September 20, 2006
In the last shareholder letter, I used the phrase "dramatic transition" to describe this exciting time in the history of Patriot Corporation ("Patriot") that began in mid-June 2005 when we shifted our primary business focus from developing and marketing chips to licensing other companies to use our valuable intellectual property. In the spring of 2006, we pointed with pride to the fact that during January and February of this year, three major electronics systems manufacturers - HP, Fujitsu and Casio - had signed license agreements for rights to utilize our valuable technology covered by patents in the portfolio jointly owned by Patriot and the TPL Group. License agreements had previously been signed with AMD and Intel Corp.
Patriot's Board of Directors startled the world of microcap companies last spring by having the Company declare and pay two cash dividends within approximately six weeks. Some shareholders questioned why we chose to pay two dividends during that time period as opposed to doing other things with that money. The Board of Directors carefully considered a number of different options, including discussions with our SEC attorneys about a possible stock buyback program, and finally concluded that the dividend payout was the most prudent thing to do at that time. We were delighted in finally having sufficient cash resources to give something back to our shareholders as dividends.
The continuation of our dramatic transition to our current focus on our patent portfolio licensing program was validated by the good news that five more well-known electronics companies signed license agreements during the period of June through September 1, 2006 - Sony, Nikon, Seiko-Epson, Pentax and Olympus.
Today we enthusiastically announced that Kenwood Corporation has become the ninth major manufacturer to purchase a license in as many months. Kenwood is a major manufacturer simultaneously doing business in automotive electronics, communications equipment, and home electronics. As I write this, negotiations with other potential licensees are underway. More than 300 companies have been contacted regarding licensing opportunities, and the list of possible candidates is well beyond that number.
We remain very confident that the patent portfolio licensing program is in extremely good hands with the very active Alliacense licensing team, who continually demonstrate their professionalism and tireless commitment to the success of this program.
The licensing successes to date triggered the need to comply with various confidentiality agreements that now apply to Patriot. This prevents us from announcing the dollar amounts of revenues related to individual license agreements except to report revenues in our quarterly financial statements filed with the SEC. As a general rule, our portfolio license fees - whether or not discounted as a result of negotiation strategy - are related to the relevant revenues generated for a licensee by products associated with the licensed technology, rather than the overall size and revenue of the company purchasing a license.
We are very aware that our shareholders and the investment community have been waiting for news that will reveal the revenue realized by Patriot from the licenses that have been signed since June 1, 2006. We expect to release this information in October, 2006. Financial results for the fiscal year ending May 31, 2006 will be reported on the Form 10-KSB, which is expected to be filed by October 13, 2006. Financial results for the first quarter of the new fiscal year, covering the period from June 1 through August 31, 2006, will be reported on our Form 10-Q, which is due to be filed by October 15, 2006.
Annual Financial Report Temporarily Delayed
The recently announced temporary delay in filing the 2006 Form 10-KSB in a timely manner is extremely frustrating for the directors and officers of the Company. We take responsibility for the delay. The explanation includes many weeks of concentrated effort and attention by our financial team in dealing with complex accounting issues that included ongoing consultations with our professional advisors.
The initial notice of the possible need to restate our financials was raised by our current auditors while the annual audit and preparation of the 2006 Form 10-KSB was in progress. During a careful review of that matter, we learned that the Company's prior auditors required certain calculations involved in considering a restatement of the Company's financials-for periods with which the prior auditors had been involved-to be determined by an independent study. A study was commissioned by the Company and the methodology and progress was provided to the prior auditors at various stages through the final completion on September 11, 2006. The next day, which was the day before the deadline for timely filing of the Form 10-KSB, the Company's prior auditors informed the Company of their decision that a different methodology than that which was applied in the independent study should be used. They informed us that without our using this new methodology, they would not be prepared to issue their opinion. The methodology was one that would have taken two weeks to complete. The result was that the Company was unable to file the Form 10-KSB on time.
Patriot filed documents with the SEC on September 13 and 15, 2006, summarizing reasons for the delay in filing the Annual Report on Form 10-KSB. On September 13, 2006, the Company filed a Form 8-K, in which Patriot reported that it will restate its financial statements for the year ended May 31, 2005, and the related quarterly reports for the quarters ended August 31, 2005, November 30, 2005 and February 28, 2006. The issue pertaining to the embedded derivatives as described in that 8-K also relates to the previous fiscal years ended May 31, 2004, May 31, 2003 and May 31, 2002. Please refer to a copy of that public document for a more technical explanation. Two days later, on September 15, 2006, after further deliberation, the Company filed a Form 8-KA announcing in part that we will rely solely upon our current principal independent auditors as we prepare for and file all these financial restatements - meaning without further participation from our former auditors.
A non-technical description of the situation is that, after extensive consultation with our professional advisors during the period leading up to September 8, 2006, it was determined that we should reassess the prior accounting treatment of (1) our interest in Phoenix Digital Solutions, LLC and (2) our previously outstanding non-conventional convertible notes - the last of which were paid off in March 2006 - which allowed note holders to convert the notes payable into shares of our common stock at prices that were variable and potentially based upon several factors, including the market price of our common stock at the time of conversion. The result is that we must restate our financial statements.
As part of the positive transition Patriot has experienced during the past year, we have had to address and resolve a number of matters left over from the past. We anticipate that the restatement of our prior year financial statements will be a significant step toward finally concluding such cleanup matters.
No Material Effect on Financial Condition of the Company
As stated in our recent filings with the SEC, there will be no material effect on the Company's financial condition by either (1) the decision by the Company to account for its interest in Phoenix Digital Solutions, LLC in accordance with the equity method of accounting for investments (with the result that the financials of the LLC will no longer be consolidated with those of Patriot for reporting purposes) or (2) our decision to bifurcate the embedded derivatives in Patriot's previously outstanding convertible notes in accordance with applicable SEC guidance and accounting standards. As soon as we complete the filing of the Form 10-KSB on or before October 13, 2006, the "E" designation next to our trading symbol will be removed.
The fact that the information from our Form 10-KSB will not be available until mid-October will prevent us from being able to prepare and mail proxy statements in time for holding a shareholders meeting in October as previously indicated. We are now looking forward to holding the annual shareholder meeting early in 2007. Shortly after the filing of our 2006 Form 10-KSB, the Board of Directors will set the meeting date and we will be preparing and mailing out the proxy statements for that meeting.
Analyst and Media Promotional Activities
During the past few months, we have stepped up efforts to increase public and industry awareness and coverage of Patriot:
- Board member Jim Turley and I have separately been involved in various interviews with reporters and analysts, some intended for publication and some for background information about Patriot to lay the foundation for future coverage. Arrangements for other panel and Web appearances are underway.
- Patriot has recently engaged the firm of JM Dutton & Co. to prepare a report and analysis, which is expected to be completed and published near the end of October.
- In addition to the ongoing services of The Hoffman Agency for public relations and Hawk Associates for investor relations, we have recently retained the services of Shareholder Development Group, a firm that will provide continuing information about Patriot via e-mail to a list of over 750,000 subscribers.
The officers and directors continue to have great confidence in the strength of Patriot and its business strategy. As we accumulate cash from licensing revenues, we are evaluating prudent allocation of this valuable resource with the goal of increasing shareholder value.
Earlier this year, we announced a program in which the Patriot may purchase shares of its stock on the open market from time to time. We have been implementing that program in the past few months, and we will continue to do so at times when we deem it appropriate and prudent.
Consistent with our business plan, we are also evaluating potential acquisition opportunities that would provide value and an additional revenue stream. The mention of these alternative uses of cash does not preclude us from declaring future cash dividends to shareholders. Lastly, we continue to work toward the goal of getting Patriot listed and traded on a national exchange such as the NASDAQ, AMEX or NYSE.
We appreciate your continued loyalty and patience.
David H. Pohl
Chairman and CEO