PCS Edventures!, Inc. 10-K

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 Annual R eport, which are forward-looking, involve a high degree of risk and uncertainty. Certain statements in this Annual Report set forth management’s 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 Company’s 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 Company’s S EC filings. The Company assumes no duty to update forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion should be read in conjunction with Item 1A, “Risk Factors” of this report beginning on page 18 and our audited financial statements and notes thereto contained in Item 8, “Financial Statements and Supplementary Data of this report. Plan of Operation. PCS holds a unique position in the STEM education market with ( 1) an existing STEM library and deep expertise in creating STEM solutions comprised of curriculum and materials; ( 2) a unique PCS learning methodology – an adaptive (customizes to individual learners), experiential (hands-on in nature), learning framework that can be monetized in a number of ways , with what we believe is an approach to educational assessment and incentivizing students for the future, and PCS is an innovative leader in this area; ( 3) PCS has developed an innovative K12 robotics and engineering system comprised of hardware and software specifically designed to engage students in STEM topics such as hands-on physics and engineering and coding; ( 4) PCS has established itself as a prime STEM provider in the Kingdom of Saudi Arabia and is growing its revenues from the Kingdom; and ( 5) PCS entered the B2C space with a retail product launch this year and also has a working model for experiential learning labs operational. With a plan to expand higher margin digital delivery products , PCS is now in the development stage of a unique, subscription-based online learning system that can be licensed to schools or non-profit organizations, as well as be used in the home environment. 18 18 Table of Contents As we enter FY2016, our strategy is profitability driven seeking to optimize and streamline operations while moving our digital learning and robotics product strategy forward. A continued underlying principle will be the building of services and products with recurring revenue traits such as online licens ing . Tactically we will focus on improving product quality, improving our delivery and support infrastructure to accommodate larger scale delivery , improving our sales infrastructure, and building our new, higher margin digital products to add to our lineup of STEM products and services. We will continue to focus on the improvement of our web-based marketing efforts, expand our sales force and channel partners, and tighten sales processes for our domestic STEM sales. We will continue to fulfill existing and capture new STEM contracts with the Kingdom of Saudi Arabia. We will continue to use our EdventuresLab program for ( 1) an R&D test bed for product improvement and refinement with a major emphasis on digital delivery of content in FY2016; ( 2) r evenue generation through afterschool and summer course fees; ( 3) r evenue through licensing EdventuresLab curriculum and methods; and ( 4) r evenues from STEM retail products. We believe e-commerce sales of kits associated with STEM learning targeting the families of students attending the centers as well as the larger home retail market will provide a consistent, dependable boost in Q3 annual revenues to offset low education sales traditionally anticipated during this time frame. We will actively seek retail distribution methods and channels for our robotics retail products and expand their usability for other market segments. Management's Discussion and Analysis of Financial Condition and Results of Operation. Operating Results - Overview . Fiscal year ended March 31, 201 5 resulted in a net loss from continuing operations of ($ 1, 447,820 ) as compared to the net loss from continuing operations during the fiscal year ended March 31, 201 4 of ($ 930,635 ). This is a n in crease in of $ 517,185 or approximately 5 6 % , from the net loss for the fiscal year ended March 31, 201 4 . The Basic Loss per Share for FY 201 5 and FY 201 4 was ($0.0 2 ) and ($0. 0 2 ) , respectively . Details of changes in revenues and expenses can be found below. Operating Results From Discontinued Operations . On November 30, 2005, we 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 our 8-K Current Report filed with the SEC on December 9, 2005, and amended on February 15, 2006. As a result of the definitive Share Exchange Agreement between the parties, 511092 N.B. LTD. became our wholly-owned subsidiary. In December, 2005, the name of this subsidiary was formally changed to PCS LabMentors, Ltd. We divested this subsidiary in August , 2013. F Y 2015 had no operating results for discontinued operations. L abMentors, final results of operations were reported d uring fiscal year 2014 . LabMentors , results of operations were separated and classified as Discontinued . Revenues for discontinue d operations for the period April 1, 201 3 through August 31, 2013 , were $46,901 . Cost of sales for discontinue d operations for the period April 1, 2013 thr ough August 31, 2013 , w as $20,0 22 . Operating and other e xpense for discontinue d operations for the period April 1, 201 3, through August 31, 2013 , were $57,459 . Operating Results Revenues. R evenues , excluding revenues from discontinued operations , for the twelve-month period ended March 31, 201 5 , were $ 2 ,901,113 a n in crease of $ 1, 045,402 or 56 % , as compared to $ 1 , 855 , 711 for the twelve-month period ended March 31, 201 4 . The revenue growth was across all three focus areas : 1) large contract fulfillment with T4EDU in Saudi Arabia generating approximately $802,764 additional revenue over FY 2014 , 2) opening of a second EdventuresLab with $72,978 additional revenue over FY 2014 , and 3) domestic sales exceeded FY 2014 by $133,479 . 19 19 Table of Contents Operating Results Cost of Goods Sold/Cost of Sales. Cost of Sales for the 12 month period ended March 31, 201 5 , in creased $ 6 78,741 or 74 % to $ 1,59 0 , 549 as compared to $ 911,808 for the 12 month period ended March 31, 201 4 . FY201 5 , as a percent of revenue to cost of goods sold , was 55 %. Included in PCS’ C ost of Sales are variable costs such as sales commissions, shipping expenses , and product royalty payments. Operating Results Operating Expenses. Operating expenses excluding assets from discontinued operations , for the 12 month period ended March 31, 201 5 , increased by $ 5 12 , 702 or 3 0 % to $ 2,2 09 , 691 as compared to $ 1,696, 989 8 for the 12 month period ended March 31, 201 4 . The table below identifies the year over year changes: Fiscal Year ended March 31, 2014 800x600 Normal 0 false false false EN-US X-NONE X-NONE Product Development $ 800x600 Normal 0 false false false EN-US X-NONE X-NONE 228,293 (1) 800x600 Normal 0 false false false EN-US X-NONE X-NONE Employee Expenses 800x600 Normal 0 false false false EN-US X-NONE X-NONE 162,701 (2) 800x600 Normal 0 false false false EN-US X-NONE X-NONE International Consulting 800x600 Normal 0 false false false EN-US X-NONE X-NONE 61,000 (3) Marketing Expense 800x600 Normal 0 false false false EN-US X-NONE X-NONE 36,487 (4) 800x600 Normal 0 false false false EN-US X-NONE X-NONE Settlement Expense 800x600 Normal 0 false false false EN-US X-NONE X-NONE 32,000 (5) Other, net ( 800x600 Normal 0 false false false EN-US X-NONE X-NONE 7,779 ) $ 512,702 1) Product Development E xpense in creased due to: new Cortex, Brain 5.0 manufacturing, and international product line s developed in year ended March 31, 201 5 . 2) Employee Expense in crease d with the addition of two positions coordinating international sales efforts, learning center and domestic sales management, and a curriculum writer. 3) International Consulting Expense was incurred with the partnering of a Kingdom of Saudi Arabia contract facilitator positioned abroad. 4) Marketing Expense increased with additional efforts in website optimization, and lead generation campaigns . 5) Settlement expense was incurred with the medi ation of an employment contract dispute Operating Results – Other Income/Expenses . Total other income (expense) for the fiscal years ended March 31, 201 5 and 201 4 was ( $ 5 48 , 693 ) and ( $ 177,549 ) respectively; a change of 2 09 % or ( $ 3 71,14 4 ) which was p redominantly d ue to debt discount charged to interest expense on notes payable converted in FY 2015 . Liquidity. As of the fiscal year ended March 31, 201 5 , we had $ 1 30 , 162 in cash, with total current assets of $ 855, 299 and total current liabilities of $ 2,257,846 . We have an accumulated deficit of ($ 39, 618,006 ) , and stock holder’s equity of ( $ 1, 6 73 , 404 ) . The Company has a working capital deficit of $ 1,402,54 7 at March 31, 201 5 . The working capital deficit for the fiscal year ended March 31, 201 4 was $ 707,632 . The Company has a current ratio at March 31 of 0 . 3 7 and 0. 52 for FY2 01 5 and FY 201 4 , respectively. This de crease in liquidity was due primarily to the change in debt structure resulting in an increase in short term debt, and the expensing of the debt discount at conversion . Critical Accounting Policies. 20 20 Table of Contents Estimates. Our discussion herein and analysis thereof is based upon our financial statements in Part II 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 of our Financial Statements contained in Part II, Item 8 for additional discussions of these and other accounting policies and disclosures required by GAAP. 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, 201 5 , the Company had sales to t hree major customers that accounted for 56 % and 37 % , respectively, of total revenue as of the fiscal year ended March 31, 201 5 , and 201 4 . Three customers account ed for 81 % and 91 % of total account s receivable as of the fiscal years ended March 31, 201 5 and 201 4 respectively. See N ote 4 to the F inancial S tatements 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 Company’s financial statements include translations for the LabMentors subsidiary, where applicable, 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. 21 21 Table of Contents Intellectual Property. The Company ’ s 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 us . 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 Company’s delivery and access platform that was determined to b e 60 months. As of March 31, 20 1 2 , Intellectual Property was fully amortized . 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 Company’s evaluation of goodwill and intangible assets completed at March 31, 201 2, 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, 201 2 , 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 . N o additions occurred during the fiscal year s ended March 31, 201 4 and March 31, 201 5 . Despite the goodwill and intangible asset impairments described, the Company’s Lab Mentors subsidiary ha d continuing operations and continue d to produce revenue until it s sale during the fiscal year ended March 31, 2014 . 22 22 Table of Contents 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 o f 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 the fiscal year ended March 31, 201 5 . Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not required for smaller reporting companies.