agreement with Russell H. Fish III ("Fish").
May 31, 2009 May 31, 2008 Impairment of goodwill $ 235,897 $ -
The inability of PDSG to meet its business plan and the general economic environment were indicators of potential impairment on our goodwill and intangible assets, accordingly at May 31, 2009, management obtained a third party valuation of PDSG's goodwill and intangibles from Vantage Point Advisors, Inc. Based on the results of the valuation, it was determined that goodwill was impaired by approximately $236,000.
Consolidated:
May 31, 2009 May 31, 2008
Other income (expense):
Interest and other income $ 346,755 $ 1,470,008
Loss on sale of assets (1,733 ) (4,139 )
Interest expense (66,933 ) (389 )
Impairment of investment in affiliated company (866,667 ) -
Gain on sale of subsidiary interest - 150,000
Equity in earnings of affiliated companies 9,704,669 19,917,769
Total other income, net $ 9,116,091 $ 21,533,249
Segment Results:
May 31, 2009 May 31, 2008
Holocom:
Interest and other income $ 9,626 $ 25,587
Interest expense (10,435 ) (389 )
Gain on sale of subsidiary interest - 150,000
Total other income (expense), net $ (809 ) $ 175,198
. . .
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