Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis or Plan of Operation.
Cautionary Statements for Purposes of Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
Except for historical facts, all matters discussed in this report, which are forward-looking, involve a high degree of risk and uncertainty. Certain statements in this report set forth managements intentions, plans, beliefs, expectations, or predictions of the future based on current facts and analyses. When we use the words believe, expect, anticipate, estimate, intend or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results may differ materially from those indicated in such statements, due to a variety of factors, risks and uncertainties. Potential risks and uncertainties include, but are not limited to, competitive pressures from other companies within the Educational Industries, economic conditions in the Companys primary markets, exchange rate fluctuation, reduced product demand, increased competition, inability to produce required capacity, unavailability of financing, government action, weather conditions and other uncertainties, including those detailed in the Companys SEC filings. The Company assumes no duty to update forward-looking statements to reflect events or circumstances after the date of such statements.
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The following discussion should be read in conjunction with Item 1A, Risk Factors of this report beginning on page 18 and our audited consolidated financial statements and notes thereto contained in Item 8, Consolidated Financial Statements and Supplementary Data of this report.
Plan of Operation.
In fiscal year 2015, PCS will expand its commitment to the research and development of PreK-12, brain-based learning programs in Science, Technology, Engineering and Math (STEM) that embed 21st century thinking skills and new technologies through the deployment of Edventures Lab programs starting in Boise, Idaho with a second site opening in Eagle, Idaho in June of 2014 and the deployment of its new tablet-based interactive software for engineering and robotics The PCS strategic plan focuses on three initiatives which work together to create a long term plan for rapid growth:
1) Domestic STEM program sales into the K12 STEM marketplace consisting of afterschool and in-school customers.
2) Consumer and retail STEM offerings through the Edventures Lab program.
4) Specialized consulting and educational services that provide K-12 STEM educational solutions for the international market
Fiscal year 2014 saw progress on all three of these initiatives as we expanded our domestic sales presence, created partnerships to strengthen our product offerings, closed significant International contracts in Saudi Arabia, and expanded our Edventures Lab program.
During fiscal year 2015 we will continue to build upon these successes through pursuing additional contracts overseas, expanding our domestic sales force further, and preparing for scaling additional Edventures Lab sites. The PCS Edventures Lab concept is a key strategic addition to our plan as they will serve the following purposes: 1) R&D test bed for product improvement and refinement; 2) Revenue generation through afterschool and summer course fees, a revenue stream that will be more predictable and consistent compared to the seasonal revenues associated with education budgets; 3) The centers will serve as showrooms for PCS products in strategic locations and key districts around the country. We believe this will provide PCS with significant competitive advantages over other solution providers since administrators and educators can visit local centers for support, training, and demonstrations of our products in action; 4) Revenues from experiential retail. We believe e-commerce sales of kits associated with STEM learning targeting the families of students attending the courses will provide a boost in Q3 revenues to offset low education sales traditionally anticipated during this time frame; and 5) the Edventures Lab sites will establish the basis for expanding a subscription-based, digital learning network into targeted communities that will eventually span the United States.
To capitalize on the expansion of the Edventures Lab, we are actively pursuing funding vehicles such as private equity and licensing arrangements. Our plan to refine operations in our first center in Boise was successful and we are deploying a second program in Eagle Idaho opening in June of 2014. A third site, our first licensee, is under development at this time. The establishment of this initial network of centers will establish the groundwork required for scaling in FY2015 and beyond. We believe the strategic deployment of Edventures Labs to be a viable and sound approach based on our initial trial programs.
Management's Discussion and Analysis of Financial Condition and Results of Operation.
Operating Results - Overview.
Fiscal year ended March 31, 2014 resulted in a net loss from continuing operations of ($930,635) as compared to the net loss from continuing operations during the fiscal year ended March 31, 2013 of ($542,051). This is an increase in of $388,589 or approximately 72%, from the net loss for the fiscal year ended March 31, 2013. The Basic Loss per Share for fiscal year 2014 and 2013 was ($0.02) and ($0.01), respectively. Details of changes in revenues and expenses can be found below.
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Operating Results From Discontinued Operations.
On November 30, 2005, PCS entered into an agreement with 511092 N.B. LTD., a Canadian corporation, (LabMentors) to exchange PCS common stock for common stock of 511092 N.B. LTD. as disclosed in the 8-K as filed with the Securities and Exchange Commission (the SEC) on December 9, 2005 and amended on February 15, 2006. As a result of the definitive Share Exchange Agreement, 511092 N.B. LTD. became a wholly owned subsidiary of the Company. In December 2005, the name of this subsidiary was formally changed to PCS LabMentors, Ltd. The Company divested the wholly owned subsidiary, PCS LabMentors, Ltd in August of 2013.
During fiscal year 2014, all PCS LabMentors, Ltd results of operations were separated and classified as Discontinued. Revenues for discontinued operations for the period April 1, 2013 through August 31, 2013 were $46,901 compared to twelve-month period ended March 31, 2013, revenues of $159,082. Cost of sales for discontinued operations for the period April 1, 2013 through August 31, 2013 was $20,022 compared to twelve-month period ended March 31, 2013, cost of sales of $78,113. Operating and other expense for discontinued operations for the period April 1, 2013 through August 31, 2013 were $57,459 compared to twelve-month period ended March 31, 2013, operating and other expense of $201,383.
Operating Results Revenues.
Consolidated revenues, excluding revenues from discontinued operations, for the twelve-month period ended March 31, 2014, were $1,855,711 a decrease of $920,262 or 33%, as compared to $2,775,973 for the twelve-month period ended March 31, 2013. The decrease was primarily due to two events: 1) a large order we received from a single customer for implementation of robotics labs into a number of after-school sites in FY2013 was not repeated in FY2014; 2 A large contract fulfillment with T4EDU in Saudi Arabia will be invoice and recognized in fiscal year 2015 due to delay in shipment; the contract was being negotiated at the end of FY and will recognized in early 2015. Although overall revenues were down due to these two events, tracking domestic revenues year over year show steady growth in direct domestic sales, channel partners, Edventures Lab revenues, and International projects.
Operating Results Cost of Goods Sold/Cost of Sales.
Consolidated Cost of Sales, excluding cost of sales from discontinued operations, for the twelve-month period ended March 31, 2014, decreased $378,121 or 29% to $911,808 as compared to $1,289,929 for the twelve-month period ended March 31, 2013. The FY2014 as a percent of revenue to cost of goods sold was $49%. The change was mainly due to fulfilling the orders associated with the additional revenues generated during the fiscal year. Included in PCS cost of goods sold are variable costs including sales commissions, shipping expenses and product royalty payments. In addition, LabMentors has minimal variable costs. Cost of goods sold for FY2014 as a percent of revenues was consistent with FY2013 at 46%.
Operating Results Operating Expenses.
Operating expenses excluding assets from discontinued operations, for the twelve-month period ended March 31, 2014, decreased by ($101,666) or 6% to $1,696,898 as compared to $1,798,655 for the twelve-month period ended March 31, 2013. The table below identifies the year over year changes:
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Fiscal Year ended
March 31, 2014
Option Warrant Expense
$
(47,399
)
(1)
Salaries
(272,671
)
(2)
Contract Labor
154,558
(3)
Marketing Expense
46,464
(4)
Bad Debt Expense
46,969
(5)
Board Compensation
(17,500
)
(6)
Other, net
(12,087
)
$
(101,666
)
1) Option Warrant Expense decreased due to less warrants being issued during the year ended March 31, 2014.
2) Salaries decrease due to reduced headcount and lower salaries for the positions that have turned over.
3) Contract Labor increased due to use of specialized contractors working on a project basis in the Learning Center, Domestic and International product development, and administration.
4) Marketing Expense increased with an increase in public and media relations, lead generation campaigns, and tradeshow attendance expense and related travel.
5) Bad debt increased with allowance for the entire note receivable from the sale of Labmentors.
6) Board Compensation decreased by the resignation of two board members forfeited restricted stock units.
Operating Results Other Income/Expenses.
___________________________________________________________________________________________
Total other income (expense) for fiscal years 2014 and 2013 was ($177,549) and ($229,439) respectively; a change of 23%. The change was primarily due to no derivatives valuations during the fiscal year.
Liquidity.
As of the fiscal year ended March 31, 2014, we had $27,860 in cash, with total current assets of $777,327 and total current liabilities of $1,484,959. We have an accumulated deficit of ($38,170,186), and shareholders equity of ($1,219,954).
The Company has a working capital deficit of $707,632 at March 31, 2014. The working capital deficit for the fiscal year ended March 31, 2013 was $615,541. The Company has a current ratio at March 31 of 0.52 and 0.45 for fiscal years 2014 and 2013, respectively. This increase in liquidity was due primarily to the fiscal year 2014 ending inventory included a very large order that shipped the first week of FY2015, extension of notes payable of $303,745 for two years, and accounts receivable contained a large receivable that paid the first week of FY2015.
Critical Accounting Policies.
Estimates.
Our discussion herein and analysis thereof is based upon our financial statements in Item 7 below, which have been prepared in accordance with Generally Accepted Accounting Principles of the United States (GAAP). The preparation of these statements requires management to make estimates and best judgments that affect the reported amounts. See Note 4 contained in Item 7 for additional discussions of these and other accounting policies and disclosures required by GAAP.
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Concentration of Credit Risks and Significant Customers.
The Company maintains cash in bank deposit accounts, 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.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which when realized have been within the range of management's expectations. The Company does not require collateral from its customers.
During the fiscal year ended March 31, 2014, the Company had sales to two major customers that accounted for 28% and 13% of total consolidated revenue as of March 31, 2014 and 2013.
The same two customers also accounts for 86% and 31% of total account receivable as of March 31, 2014 and 2013 respectively. See Note 4 to the financial statements for additional information.
Fair Value of Financial Instruments.
The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.
Foreign Currency Translation.
The functional currency of the Company is the U.S. dollar. The Companys financial statements include translations for the LabMentors subsidiary, which are maintained in Canadian dollars. All assets and liabilities are translated at the exchange rate on the balance sheet date and all revenues and expenditures are translated at the average rate for the period. Translation adjustments are reflected as a separate component of stockholders' equity, accumulated other comprehensive income (loss), and the net change for the year reflected separately in the statements of operations and other comprehensive income (loss).
In accordance with the financial accounting standard pertaining to the Statement of Cash Flows, the cash flows of the Company are translated using the weighted average exchange rates during the respective period. As a result, amounts in the statement of cash flows related to changes in assets and liabilities will not necessarily agree with the changes in the corresponding balances on the balance sheet that were translated at the exchange rate at the end of the period.
Educational Software.
The Company's inventory consists partially of internally developed education computer programs and exercises to be accessed on the Internet. In accordance with the financial accounting standard pertaining to internally developed software, the costs associated with research and initial feasibility of the programs and exercises are expensed as incurred. Once economic feasibility has been determined, the costs to develop the programs and exercises are capitalized until they are ready for sale and access and are reported at the lower of unamortized cost or net realizable value. Capitalized program and exercise inventory are amortized on a straight-line basis over the estimated useful life of the program or exercise, generally 24 to 48 months.
Intellectual Property.
The Companys intellectual property consists of capitalized costs associated with the development of the Internet software and delivery platform developed by the Company to enable access to the various educational programs and exercises developed by the Company. In accordance with generally accepted accounting principles as discussed previously regarding inventory, the initial costs associated with researching the delivery platform and methods were expensed until economic feasibility and acceptance were determined. Thereafter, costs incurred to develop the Internet online delivery platform and related environments were capitalized until ready for sale. Costs incurred thereafter to maintain the delivery and access platform are expensed as incurred. These capitalized costs were amortized on a straight-line basis over the estimated useful life of the Companys delivery and access platform that was determined to be 60 months. As of March 31, 2012 Intellectual Property was fully amortized.
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Property and Equipment.
Property and equipment are recorded at cost and are being depreciated for financial accounting purposes on the straight-line method over their respective estimated useful lives ranging from three to seven years. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in the results of operations. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized.
Goodwill and Intangible Assets.
We recorded our acquisition of LabMentors in accordance with the financial accounting standards issued by the FASB. We allocate the cost of acquired companies to the tangible and identified intangible assets and liabilities acquired with the remaining amount being recorded as goodwill. Certain intangible assets, such as acquired technology, are amortized (see Intellectual Property above).
The most recent acquisition did not have significant tangible assets, and, as a result, the majority of the purchase price was allocated to goodwill, which increases the potential for impairment charges that we may incur in the future.
We account for goodwill and other intangible assets in accordance with the financial accounting standards issued by the FASB pertaining to Goodwill and Other Intangible Assets. Under this standard, goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that impairment might have occurred. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step used to identify potential impairment is the comparison of the fair value of the item with its carrying amount, including goodwill and intangible assets with indefinite lives. We operate as one company, and, therefore, compare our book value to market value, which management must determine upon review based on similar transactions. If our fair value exceeds our book value, our goodwill is considered not impaired and the second step of the impairment test is unnecessary. If the book value exceeds the fair value, the goodwill is considered to be impaired and management must measure the amount of impairment loss, if any. For the measurement step, if the carrying amount of the goodwill exceeds the estimated fair value of the goodwill, an impairment loss would be recognized in an amount equal to that excess. The fair value estimate requires that future cash flows relating to the acquisition, in this case, be forecasted. These forecasts require management to make assumptions on the future sale of current and future products and services, future market conditions, technological advances, future growth rates, and discount rates utilized. Any loss recognized cannot exceed the carrying amount of the goodwill. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. The Companys evaluation of goodwill and intangible assets completed at March 31, 2012, resulted in a full impairment. This impairment was recorded as an operating expense of $202,688 with respect to the goodwill. As of March 31, 2012, amortizable intangible assets were comprised of educational software being amortized over the estimated useful life of the program or exercise, generally 24 to 48 months. The Company recognized $92,468 of impairment of intangible assets pertaining to the education software acquired with and subsequently developed at LabMentors. Due to the impairment at March 31, 2012, the entire balance of intangible assets was amortized. No additions occurred during the fiscal years ended March 31, 2013 and March 31, 2014.
Despite the goodwill and intangible asset impairments described, the Companys Lab Mentors subsidiary had continuing operations and continued to produce revenue until its sale in fiscal year ended March 31, 2014
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Options/Warrants and Shares Issued for Services.
On January 1, 2006, the Company adopted the accounting standard pertaining to Accounting for Stock Based Compensation , which establishes accounting for stock-based payment transactions for employee services and goods and services received from non-employees. The Company is required to recognize expense of options or similar equity instruments issued to employees using the fair-value-based method of accounting for stock-based payments. This standard covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award.
The Company accounts for shares issued to employees and others based upon the prior day closing price of our common stock as of grant date.
Acquisitions.
Our strategy is to investigate companies and/or assets for acquisition that continue to increase our product depth, market penetration, and synergies within the Company. The Company has made no acquisitions over the last three years.
Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements as of March 31, 2014.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
None, not applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.