February 7, 2008
To: Jim Turley, CEO, Patriot Scientific Corporation (and to Executive Committee)
From: RER, individually and on behalf of various shareholders
Re: PTSC status, present and near-term
Dear Mr. Turley:
As in years past, many shareholders believed it would be a good idea to provide you with a list of topics of interest and/or concern that they would like for you and/or others at PTSC to address in the coming weeks and/or months. Unlike last year, we are not approaching any external event, such as the Markman hearing, that would cause the contents of this letter to be unduly “sensitive” in nature. However, an “event” of even greater importance to the shareholders, that being the release of the April 2008 SEC earnings report, which is expected to contain in some form the figures from our settlement in the recently concluded Texas litigation, is now imminent. As a result, it was believed necessary to send this letter to you, and to the other members of the Executive Committee.
Please note that the subjects discussed herein do not in all instances necessarily reflect the views of the writer or of all contributors to this letter, but rather, should be considered general representations. Additionally, and as should be obvious, the comments expressed herein are offered only on behalf of the shareholder group described below, which is largely related to the discussion forum for PTSC sponsored by Agoracom, a company which is itself supported by PTSC. Nevertheless, there are shareholders who are members of that forum, and elsewhere, who have chosen not to support this effort. A copy of this letter has been provided to Brian Boyajian, our Advisory Board member, and the subjects discussed herein have been posted in general terms on the Agora message board, since all such subjects have been discussed there at length. I further expect that this letter itself, in its entirety, will be posted in that forum.
As with my April 2007 letter directed to then-CEO David Pohl, we have taken an informal survey of the shareholders who support this effort, asking them to supply their names, addresses, and the number of shares they presently hold. This year, some 170 shareholders have responded, and have indicated that they collectively hold approximately 57,000,000 shares. If there are significant revisions to those numbers after this letter has been made available for review by the shareholders, I will provide you with that information.
Since this is not a formalized effort, I have again taken people at their word in accepting their share counts. However, I would be remiss if I did not also advise that, in a marked change from last year, there has been an indication that a few contributors, in a rather despicable show of contempt and disrespect for both their fellow shareholders and the Company, have sent in bogus information. We do not know who those people are, and, of course, they certainly would not be expected to be brave enough to come forward and retract their lies. Nevertheless, I continue to feel that the overwhelming majority of people, many of whom are “repeat” contributors from past efforts, are sincere in supporting this letter and have provided legitimate data.
Before going further in expressing our concerns, let me say that many shareholders, including myself, recognize the fact that you accepted the CEO position under rather difficult conditions — you are not in control of litigation or of settlements from licensing efforts (which, other than the relatively small revenues arising from the Holocom venture, is currently understood to be the Company’s sole revenue stream), and likewise, you are not in control of PR and/or other channels of information arising from litigation and/or licensing. Notwithstanding these disadvantages, you have made decisions pertaining to share buybacks, dividends, and in others areas which, while not all shareholders are in agreement, should nonetheless be seen as being based on an honest exercise of your best judgment, and with the realization that nobody can please everyone at all times — your efforts in those endeavors are respected and appreciated. Nevertheless, you accepted the CEO position (having already been on the Board of Directors since February 2006) knowing of the restrictions under which you would be operating, and whatever the case may be, the Company is in its current status.
In August 2007, you stated, in an interview on a financial website, that PTSC was “sitting on a gold mine”, while at other times you have publicly stated that the Company feels its stock is “very undervalued” and that our intellectual property is like having patents “on water”. Not surprisingly, therefore, and especially in view of the settlement of the Texas litigation as announced on December 18, 2007 — arguably the single biggest event in the Company’s history — many shareholders continue to be disappointed with the performance of our stock price. A quick illustration shows that their disappointment is neither unfounded nor unreasonable.
As of the time this memorandum was transmitted to you today, the price was .42 — this is down some 50% just from the date of the settlement on December 18, essentially flat from the shareholder meeting in October 2007, and down nearly 25% from the April 2007 shareholder meeting. Although Mr. Pohl chose to “overlook the negative” in his letter to the shareholders in early 2007, when he memorialized a “677% increase” in the stock price for the calendar year 2005 - 2006, comparing the closing prices for the calendar years 2006 and 2007 shows a paltry gain of 1%, despite the overall markets having performed significantly better during the same time frame. Furthermore, from the 2006 closing high of $1.96 to the price at the current moment is not only stunning, but is also a mind-boggling decline of nearly 80%.
Looking back as far as 1999 - 2000, and accounting for the dilution that has occurred since then as a result of warrant conversion, our stock price today, after some eight years, would nevertheless be down by some 40% — and in those prior years, PTSC had no patent licensing program in effect, no tens of millions of dollars in the bank, and no favorable Markman ruling to hold over the heads of alleged infringers. Finally, from the close on the last business day of December 2007 until today, the decline has been roughly 37% — while the markets have been in turmoil over the past few months, PTSC’s stock performance has been consistently bad since early 2006.
Of course, no one should expect the CEO and/or Board of Directors of any company to be able to manage its share price on a daily or other very near-term basis. However, when a decline in the stock price has been a clear, virtually continuous, and pervasive trend for nearly two years, despite nothing but continued “good news” in every aspect of corporate status, the shareholders certainly have a right to express concern and to inquire what the Company intends to do, and what it is doing, in order to attempt to reverse that trend.
Again, all of the above has developed despite the resolution of the Texas litigation and development of the best financial condition in the Company’s history. Clearly, therefore, your repeated comment of “up and to the right” has not materialized, at least in the pockets of the vast majority of the shareholders. To continue to ignore what has occurred, and to continue using methods of doing business that have shown to be completely ineffective at increasing shareholder value, does not bode well for the message the Company is sending to other potential investors, nor to potential merger/acquisition candidates.
The shareholders appreciate your recent letter, which, although issued long after the Texas settlement, at least addressed some areas of interest. Nevertheless, there remain questions and/or statements of additional concern which are as follows, in no particular order of importance:
1) With regard to the recent settlement of the Texas litigation:
— Does the Company know whether TPL also negotiated business deals of any kind with Matsushita and/or Toshiba and/or NEC for TPL’s own technology/IP/products, similar to the actions taken by TPL in the prior settlement with Sony? If no such deals were entered into by TPL, will PTSC announce that fact so as to provide clarity to its shareholders?
— If such deals were done by TPL, does PTSC approve? If PTSC does not approve, has it addressed, or does it plan to address, such with TPL?
— Although it is understood that the settlements contain confidentiality clauses, does the Company intend, in the near future, to comment on such to the shareholders in terms of whether those settlements were felt to be “good,” “acceptable,” “favorable,” “a worthwhile endeavor,” or in other such terms? If not, how will existing and/or potential investors ever be able to know the Company’s sentiments in this regard?
2) Somewhat in conjunction with the above, will the Company immediately provide an update as to how many other potential licensees are now being actively pursued, and how many have responded with a willingness to negotiate? This information has been provided in the past, and as such, there would seem to be nothing which would preclude an update at present — undoubtedly, such would be of great interest to both current and prospective shareholders.
3) You have recently commented that the Company now has “tens of millions of dollars coming in annually” — please expound on this, as the shareholders have not been able to determine the current existence of any ongoing revenue stream that would support such a statement as to income in future years.
4) Despite the abysmal continued slide in our stock price, Board and Committee members (who are actually the same people) continue to be paid handsomely, in some cases hundreds of thousands of dollars, often for unspecified reasons.
— Assuming the that stock price is not at least in the $1.50 to $2.00 range by the end of May 2008, which would be some two months after the upcoming April earnings report, will the Company agree to design and implement a “pay based on stock price performance” system for all Board and Committee members, including but not limited to a substantial reduction and/or elimination of pay until the stock price reaches the range mentioned above?
— If the Company will not do so, why not? In other words, what is the justification for Board and Committee members to continue to prosper from PTSC when the general shareholder community does not?
— As to each member of the PTSC Board of Directors, how many other companies is he or she affiliated with in terms of board and/or committee membership, and what are those other companies?
5) The Company refused to answer our question in April 2007 as to the conversion of warrants and correlative sale of shares by Mr. Swartz and/or his companies and/or partners/affiliates as possibly being responsible for causing a “ceiling” on the share price even during the corresponding period of “good news” for the Company.
— With the warrant conversion completed in October 2007, what is the Company’s explanation for the continuing decline in our stock price despite repeated “good news”?
— What has the Company done to investigate the cause of the bizarre and aberrant behavior of our stock price in spite of the conditions described in this letter, a reasonable deduction from which appears to indicate deliberate manipulation by outside sources? If no such action has been taken, why not, and will the Company consider doing so by the end of May 2008 if the share price has not improved to the levels stated above?
6) As to the status of the MMP patents currently in litigation and/or as under review with the USPTO, and perhaps best answered by the Company’s patent attorneys.....
— What is the estimated time frame for a final ruling by the PTO on the ‘584, the ‘336, and the ‘148?
--- Assuming re-validation of the ‘584 by the PTO, what effect, if any would such have on the existing appeal involving the ‘584 in the Federal Circuit?
7) The Company, in its recent 10Q, has made the statement that passage into law of the current Patent Reform Act would (as opposed to “could” or “might”) have a negative impact on future licensing and/or litigation. Several lawyers supporting this letter, however, including myself, while not patent attorneys, are unable to understand how the provisions of the Act could be retroactively applied so as to prejudice existing patents — especially since the prior drafts of this legislation have contained specific provisions stating that it would be applicable only to those patents granted after passage of the Act.
— Would the Company authorize our attorneys to prepare a written explanation, relatively short and able to be understood by laymen, of their views on the possibility of retroactive application of those sections of the Act which the Company believes would (or might) have a negative impact? This is believed to be important not only to existing shareholders in gauging their investment in PTSC, but also to prospective shareholders who are looking at the Company as a possible investment.
8) With regard to merger/acquisition status, the Company has made vague statements about instituting such a move as a far back as 2006 or earlier....
— No one expects you to identify the other company or companies by name, or to speak of specific terms that are being discussed — however, rather than making further meaningless statements of the type the shareholders have seen for some two years now, what is the status of the Company’s progress toward an actual merger or acquisition in terms of whether a specific company has been identified, and where do we stand in the progress of those negotiations?
— Since management has known an approximate range of the settlement figures in the Texas litigation for several months, even prior to December 18, and could thus begin narrowing potential merger/acquisition candidates, what is now a reasonable time frame for the completion of any such deals?
9) Our various PR/analyst firms (Hawk Associates, Dutton, and Hoffman) have been paid many tens of thousands of dollars over the years, and have either been grossly ineffective and/or inaccurate in providing information to the shareholders and/or the investment community in general...
— Will the Company consider replacing these firms with ones that are actually effective?
— In much the same context, the Company’s marketing efforts, which have largely been dependent upon penny-stock newsletters and conferences, has yielded nothing — is the Company now willing to entertain new marketing vehicles designed to reach new and different, and perhaps more sophisticated, classes of potential investors? If not, why?
10) The Company’s website is outdated in appearance and often contains information that is old and/or otherwise inaccurate. Since this is obviously not acceptable for any company in today’s business environment — and especially for a microprocessor-oriented company that advertises itself as owning an interest in “patented intellectual property elemental to virtually every microprocessor design” — will the Company commit to undertake immediate improvements to the website, and to regular maintenance and updating of such thereafter? If so, when can the shareholders expect this to begin? If not, why not?
11) As to entities related to or affiliated with PTSC:
— Why is there no accountability, at least in direct form, in PTSC’s books for Phoenix Digital Solutions?
— Why is Holocom not booked as separate entity?
— How are non-accountant investors able to learn what is occurring with these entities when there is no transparency in the Company’s books and records in this regard?
12) Assuming he would agree to do so, would the Company likewise agree to allow Brian Boyajian, our Advisory Board member, to periodically make posts on the Agora PTSC message board, and/or in other forums, the content of which would be within the confines of appropriate discussion? If not, why?
13) Since becoming a Board member of PTSC and up to the present time in your position as CEO, have you received any income or compensation of any kind, directly or indirectly, from any companies that PTSC has put on notice, whether formally or informally, of alleged infringement?
— If not contained in your answer above, have you, since becoming CEO of PTSC, received any income or compensation of any kind from any consulting work, or earned from any source than as paid to you by PTSC?
14) Prior to becoming CEO and/or a Board member, you made a considerable number of statements praising Ignite and/or Inflame — why has there been no further development of those technologies to the extent of at least searching for a development partner?
As you already know, new and potential investors in the Company’s stock read the Agoracom board each day. The constant refrain of questions like those above, and others, often negatively presented, cannot in any way be good for the Company’s image or the faith of its investors.
In view of the foregoing, it is hoped that you will take the opportunity to provide answers to as many of these questions and concerns as possible during the next two months before the Company’s earnings are released in April. PTSC may be a penny stock for the present, but that doesn’t mean its management is required, or should be satisfied, to continue to portray it as such to the investment community when, in fact, the Company has asserted it unique position in the field of intellectual property.
The shareholders supporting this letter thank you very much for your consideration of the above, and we wish you every success.
Sincerely,
RER
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