Stan...as of today, do you still believe the BoD is not responsible?

Year End Shareholder Call

Monday, August 17, 2009

Questions and Answers

Operator: (Operator instructions)

Ladies and gentlemen, our first question comes from Stan Caplan from Caplan Company.

Stan Caplan: Hello, guys.

Rick Goerner: Hey, Stan. How are you?

Stan Caplan: All right. How many people do we have on the call?

Rick Goerner: For what purpose is that, Stan? We're happy to take your question, though.

Stan Caplan: Okay. I'd just like to know how many are listening in. Is that a secret?

Rick Goerner: No, several dozen.

Stan Caplan: All right. I will preface my question with some comments, so please bear with me.

From reviewing the 10-K, some important business trends stand out. Except for a minimal profit in Holocom, an investment made three to four years ago, there's continued deterioration, write-offs, impairments, and losses in all Patriot subsidiaries and investments, including the auction rate securities. The Patriot strategy was supposed to be to invest in companies with a high probability of profitability within 12 months. Instead, over the last 1.5 years, our management team has continued to throw easy money received from the MMP licenses into high-risk, cash-draining losers.

Our management pours more shareholder dollars into Talis. There's an $8,400 5-31-08 year-end loss that mushrooms to $488,000 year-end loss for 5-31-09. Management drops our cash into the Avot black hole, and we suffer an $867,000 impairment.

And as for the Patriot Data Solutions Group, a $10 million price tag plus the creation of several hundred thousand dollars of additional monthly expense, along with the $236,000 impairment and a $2.9 million partial year loss from 9/1/08 to 5/31/09.

And then this July 16 press release, the one that retracted the $3 to $6 million revenue guidance we were promised at the last shareholder meeting, at least management admits in the 10-K regarding Avot and PDSG that it was "the inability to meet its business plan."

Think about this. There was approximately $9.7 million flowing to Patriot from the MMP licenses. We didn't need any employees or overhead to collect that $9.7 million, but look how much remained on the bottom line. After management's investments of our money, there was only $881,509 of net income. That's right; less than 10% of our licensing revenue.

Now, these results tell a very clear story. Either our management has not exercised proper due diligence when analyzing our investments or they don't know how to manage the investments they've made, or both.

Some shareholders want to blame the Board of Directors, but I say the Board's blame is hiring the current management and letting them stay this long.

However, the wisest thing the Board did was to request an assessment from qualified third-party Greg Baroni. Surely, Mr. Baroni's recommendations will include who should be or not be on the management team and the uniqueness, value, and validity of the Crossflo products and services.

When the Board gets this report, they have two important considerations -- one, Patriot's business failures in the last 1.5 years; two, Mr. Baroni's analysis. Now, if number one and number two are consistent, and I'll bet you all my Patriot stock they will be, the Board comes into the spotlight. And if the Board does not make immediate changes, then they are the problem and are negligent and should answer accordingly.

So, Rick, here's your two-part question. Based upon your performance since 2/28/08 and the 10-K results, what have you accomplished to date to enhance shareholder value? And the follow-up is how many quarters, in your opinion, should the Board of Directors of a public company allow a CEO to reach profitability and enhance shareholder value? Thank you.

Rick Goerner: Okay. Well, Stan, I want to get to your question, and you bring up a number of points which I think are pretty clear from our releases, but let me address two bits.

Number one, our first acquisition was accomplished 11 months ago with Crossflo, establishing that as the platform for our data sharing strategy, and that was followed then two months later by the addition of the Verras Medical activity for the healthcare application, and then as recent as March 27 for the Vigilys acquisition from Kratos.

So while we were chartered to launch an M&A strategy nearly a year-and-a-half ago to invest the proceeds of the MMP portfolio into establishing a strategy for creating an operating company, I think that we have executed to that vision in terms of providing both a strategy to build from off the data sharing technology, and I believe, in retrospect, our focus in healthcare and public sector is very well aligned with where the market's going.

As we've acknowledged in the reports, both as a result of budget issues that we did not contemplate and as a result of changes within different states' priorities, that it has been more difficult for us to realize the revenue plans that we forecasted, and we've obviously reviewed those activities with the Board, and we believe that we do have a large and growing sales pipeline of opportunities that will generate the plans that we originally forecasted for the entities, and we're confident that the current initiatives are ones that will generate revenue because our customers are asking us for increased involvement on new projects.

Stan Caplan: Okay, may I have your response to Part B of the question?

Rick Goerner: Which is how many quarters?

Stan Caplan: Right.

Rick Goerner: I think that -- I don't speak for the Board certainly, but I would suggest that independent of a formula, because I don't think there is one, I think that the strategy of the Company needs to be assessed, and I think that if the revenue results don't materially come together in the next six to nine months, that obviously things will be different.

We believe that that will not be the case. We're pretty comfortable with the sales pipeline that we have developed, and at this point, I think the Board has been supportive of the efforts within PDSG on an expanding basis to do the marketing initiatives and do the product development efforts that we've acknowledged to the Board need to be done to position the Company going forward.

Howard Halpern: I guess one final question. You talked about California administrative office of courts. Now, is that a full-fledged project or just a pilot project that you're going to keep broadening within the scope of that court system?

Rick Goerner: I'll answer briefly, and then if that's not sufficient, Renney is here, and he could put a little more color on it.

The initial project with AOC is largely for the development of the IEPDs, which are the exchange documentation that will enable data sharing to occur in the -- I think there's 57 counties in California and multiple court justice and probation systems, and so we believe it was the largest deployment of IEPD activity to date. It sets the platform for them to then be able to do full data sharing, but there are subsequent phases to the deployment.

Howard Halpern: Okay. Wow, I guess then how many phases would ultimately get them to where they or you want to be with them as sort of -- and you're able to broaden out and go to different states and show what you've done?

Renney Senn: Howard, this is Renney. Let me take a stab at that.

First, looking at the internal to California segment of this, this IEPD development, this necessary precursor to data exchange involves 52 courts of the state court system. Those, in turn, must be able to share data with all of the county and municipal courts with which they are affiliated in each of those counties.

They also have district attorney offices, as well as social services, financial services throughout the state that need to be connected to the court system. So it touches many, many different elements, including jails and prisons.

So this is the beginning of a long-term process which is presently not definable in terms of the scope or the number of phases involved, but at the end of the day, since we are so early on in this whole data sharing environment at the state, local, and the federal level, the fact that we've been able to achieve this very important credential and qualification with the state of California and the largest state court system in the country, it gives us the opportunity to be able to say something that no one else in the country can say as we go to other states to build on this qualification and experience, that we have, in fact, done it. So that's -- what that's going to result in is now not definable, but it is material.

Rick Goerner: So there's literally thousands of offices, agencies, and databases that this could cut across, but in terms of a circled budget line item in the California budget that says for the next seven years or what have you, you won't find that called out because they are still contemplating the breadth of deployment, and obviously, up until recently, California's budget wasn't approved either, and we need to understand all the ramifications of the new budget relative to projects such as AOC and the Sacramento court work that we did.