On April 27, 2011, the Company granted to two consultants warrants to purchase an aggregate of 200,000 shares of restricted Rule 144 common stock at $0.35 per share. Exercisability of each of the purchase warrants is contingent upon the delivery of a signed international distribution agreement and receipt of revenue by the Company in an amount of no less than $250,000 (USD). The warrant expires 36 months from the effective date.
On June 20, 2011, the Company issued a short term note payable in the principal amount of $100,000 with interest accruing at 10% per annum and purchase warrants of 200,000 shares of common stock. The stock purchase warrants expire in 36 months and allow the warrant holders to purchase shares of the Companys restricted Rule 144 common stock at a price of $0.15 per share. The exercise price per share represents a 28% discount from the closing price of the Companys common stock on the OTC Bulletin Board on the commencement date of the note. The warrants computed volatility is 159.3%. A risk free interest rate of .68% was used to value the warrants. The fair market value of the warrants was $36,138.
On June 29, 2011, the company granted a stock purchase agreement to a consultant for 250,000 stock purchase warrants. Each purchase warrant is convertible into one share of restricted Rule 144 common stock at $0.17 per share. The purchase warrant is contingent upon the delivery of a signed distribution agreement and receipt of revenue by the Company in an amount of no less than $250,000 (USD). The warrant expires 36 months from the effective date.
PCS EDVENTURES!.COM, INC
Notes to the Consolidated Financial Statements
June 30, 2011
On June 29, 2011, the Company extended the due date on certain convertible Notes Payable in existence at March 31, 2011 in the aggregate amount of $215,000. The notes are convertible into common stock at a rate of $0.15 per share. These notes were originally due on June 29, 2011, and will now mature on October 27, 2011. In consideration for the note extension the Company issued an additional 430,000 in restricted Rule 144 common stock warrants. The restricted Rule 144 common stock warrants allow for the purchase of one share of restricted Rule 144 common stock at $0.15 per restricted Rule 144 common stock warrant. The warrants expire 36 months from the date of the original warrant agreement. The fair market value of these warrants was calculated using the Black Scholes Valuation Model, resulting in an expense of $61,995 during the quarter ended June 30, 2011.
NOTE 14 INTEREST EXPENSE
On April 11, 2011, the Company repaid that certain note dated March 7, 2011, in the amount of $101,458. The payment consisted of $100,000 in principal and $1,458 in interest. The interest paid included $1,000 that was accrued as of March 31, 2011, in Accrued Expenses and was expensed in the previous period.
NOTE 15 - SUBSEQUENT EVENTS
On July 11, 2011, the Company issued 45,077 shares of common stock as benefits to employees, valued at $6,520, based on the closing price of the Companys common stock on the date of grant.
On July 11, 2011, the Company issued 21,085 shares of common stock for consulting services rendered valued at $3,387, based on the closing price of the Companys common stock on the date of grant.
On July 5, 2011, the Company amended purchase warrants previously issued on April 27, 2011, entitling the holder to purchase in the aggregate 200,000 shares of the Companys common stock. The amendment adjusted the warrant exercise price from $0.35 per share to $0.16 per share of restricted Rule 144 common stock and adjusted the expiration date to 36 months from the date of amendment.
On July 28, 2011, Anthony A. Maher announced his resignation as Chief Executive Officer and Chairman of the Board, effective on July 31, 2011. Ms. Valerie Grindle was appointed to serve as Chief Executive Officer effective the same date and as a member of the Board of Directors until the next annual meeting of the Company or her prior resignation or termination. Ms. Grindle also serves as the Companys Chief Financial Officer.
On August 5, 2011, the Company issued 45,077 shares of common stock as benefits to employees, valued at $8,055 based on the closing price of the Companys common stock on the date of grant.
On August 5, 2011, the Company issued 25,289 shares of common stock for consulting services rendered valued at $4,046, based on the closing price of the Companys common stock on the date of grant.
Effective August 15, 2011, Robert O. Grover, who had been serving as President, Chief Technology Officer and Chief Operating Officer, will be serving as Chief Technology Officer and President of PCS International. This will allow Mr. Grover to focus his attention on new product development and the Companys efforts to establish business in global markets.
Effective August 1, 2011, PCS entered into an operating lease for 1,853 square feet of additional office space at its main office building located in Boise, Idaho. The rent is $500 per month and is on a month to month agreement.
Effective September 6, 2011, Ms. Leann Gilberg will assume the position of Chief Financial Officer.
Item 2. Managements Discussions and Analysis of Financial Condition and Results of Operations.
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 Securities and Exchange Commission 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 our audited consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contained in our Form 10-K for the year ended March 31, 2011.
Plan of Operation
In fiscal year 2012 PCS will continue its commitment to the research and development of PreK-16, brain-based learning programs in Science, Technology, Engineering and Math (STEM) that embed 21st century thinking skills and new technologies. In order to deploy the technical education and K-6 programs that had been in development and pilot testing for several years, PCS implemented a new Strategic Business Unit (SBU) and subsidiary structure in fiscal year 2011 that targeted sales efforts to the following markets:
1) K-6 programs for the elementary classroom
2) Tech Ed programs for grades 6-12
3) Afterschool programs
4) Services that provide K-16 educational solutions for the international market
5) Virtual labs for community colleges and universities
Fiscal year 2011 was the first year of implementation of the K-6 and Tech Ed SBUs and represented a milestone for taking PCS programs into the core classroom market, beyond the afterschool market. Progress was made in establishing district and university relationships, expanding the pilot programs, compiling research, developing grant partnerships, and refining the products and services for the classroom through continued application and testing.
During fiscal year 2012 we will continue to build upon the SBU foundations established in FY2011 and drive toward the establishment of synergies between these SBUs and our subsidiary, LabMentors. This effort will include a more focused approach to our web-based marketing efforts and tightened sales processes. In addition, during FY2011, PCS applied for and was awarded Trade Adjustment Assistance funds in the amount of $75,000 to apply to the development and promotion of PCS programs to improve our competitiveness against foreign imports. These matching funds will be used in fiscal year 2012 to improve and expand the PCS Robotics line of controllers, proprietary software, and curriculum solutions to take advantage of the rapidly growing robotics education market.
Results of Operations
The quarter ended June 30, 2011, resulted in revenue of $563,790 as compared to revenue during the quarter ended June 30, 2010 of $485,241. The Company has increased its revenue from the prior fiscal year, same three-month period by $78,549 or 16% percent. This increase is due to a more targeted marketing approach as well as increased focus on the new SBUs as discussed in the Plan of Operations.
Despite this increase in revenue, gross profit was down 5% due to a higher mix of sales with lower gross margins. In addition, an increase in interest and debt expense due to the discounting of debt and the issuance of
warrants attached to financing resulted in a net loss of ($604,780) for the quarter ended June 30, 2011 as compared to a net loss during the quarter ended June 30, 2010, of ($395,374). The Basic Loss per Share for the quarter ended June 30, 2011, is ($0.01) which is equivalent to the ($0.01) loss per share for the three-month period ended June 30, 2010.
The Company ended the first quarter of FY 2012 with $141,223 in cash, total current assets of $700,985 and total current liabilities of $1,018,608 resulting in a working capital deficit of $317,623 compared to positive working capital of $606,226 for the quarter ended June 30, 2010. The Company had a current ratio at June 30, 2011 and 2010 of 0.69 and 2.26, respectively. This decrease in liquidity was due primarily to continuing net losses which were partially financed through short term debt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the Exchange Act) and is not required to provide the information required under this item.
Item 4. Controls and Procedures
Changes in Internal Control Over Financial Reporting.
On March 24, 2011, Ms. Valerie L. Grindle was appointed Senior Vice President of Finance and Administration and Chief Financial Officer.
On July 31, 2011, Anthony A. Maher resigned as Chief Executive Officer and Chairman of the Board, as reported on Form 8K filed with the SEC on July 28, 2011. Ms. Grindle was appointed to serve as Chief Executive Officer effective the same date and as a member of the Board of Directors. Ms. Grindle also serves as the Companys Chief Financial Officer.
Effective September 6, 2011, Ms. Leann Gilberg will assume the position of Chief Financial Officer.
Managements Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the COSO.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(i) The Company previously announced that on August 27, 2010, it obtained a copy of a complaint filed by the U.S. Securities and Exchange Commission (SEC) commencing a civil lawsuit against PCS, its Chief Executive Officer Anthony A. Maher, and its former Chief Financial Officer Shannon Stith (Parties). The complaint (Case 1:10-cv-00433-CWD) was filed in the United States District Court For The District Of Idaho. The lawsuit involves disclosures made by the Company concerning its March 26, 2007 License Agreement with Global Techniques dba PCS Middle East (PCS ME). The complaint alleges: 1) the Parties violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], and, in doing so, the Parties are alleged to have committed fraud in connection with the purchase and sale of securities; 2) the Parties violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-11 thereunder [17 C.F.R. 240.12b-20, 240.13a-1, and 240.13a-11] by making alleged false filings with the SEC and aiding and abetting false filings with the SEC; and 3)
Mr. Maher and Ms. Stith violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rule 13a-14 thereunder [17 C.F.R. § 240.13a-14] in making false certifications of an annual report. The complaint seeks a permanent injunction, civil money penalties pursuant to Section 21(d)(3) of the Exchange Act, and a bar against Mr. Maher and Ms. Stith from serving as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, as amended, or that is required to file reports pursuant to Section 15(d) of the Exchange Act. On April 28, 2011 and May 24, 2011, the Company participated in Court-ordered settlement conferences with representatives of the SEC and has reached a tentative agreement under which there will be no material financial impact to the Company. On May 25, 2011, the Court entered a consent judgment against Ms. Stith: (1) permanently enjoining her from aiding and abetting any violation of Section13(a) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-11 promulgated thereunder, (2) permanently enjoining her from violating Section 13(a) of the Exchange Act and Rule 13a-14 promulgated thereunder, and (3) ordering her to pay a civil penalty pursuant to Section 21(d)(3) of the Exchange Act in an amount that will be determined by the Court.
Under its bylaws, PCS is obligated, subject to certain exceptions and conditions, to indemnify and advance expenses to current and former officers and directors in connection with the SEC suit. The costs incurred by PCS in addressing the SEC suit may have a material adverse effect on PCS business, financial position, results of operations and cash flows (including its liquidity and its plan of operation as outlined in managements discussion and analysis in PCS most recent 10-K and 10-Q reports).
(ii) Class Action Lawsuit: The Company, along with its former CEO and former CFO, has been named in a class action lawsuit (Niederklein v. PCS Edventures!.com, Inc., et al., U.S. District Court for the District of Idaho, Case 1:10-cv-00479-CWD). The class action was brought on behalf of shareholders who purchased shares of the Companys common stock during the period between March 28, 2007 and August 15, 2007. On February 24, 2011, the Court granted the motion of Moustafa Salem to serve as the lead plaintiff. On June 8, 2011, the lead plaintiff filed a motion to voluntarily dismiss the former CFO without prejudice from the lawsuit, which the Court has granted. On June 10, 2011, the Company participated in a Court-ordered settlement conference and is still engaged in ongoing negotiations regarding resolution on the class action.
Under its bylaws, PCS is obligated, subject to certain exceptions and conditions, to indemnify and advance expenses to current and former officers and directors in connection with this suit. The costs incurred by PCS in
addressing this suit may have a material adverse effect on PCS business, financial position, results of operations and cash flows (including its liquidity and its plan of operation as outlined in managements discussion and analysis in PCS most recent 10-K and 10-Q reports)
Item 2. Recent Sale of Unregistered Securities.