**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**Form 10-QSB**

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For theQuarterly Period Ended April 30, 2006**

**CommissionFile Number 0-11518**

**PPTVISION, INC.**(Exact name of Small Business Issuer as specified in itscharter)

| **MINNESOTA**                             | **41-1413345**                     |
|-------------------------------------------|------------------------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer                   |
| incorporation or  organization)           | Identification  Number)            |
|                                      |                               |
| **12988  Valley View Road**               | **Eden  Prairie, Minnesota 55344** |
| (Address of  principal executive offices) | (Zip Code)                         |

 

**(952) 996-9500**(Issuer’s telephone number, including area code)

Check whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the last 90 days.    Yes x    No o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    Yes o    No x

Shares of $.10 par valuecommon stock outstanding at May 30, 2006: 3,798,747

 

 

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INDEX

PPT VISION, INC.
|               | ** ** | ** **                                                                                               | ** ** | ** ** |
|---------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------|
| Part I.  |       | Financial Information                                                                                    |       |       |
|          |       |                                                                                                     |       |       |
| Item 1.       |       | Financial Statements                                                                                     |       |       |
|          |       |                                                                                                     |       |       |
|          |       | Balance  Sheets as of April 30, 2006 and October 31, 2005                                      |       |       |
|          |       |                                                                                                     |       |       |
|          |       | Statements of Operations for the Three and Six Months  Ended April 30, 2006 and April 30, 2005 |       |       |
|          |       |                                                                                                     |       |       |
|          |       | Statements of Cash Flows for the Six Months Ended  April 30, 2006 and April 30, 2005           |       |       |
|          |       |                                                                                                     |       |       |
|          |       | Notes to Condensed Financial Statements —  April 30, 2006                                      |       |       |
|          |       |                                                                                                     |       |       |
| Item 2.       |       | Management’s Discussion and Analysis or Plan of  Operation                                          |       |       |
|          |       |                                                                                                     |       |       |
| Item  3.      |       | Controls  and Procedures                                                                                 |       |       |
|          |       |                                                                                                     |       |       |
| Part II. |       | Other  Information                                                                                       |       |       |
|          |       |                                                                                                     |       |       |
| Item 1.       |       | Legal Proceedings                                                                                        |       |       |
|          |       |                                                                                                     |       |       |
| Item 2.       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                             |       |       |
|          |       |                                                                                                     |       |       |
| Item 3.       |       | Defaults Upon Senior Securities                                                                          |       |       |
|          |       |                                                                                                     |       |       |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                      |       |       |
|          |       |                                                                                                     |       |       |
| Item 5.       |       | Other Information                                                                                        |       |       |
|          |       |                                                                                                     |       |       |
| Item 6.       |       | Exhibits                                                                                                 |       |       |
|          |       |                                                                                                     |       |       |
|          |       | Signatures                                                                                               |       |       |

 

2

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PPT VISION, INC.BALANCE SHEETS
| ** **                                       | ** ** | **April 30, 2006** | ** ** | **October 31, 2005** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**              | ** ** | **(audited)**                  | ** ** |
| ASSETS                                           |       |                         |       |                           |       |
| Current assets                                   |       |                         |       |                           |       |
| Cash and cash equivalents                        |       | $                            | 647,000    |                           | $          | 778,000 |   |
| Accounts receivable, net                         |       | 1,370,000                    |       | 1,197,000                      |       |
| Inventories:                                     |       |                         |       |                           |       |
| Manufactured and purchased parts                 |       | 415,000                      |       | 454,000                        |       |
| Work-in-process                                  |       | 25,000                       |       | 34,000                         |       |
| Finished goods                                   |       | 8,000                        |       | 2,000                          |       |
| Total inventories                                |       | 448,000                      |       | 490,000                        |       |
| Other current assets                             |       | 123,000                      |       | 160,000                        |       |
| Total current assets                             |       | 2,588,000                    |       | 2,625,000                      |       |
| Fixed assets, net                                |       | 395,000                      |       | 438,000                        |       |
| Intangible assets                                |       | 54,000                       |       | 68,000                         |       |
| Other assets                                     |       | —                       |       | 22,000                         |       |
| Total assets                                     |       | $                            | 3,037,000  |                           | $          | 3,153,000 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY       |       |                         |       |                           |       |
| Current liabilities                              |       |                         |       |                           |       |
| Accounts payable                                 |       | $                            | 419,000    |                           | $          | 367,000 |   |
| Accrued expenses                                 |       | 139,000                      |       | 223,000                        |       |
| Deferred revenue — customer advances        |       | 12,000                       |       | 9,000                          |       |
| Total current liabilities                        |       | 570,000                      |       | 599,000                        |       |
| Shareholders’ equity                        |       |                         |       |                           |       |
| Common stock                                     |       | 380,000                      |       | 300,000                        |       |
| Capital in excess of par value                   |       | 36,402,000                   |       | 36,081,000                     |       |
| Accumulated deficit                              |       | (34,315,000                  | )          | (33,827,000                    | )          |
| Total shareholders’ equity                  |       | 2,467,000                    |       | 2,554,000                      |       |
| Total  liabilities and shareholders’ equity |       | $                            | 3,037,000  |                           | $          | 3,153,000 |   |

 

See accompanyingnotes to condensed financial statements

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PPT VISION, INC.STATEMENTS OF OPERATIONS(UNAUDITED)
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **April 30,**               | ** ** | **April 30,**             | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                     |       | $                                | 1,408,000  |                           | $          | 1,567,000 |   | $ | 2,990,000 |   | $ | 3,092,000 |   |
| Cost of revenues                             |       | 672,000                          |       | 803,000                        |       | 1,374,000 |   | 1,532,000 |   |
| Gross profit                                 |       | 736,000                          |       | 764,000                        |       | 1,616,000 |   | 1,560,000 |   |
| Expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing                          |       | 543,000                          |       | 659,000                        |       | 1,102,000 |   | 1,345,000 |   |
| General and administrative                   |       | 249,000                          |       | 269,000                        |       | 485,000 |   | 560,000 |   |
| Research and development                     |       | 357,000                          |       | 336,000                        |       | 686,000 |   | 710,000 |   |
| Restructuring charges                        |       | —                           |       | 390,000                        |       | — |   | 390,000 |   |
| Total expenses                               |       | 1,149,000                        |       | 1,654,000                      |       | 2,273,000 |   | 3,005,000 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Interest and  other income                   |       | 129,000                          |       | 20,000                         |       | 169,000 |   | 20,000 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Loss from  continuing operations             |       | (284,000                         | )          | (870,000                       | )          | (488,000 | ) | (1,425,000 | ) |
| Loss from  discontinued operations           |       | —                           |       | —                         |       | — |   | (55,000 | ) |
| Net loss                                     |       | $                                | (284,000   | )                              | $          | (870,000 | ) | $ | (488,000 | ) | $ | (1,480,000 | ) |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Per share data:                              |       |                             |       |                           |       |   |   |   |   |
| Weighted average  basic shares outstanding   |       | 3,655,000                        |       | 2,997,000                      |       | 3,321,000 |   | 2,996,000 |   |
| Weighted average  diluted shares outstanding |       | 3,655,000                        |       | 2,997,000                      |       | 3,321,000 |   | 2,996,000 |   |
| Basic and  diluted loss per common share     |       |                             |       |                           |       |   |   |   |   |
| Loss from continuing operations              |       | $                                | (0.08      | )                              | $          | (0.29 | ) | $ | (0.15 | ) | $ | (0.47 | ) |
| Loss from discontinued operations            |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | (0.02 | ) |
| Net loss                                     |       | $                                | (0.08      | )                              | $          | (0.29 | ) | $ | (0.15 | ) | $ | (0.49 | ) |

 

See accompanyingnotes to condensed financial statements

4

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PPT VISION, INC.STATEMENTS OF CASH FLOWS(UNAUDITED)
| ** **                                                                   | ** ** | **Six Months**          | ** ** | **Six Months**    | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **Ended**                    | ** ** | **Ended**              | ** ** |
| ** **                                                                   | ** ** | **April 30, 2006** | ** ** | **April 30,2005** | ** ** |
| Net loss                                                                     |       | $                            | (488,000)  |                   | $          | (1,480,000 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                         |       |                   |       |
| Stock option expense                                                         |       | 1,000                        |       | —                 |       |
|                                                                         |       |                         |       |                   |       |
| Depreciation and amortization                                                |       | 86,000                       |       | 127,000                |       |
| Gain on sale of securities                                                   |       | (72,000                      | )          | —                 |       |
| Change in allowance for doubtful accounts                                    |       | (5,000                       | )          | —                 |       |
|                                                                         |       |                         |       |                   |       |
| Change in assets  and liabilities:                                           |       |                         |       |                   |       |
| Accounts receivable                                                          |       | (168,000                     | )          | 601,000                |       |
| Inventories                                                                  |       | 42,000                       |       | (12,000                | )          |
| Other current assets                                                         |       | 37,000                       |       | 81,000                 |       |
| Accounts payable                                                             |       | 52,000                       |       | (505,000               | )          |
| Accrued expenses                                                             |       | (84,000                      | )          | (55,000                | )          |
| Deferred revenue - customer advances                                         |       | 3,000                        |       | (42,000                | )          |
| Total adjustments                                                            |       | (108,000                     | )          | 195,000                |       |
| Net cash used in operating activities-continuing  operations                 |       | (596,000                     | )          | (1,285,000             | )          |
| Net cash used in operating activities-discontinued  operations               |       | —                       |       | 55,000                 |       |
| Net cash used in operating activities                                        |       | (596,000                     | )          | (1,230,000             | )          |
| Cash flows from  investing activities:                                       |       |                         |       |                   |       |
| Purchase of fixed assets                                                     |       | (29,000                      | )          | (36,000                | )          |
| Net investment in other long-term assets                                     |       | —                       |       | (142,000               | )          |
| Proceeds from sale of security                                               |       | 94,000                       |       | —                 |       |
| Net cash provided by (used in) investing activities                          |       | 65,000                       |       | (178,000               | )          |
| Cash flows from financing  activities:                                       |       |                         |       |                   |       |
| Proceeds from the exercise of stock options                                  |       | —                       |       | 3,000                  |       |
| Proceeds from issuance of common stock                                       |       | 400,000                      |       | —                 |       |
| Net cash provided by financing activities                                    |       | 400,000                      |       | 3,000                  |       |
| Net cash provided by discontinued operations                                 |       | —                       |       | 145,000                |       |
| Net decrease in  cash and cash equivalents                                   |       | (131,000                     | )          | (1,260,000             | )          |
| Cash and cash  equivalents at beginning of year                              |       | 778,000                      |       | 2,617,000              |       |
| Cash and cash  equivalents at end of period                                  |       | $                            | 647,000    |                   | $          | 1,357,000 |   |

 

See accompanyingnotes to condensed financial statements

 

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PPT VISION, INC.NOTES TO CONDENSED FINANCIAL STATEMENTSApril 30, 2006(UNAUDITED)

NOTE A - DESCRIPTION OFBUSINESS

PPT VISION, Inc. (“TheCompany”) designs, manufactures, and markets camera-based intelligent systemsfor automated inspection in manufacturing applications. The Company’s products,commercially known as machine vision systems, enable manufacturers to realizesignificant economic paybacks by increasing the quality of manufactured partsand improving the productivity of manufacturing processes. The Company’smachine vision product line is sold on a global basis to end-users, systemintegrators, distributors and original equipment manufacturers (OEM’s)primarily in the electronic and semiconductor component, automotive, medicaldevice, and packaged goods industries.

NOTE B - BASIS OFPRESENTATION

The accompanyingunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-QSB.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Results of operations for the interim periodsare not necessarily indicative of the results to be expected for the full yearor of the results for any future periods.

The Balance Sheet at October 31,2005 has been derived from the Company’s audited financial statements for thefiscal year ended October 31, 2005 but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.

For further information,refer to the financial statements and footnotes thereto included in the Company’sannual report on Form 10-KSB for the year ended October 31,2005.

NOTE C - REVENUERECOGNITION

The Company typicallyrecognizes revenue on product sales upon shipment to the end user customers ifcontractual obligations have been substantially met and title and risk of losshave passed to the customer, which is generally the case for sales of machinevision systems, spare parts and accessories. The Company also recognizesrevenue on products sold to distributors upon shipment because contracts withdistributors do not include post-shipment obligations or any right of returnprovisions and pricing is fixed at the time of sale. Revenue related toapplication engineering, product development and customer training services isrecognized when the services are performed. Service revenue was less than 10% oftotal revenues for the three and six months ended April 30, 2006 and 2005.

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NOTE D - LIQUIDITY ANDCAPITAL RESOURCES

The Company had a loss from continuing operations forthe three and six months ended April 30, 2006 of $284,000 and $488,000,respectively. Cash used in operations was $596,000 for the six months ended April 30,2006.

The Company closed on a$400,000 private placement of common stock on February 17, 2006 in aneffort to further strengthen its balance sheet and provide for future workingcapital requirements. The private placement was funded by the Company’s currentlargest shareholder, Mr. Peter R. Peterson. In the private placement, theCompany issued 800,000 shares of common stock at a price of $0.50 per share. The Company believes it hassufficient cash to fund its operations, working capital and capital resourceneeds through the next twelve months.

The Company believes that a variety of financingalternatives are available including external borrowing against accountsreceivable and inventory, customer or vendor financing, the issuance ofadditional stock to the public or to strategic partners, or customer-sponsoredresearch and development projects.

There can be no assurance, however, that additionalcapital will be available on acceptable terms or at all, and the failure toobtain additional capital as needed may have an adverse effect on the Company’sability to continue to take advantage of future opportunities or respond tocompetitive pressures or unanticipated requirements, which could adverselyaffect its business, financial position, results of operations and cash flows.

NOTE E - LOSS PER SHARE

On March 10, 2005,the Company announced that its Board of Directors approved a 1-for-4reverse split of its common stock effective as of the close of business on March 31,2005 and the conversion to book-entry share registration also effective as of March 31,2005. In connection with the reverse split, the Board of Directors alsoapproved an amendment of the Company’s Articles of Incorporation toproportionately reduce the number of shares of common stock authorized from20,000,000 shares to 5,000,000 shares. All share numbers presented in thisreport have been restated to give effect to the 1-for-4 reversesplit.

At April 30, 2006,options to purchase 327,380 shares of the Company’s common stock were notconsidered in the calculation of diluted earnings per share. At April 30,2005, options to purchase 217,103 shares and warrants to purchase 6,250 sharesof the Company’s common stock were not considered in the calculation of dilutedearnings per share. As the Company had a net loss for both periods, theinclusion of outstanding options and warrants would have been anti-dilutive.

NOTE F - STOCK-BASED COMPENSATION

The Company uses the intrinsic value method prescribed byAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations in accounting for employee stockoptions. Under the intrinsic value method, compensation expense is recorded onlyto the extent that the market price of the common stock exceeds the exerciseprice of the stock option on the date of grant.

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In December 2002, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure.” SFAS No. 148 is an amendment to SFAS No. 123 providingalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation and alsoprovides required additional disclosures about the method of accounting forstock-based employee compensation. The Company adopted the annualdisclosure provision of SFAS No. 148 during the year ended October 31,2003. The Company chose to not adopt the voluntary change to the fair valuebased method of accounting for stock-based employee compensation, pursuant toSFAS No. 148.

During fiscal 2005, the Company granted 2,500 of seven-yearoptions to purchase shares of the Company’s common stock to a consultant withan exercise price of $1.43 per share. Pursuant to Emerging Issues Task Force 96-18(EITF 96-18), “Accounting for Equity Instruments that are Issued to OtherThan Employees for Acquiring, or in Conjunction with Selling, Goods orServices,” the Company will value and record an expense related to the optionson the earlier of the date a performance commitment is met or the date theperformance is complete. The Company recorded an expense of $0 and $1,000 forthe three and six months ended April 30, 2006, respectively, in accordancewith EITF 96-18.

The Company has adoptedthe disclosure-only provisions of SFAS No. 148, Accounting for Stock-BasedCompensation. Accordingly, no compensation cost has been recognized withrespect to stock options. Had compensation cost for stock options beendetermined based on the fair value methodology prescribed by SFAS 123, theCompany’s net loss and net loss per share would have been reduced to the proforma amounts indicated below:

 

| Three Months Ended  April 30, | ** ** | ** **  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Net  loss                                    |       | As reported |       | $        | (284,000   | )        | $          | (870,000 | ) |
|                                         |       | Pro forma   |       | $        | (322,000   | )        | $          | (899,000 | ) |
|                                         |       |        |       |     |       |     |       |
| Stock  based compensation                    |       | As reported |       | $        | —     |     | $          | — |   |
|                                         |       | Pro forma   |       | $        | (38,000    | )        | $          | (29,000 | ) |
|                                         |       |        |       |     |       |     |       |
| Basic  and diluted loss per share            |       | As reported |       | $        | (0.08      | )        | $          | (0.29 | ) |
|                                         |       | Pro forma   |       | $        | (0.09      | )        | $          | (0.30 | ) |
|                                         |       |        |       |     |       |     |       |
| **Six Months Ended****April 30,**       | ** ** | ** **  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  loss                                    |       | As reported |       | $        | (488,000   | )        | $          | (1,480,000 | ) |
|                                         |       | Pro forma   |       | $        | (569,000   | )        | $          | (1,544,000 | ) |
|                                         |       |        |       |     |       |     |       |
| Stock  based compensation                    |       | As reported |       | $        | 1,000      |     | $          | — |   |
|                                         |       | Pro forma   |       | $        | (81,000    | )        | $          | (64,000 | ) |
|                                         |       |        |       |     |       |     |       |
| Basic  and diluted loss per share            |       | As reported |       | $        | (0.15      | )        | $          | (0.49 | ) |
|                                         |       | Pro forma   |       | $        | (0.17      | )        | $          | (0.52 | ) |

 

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| For All Periods Ended  April 30, | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Risk free  interest rates                            |       | 4.0%     |       | 4.0%     |       |
| Expected lives                                       |       | 7  years |       | 6  years |       |
| Expected  volatility                                 |       | 221%     |       | 115%     |       |
| Expected dividends                                   |       | 0%       |       | 0%       |       |

 

NOTE G - CUSTOMER ANDGEOGRAPHIC DATA

The following tables set forth the percentage of theCompany’s net revenues (including sales delivered through internationaldistributors) by geographic location for the three and six months ended April 30,2006 and 2005:

 

| Three Months Ended April 30 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| United States                                   |       | 44       | %          | 42       | %          |
| Europe and  Canada                              |       | 11       | %          | 30       | %          |
| Asia-Pacific                                    |       | 45       | %          | 26       | %          |
| South America                                   |       | 0        | %          | 2        | %          |
|                                            |       | 100      | %          | 100      | %          |
|                                            |       |     |       |     |       |
| **Six  Months Ended April 30**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States                                   |       | 41       | %          | 46       | %          |
| Europe and  Canada                              |       | 23       | %          | 30       | %          |
| Asia-Pacific                                    |       | 36       | %          | 23       | %          |
| South America                                   |       | 0        | %          | 1        | %          |
|                                            |       | 100      | %          | 100      | %          |

 

In the three-month periodended April 30, 2006, revenues from three customers representedapproximately 14%, 13% and 10% of total revenue, respectively. In thethree-month period ended April 30, 2005, revenues from two customers representedapproximately 14% and 12% of total revenue, respectively. In the six-monthperiod ended April 30, 2006, revenues from one customer representedapproximately 13% of the total revenue. In the six-month period ended April 30,2005, revenues from two customers each represented approximately 11% of totalrevenue.

NOTE H - NEW ACCOUNTINGPRONOUNCEMENTS

In December 2004,FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” thatfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. This statement replacesSFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Beginning with our quarterly period thatbegins November 1, 2006, we will be required to expense the fair value ofemployee stock options and similar awards. As a public company, we are allowedto select from two alternative transition methods, each having differentreporting implications. We have not yet determined the impact of SFAS No. 123Ron us.

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NOTE I - DISCONTINUEDOPERATIONS

In the fourth quarter offiscal 2004, the Company implemented a strategy to focus all of its resourceson its core 2D machine vision business. In accordance with this plan, in thefourth quarter of fiscal 2004, the Company initiated and completed the sale ofits 3D business unit, together with all the related patents, intellectualproperty, inventory and equipment. The terms of the sale included cash paymentsof $1.0 million and the opportunity to receive royalties on sales of certainproducts by the buyer for the next five years. The royalties, which will berecorded as a part of other income in continued operations, are anticipated tobe minimal, if any. For the three and six months ended April 30, 2006, aroyalty payment of $53,000 was received. As a result of the sale, in accordancewith appropriate accounting principles, the Company has revised the financialresults for all periods presented to include the 3D business as a discontinuedoperation. Accordingly, all 3D related revenue and expenses have been removedfrom continuing operations and presented in a separate line in the statement ofoperations entitled “loss from discontinued operations.” There was nodiscontinued operations for the three months ended April 30, 2006 and2005. Below is a Condensed Statement of Operations for the discontinuedoperations for the six month periods ended April 30, 2006 and 2005.

 

| Condensed Statement of Operations | ** ** | **Six-Month Ended  April 30, 2006** | ** ** | **Six-Month Ended  April 30, 2005** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| Revenues                                         |       | $                                                  | —     |                                               | $          | 169,000 |   |
| Cost of revenues                                 |       | —                                             |       | 56,000                                             |       |
| Gross profit                                     |       | —                                             |       | 113,000                                            |       |
| Total operating  expenses                        |       | —                                             |       | 168,000                                            |       |
| Income (loss) from  discontinued operations      |       | $                                                  | —     |                                               | $          | (55,000 | ) |

 

NOTE J - RESTRUCTURING ACTIONS

In the second quarter of fiscal 2005, the Company completeda three part corporate restructuring in an effort to bring the Company’s coststructure into closer alignment with current revenues. The first part of thisplan involved the closing of the Company’s Michigan office. The functions ofthe Michigan office have been transferred to several of the Company’s systemintegration partners. The second part of the plan involved the restructuring ofthe Company’s lease obligation with respect to its headquarters facility inEden Prairie, Minnesota. Under the amended lease terms signed on April 29,2005, the Company received a reduction in its base rental rates and its leasedfacility decreased from approximately 64,000 square feet to approximately35,000 square feet resulting in a savings of approximately $120,000 perquarter. In exchange for these amended lease terms, the Company paid $140,000for certain leasehold improvements associated with the reconfigured space andalso paid approximately $300,000 in accrued deferred rent The Company also paida $240,000 lease termination fee, which was accrued in the second quarter offiscal 2005, in equal monthly installments over a twelve-month period whichstarted on May 1, 2005 and ended April, 2006. The amended lease terms alsoextended the current lease term by two years through May, 2011. The third part of the planincluded other operating expense reductions primarily consisted of anapproximately 15% workforce reduction. When taken together, the three parts ofthis restructuring 

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resulted in a reduction of the Company’s total coststructure by over $1,200,000 per year.

An analysis of thecomponents of the restructuring charge related to these restructuring actionsis as follows:

| Lease termination fee and  related costs                    |   | $        | 280,000 |   |
|-------------------------------------------------------------|--------|----------|---------|--------|
| Michigan office  closure costs                              |   | 60,000   |    |
| Severance costs                                             |   | 50,000   |    |
| Total  nonrecurring charge                                  |   | $        | 390,000 |   |
| Less: Payment  through April 30, 2006                  |   | (390,000 | )       |
| Amount included in  accrued expenses at April 30, 2006 |   | $        | —  |   |

 

NOTE K - SALE OFELECTRO-SENSORS, INC. COMMON STOCK

During the second quarterof fiscal 2006, the Company sold the remaining 9,500 shares of Electro-Sensors, Inc.common stock, resulting in gross proceeds of $94,000 and a net gain of $72,000included in interest and other income on the statements of operations.

Item 2

MANAGEMENT’S DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION

# Overview

PPT VISION, Inc. designs, manufactures, andmarkets camera-based intelligent systems for automated inspection inmanufacturing applications. The Company’s products, commercially known asmachine vision systems, enable manufacturers to realize significant economicpaybacks by increasing the quality of manufactured parts and improving theproductivity of manufacturing processes. The Company’s machine vision productline is sold on a global basis to end-users, system integrators, distributorsand original equipment manufacturers (OEM’s) primarily in the electronic andsemiconductor component, automotive, medical device, and packaged goodsindustries.

The Company’s revenuesdecreased 10% to $1,408,000 during the second quarter ended April 30, 2006compared to sales of $1,567,000 in the prior year’s second quarter. TheCompany’s loss from continuing operations for the quarter ended April 30,2006 decreased to $284,000 or $.08 per share compared to $870,000 or $.29 pershare in the prior year’s period. The decrease in revenues from the second quarter of fiscal 2006compared to the same period of fiscal 2005 resulted from decreased sales of ourold product lines along with a slower than expected ramp up of sales of our newIMPACT product line. During the second quarter of fiscal year 2006approximately 88% of revenue was IMPACT-related compared to 56% of revenueduring the same period of fiscal year 2005. Overall, we had a 40% increase indollar sales in our Impact revenue during the second quarter of 2006 comparedto the same period in fiscal 2005.

Revenues decreased 3% to $2,990,000 during thesix-month period ended April 30, 2006 compared to $3,092,000 during theprior year’s six-month period and the loss decreased to $488,000 or $0.15 pershare compared to a loss of $1,480,000 or $0.49 per share in the prior year’speriod.

 

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During the fiscal 2006 second quarter, revenues fromoutside the United States accounted for 56% of revenues compared to 58% in thefirst quarter of fiscal 2005. During the first six months of fiscal 2006,revenues from outside the United States accounted for 59% compared to 54% inthe first six months of fiscal 2005.

Total operating expenses for the three-month periodended April 30, 2006 were $1,149,000, a 31% decrease in comparison tototal operating expenses of $1,654,000 in the prior year’s second quarter. Theoperating expenses for the six-month period ended April 30, 2006 were$2,273,000, a 24% decrease in comparison to total operating expenses of$3,005,000 in the prior year’s period. This reduction in operating expensesreflect the effect of the restructuring actions implemented in the secondquarter ended April 30, 2005 as described in Note J.

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

Management’s discussionand analysis of its financial condition and results of operations are based onthe Company’s accompanying unaudited condensed financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information and with theinstructions to Form 10-QSB. Accordingly, they do not include all ofthe information required by accounting principles generally accepted in UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation have been included.

The preparation of thesefinancial statements requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported revenues and expensesduring the reporting period. Management bases its estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities. Actual resultscould differ from these estimates.

Management believes theCompany’s critical accounting policies and areas that require more significantjudgments and estimates used in the preparation of its financial statements tobe:

·                  revenuerecognition;

·                  estimatingvaluation allowances, specifically the allowance for doubtful accounts andinventory; and

·                  valuationand useful lives of long-lived and intangible assets.

### RevenueRecognition

The Company typicallyrecognizes revenue on product sales upon shipment to the end user customers ifcontractual obligations have been substantially met and title and risk of losshave passed to the customer, which is generally the case for sales of 2Dmachine vision systems, spare parts and accessories. The Company alsorecognizes revenue on products sold to distributors upon shipment becausecontracts with distributors do not include post-shipment obligations or any 

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right of returnprovisions and pricing is fixed at the time of sale. Services revenue, whichincludes application engineering, product development, customer training andrepair services, is recognized when the services are performed. Service revenueis less than 10% of total revenues for the three and six months ended April 30,2006 and 2005.

# Valuation Allowances

Management estimates theallowance for doubtful accounts by analyzing accounts receivable balances byage and considering specific factors about the individual customer’s financialcondition. When it is deemed probable that all or a portion of a customer’saccount is uncollectible, a corresponding amount is added to the allowance fordoubtful accounts.

The Company’s inventoryprimarily consists of parts and other materials that are used in themanufacture of vision systems. The Company generally only builds systems basedon customer orders and as a result maintains only a minor amount of finishedgoods inventory. Management establishes valuation reserves on inventory forestimated excess and obsolete inventory equal to the difference between thecost of inventory and its estimated market value based on assumptions aboutfuture product demand and market conditions. In view of the rapid pace oftechnological change in the machine vision industry, the Company generallyconsiders inventory that has had no usage for one year to be obsolete. Inaddition, changes in the Company’s product offerings or those of the Company’scompetitors may also result in excess or obsolete inventory levels. Accordingly,these factors will also be considered in the determination of the market valueof inventory.

Actual results coulddiffer from these estimates under different assumptions. If the financialcondition of one or more of our customers were to deteriorate, or if actualproduct demand or market conditions are less favorable than anticipated bymanagement, additional reserves may be required.

# Long-Lived and Intangible Assets

The Company reviews itslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Recoverabilityof assets to be held and used is measured by a comparison of the carryingamount of an asset to undiscounted future net cash flows expected to begenerated by the assets. If these assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.

RESULTS OF OPERATIONS

Revenues

Net revenues decreased10% to $1,408,000 for the three-month period ended April 30, 2006,compared to net revenues of $1,567,000 for the same period in fiscal 2005. Forthe six-month period ended April 30, 2006, revenues decreased 3% to$2,990,000 from $3,092,000 for the same period in fiscal 2005. Unit sales ofthe Company’s machine vision systems increased to 305 for the second quarter offiscal 2006 versus 191 for the same period in fiscal 2005. In the three-

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month period ended April 30,2006, revenues from three customers represented approximately 14%, 13% and 10%of total revenue, respectively. In the three-month period ended April 30,2005, revenues from two customers represented approximately 14% and 12% oftotal revenue, respectively. In the six-month period ended April 30, 2006,revenues from one customer represented approximately 13% of total revenue. Inthe six-month period ended April 30, 2005, revenues from two customerseach represented approximately 11% of total revenue.

The decrease in revenues in the second quarter of fiscal 2006 comparedto the same period of fiscal 2005 resulted in decreased sales of our oldproduct lines along with a slower than expected ramp up of sales of our newIMPACT product line through our new distributors. During the second quarter offiscal year 2006 approximately 88% of revenue was IMPACT-related compared to56% of revenue during the same period of fiscal year 2005. Overall, we had a40% increase in dollar sales in our Impact revenue during the second quarter of2006 compared to the same period in fiscal 2005.

During the second quarterof fiscal 2006, revenues from outside the United States accounted for 56% ofrevenues compared to 58% in the fiscal 2005 second quarter. During the firstsix months of fiscal 2006, revenues from outside the United States accountedfor 59% compared to 54% in the first six months of fiscal 2005.

Wewill continue to experience fluctuating quarter-over-quarter revenuecomparisons as we transition almost exclusively to product development andsales of the IMPACT family of products. Revenue trends may also be inconsistentgiven the nature of the machine vision industry and the capital nature of ourproduct.

Gross profit decreased 4%to $736,000 for the three-month period ended April 30, 2006, compared to$764,000 for the same period in fiscal 2005. For the six-month period ended April 30,2006, gross profit increased 4% to $1,616,000 from $1,560,000 for the sameperiod in fiscal 2005. As a percentage of net revenues, the gross profit forthe second quarter of fiscal 2006 increased to 52% compared to 49% in the sameperiod of fiscal 2005. For the six-month period ended April 30, 2006,gross profit as a percentage of net revenue increased to 54% compared 50% inthe same period of fiscal 2005. The increase in gross margin is a reflectionthat the majority of our revenue in 2006 related to our IMPACT product linewhich has a higher gross margin than our older product lines. With a majorityof the Company’s revenues consisting of its newer, higher gross margin, IMPACTproduct line, it is expected that future gross margins will trend into the 55%to 60% range as our fixed manufacturing overhead is spread over a higher volumeof sales.

Sales and marketing expenses decreased 18% to $543,000for the three-month period ended April 30, 2006 compared to $659,000 forthe same period in fiscal 2005. For the six-month period ended April 30,2006, sales and marketing expenses decreased 18% to $1,102,000 from $1,345,000for the same period in fiscal 2005. As a percentage of net revenues, sales andmarketing expenses decreased to 39% for the second quarter of fiscal 2006compared to 42% for the same period in fiscal 2005. For the six-month periodended April 30, 2006, sales and marketing expenses as a percentage of netrevenues decreased to 37% compared to 43% in the same period in fiscal 2005.The Company expects sales and marketing expenses in absolute dollars to remainrelatively flat for the remainder of fiscal 2006. Increases in sales andmarketing expenditures may occur to the extent that revenue growth is achieved.

General and administrative expenses decreased 7% to$249,000 for the three-month period ended April 30, 2006, compared to$269,000 for the same period in fiscal

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2005. For the six-month period ended April 30,2006, general and administrative expenses decreased 13% to $485,000 compared to$560,000 in the same period in fiscal 2005. As a percentage of net revenues,general and administrative expenses increased slightly to 18% for the secondquarter of fiscal 2006 versus 17% for the same period in fiscal 2005. For thesix-month period ended April 30, 2006, general and administrative expensesas a percentage of net revenues decreased to 16% from 18% in the same period infiscal 2005. The Company expects general and administrative expenses to remainrelatively flat during fiscal 2006.

Research and development expenses increased 6% to$357,000 for the three-month period ended April 30, 2006, compared to$336,000 for the same period in fiscal 2005. For the six-month period ended April 30,2006, research and development expenses decreased 3% to $686,000 from $710,000in the same period in fiscal 2005. As a percentage of net revenues, researchand development expenses increased to 25% for the second quarter of fiscal2006, compared to 21% for the first quarter of fiscal 2005. Research anddevelopment expenses as a percentage of net revenues remained relatively flatat 23% for each six-month periods ending April 30, 2006 and 2005. Again,the Company expects research and development expenses to remain relatively flatduring fiscal 2006.

The Company did not record an income tax benefit orexpense for the three and six month periods ended April 30, 2006 or 2005.

TheCompany’s net loss from continuing operations for the second quarter of fiscal2006 decreased from year-ago levels to $284,000 or 8 cents per share, ascompared with a loss of $870,000 or 29 cents per share for the same period infiscal 2005. The Company’s net loss from continuing operations for the six-monthperiod ended April 30, 2006 decreased to $488,000 or 15 cents per share,as compared with a loss of $1,425,000 or 47 cents per share for the same periodin fiscal 2005. There were approximately 3.7 million shares outstanding duringthe three-month period ended April 30, 2006, as compared withapproximately 3.0 million shares outstanding for the same period in fiscal2005. There were approximately 3.3 million shares outstanding during the threeand six-month period ended April 30, 2006, as compared with approximately3.0 million shares outstanding for the same period in fiscal 2005.

Ourdiscontinued operations resulted in no gain or loss in the three and six monthsended April 30, 2006 compared to a loss of $0 and $55,000 or 0 and 2 centsper share for the three and six months ended April 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2006 the Company had cash balancesof $647,000, working capital of approximately $2.0 million and no long-termdebt.

In the second quarter of fiscal 2006 the Company incurreda net loss of $284,000 which included non-cash charges related to depreciationand amortization of $86,000. The net loss for the quarter decreased $586,000from the $870,000 loss reported in the second quarter of fiscal 2005. For thequarter ended April 30, 2006, cash used in operating activities was$596,000. As previously reported, the decrease in cash used in operationsduring fiscal 2005 relates to the Company’s second quarter corporaterestructuring actions.

The Company has beenusing its existing cash and cash equivalents to fund the cash needs of itsoperating activities. TheCompany believes it has sufficient 

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cash to fund its operations, working capital and capitalresource needs through the next twelve months. The Company closed on a$400,000 private placement of common stock on February 17, 2006 in aneffort to further strengthen its balance sheet and provide for future workingcapital requirements. The private placement was funded by the Company’s currentlargest shareholder, Mr. Peter R. Peterson. In the private placement, theCompany issued 800,000 shares of common stock at a price of $0.50 per share.

We are carefully monitoring our cash position andevaluating the need for additional capital to enable us to achieve our shortand long-term objectives. If there was a need for additional capital, theCompany believes that a variety of financing alternatives are availableincluding external borrowing against accounts receivable and inventory,customer or vendor financing, the issuance of additional stock to the public orto strategic partners, or customer-sponsored research and development projects.The avenues that we take to satisfy our potential capital requirements willdepend in large part on the level of our revenues, and we will evaluate thesealternatives as we obtain better visibility of our revenue expectations.

There can be no assurance, however, that additionalcapital will be available on acceptable terms or at all, and the failure toobtain additional capital as needed may have an adverse effect on the Company’sability to continue to take advantage of future opportunities or respond tocompetitive pressures or unanticipated requirements, which could adverselyaffect its business, financial position, results of operations and cash flows.

As of April 30, 2006, the Company had nooutstanding debt.

Working capital decreased slightly to $2,018,000 at April 30,2006 from $2,026,000 at October 31, 2005. The Company financed itsoperations during the first six months of fiscal 2006 through existing cash andcash equivalents. Net cash used in operating activities during the first sixmonths of fiscal 2006 was $596,000. Accounts receivable increased $168,000 andinventories decreased $42,000 during the first six months of fiscal 2006. Accountspayable increased by $52,000 while accrued expenses decreased by $84,000 duringthe first six months of fiscal 2006.

Net cash provided byinvesting activities was $65,000 during the six months ended April 30,2006 and included fixed asset additions of $29,000 and a sale of stock withproceeds of $94,000. This compares with $36,000 in fixed asset additions forthe same period in fiscal 2005. The Company expects that fixed asset additionsfor the remaining quarters of fiscal 2006 to continue at approximately the samerate as the first two quarters of fiscal 2006.

The Company does not have relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements. As such, the Company is not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in sucharrangements.

The Company believes it does not have materialexposure to quantitative and qualitative market risks. The carrying amountsreflected in the balance sheets of cash and cash equivalents, trade receivablesand trade payables approximate fair value at April 30, 2006 due to theshort maturities of these instruments.

NEW ACCOUNTINGPRONOUNCEMENTS

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Information regarding newaccounting pronouncements is included in the Notes to Condensed FinancialStatements.

FORWARD LOOKINGSTATEMENTS

The discussion above containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including statements regarding the Company’sexpectations, beliefs, intentions and strategies regarding the future.Forward-looking statements include, without limitation, statements regardingthe extent and timing of future revenues and expenses and customer demand. Allforward-looking statements included in this document are based on informationavailable to the Company as of the date hereof, and the Company assumes noobligation to update any such forward-looking statements.

The Company’s actual results are subject to risks anduncertainties and could differ materially from those discussed in theforward-looking statements. These statements are based upon the Company’sexpectations regarding a number of factors, including the Company’s ability toobtain additional working capital if necessary to support its operations,changes in worldwide general economic conditions, cyclicality of capitalspending by customers, the Company’s ability to keep pace with technologicaldevelopments and evolving industry standards, worldwide competition, and theCompany’s ability to protect its existing intellectual property from challengesfrom third parties. A detailed description of the factors that could causefuture results to materially differ from the Company’s recent results or thoseprojected in the forward-looking statements are contained in the section entitled “Description ofBusiness” under the caption “Important Factors Regarding Forward-LookingStatements” contained in its filing with the Securities and Exchange Commissionon Form 10-KSB for the year ended October 31, 2005 and otherreports filed with the Securities and Exchange Commission.

Item 3: CONTROLSAND PROCEDURES

(a) Evaluation ofDisclosure Controls and Procedures.

The Company’s President,Chief Executive Officer and Chief Financial Officer Joseph C. Christenson, hasreviewed the Company’s disclosure controls and procedures as of the end of theperiod covered by this report and concluded that the Company’s disclosurecontrols and procedures are effective.

(b) Changes in InternalControl Over Financial Reporting.

There have been nochanges in internal control over financial reporting that occurred during thefiscal quarter covered by this report that have materially affected, or arereasonably likely to materially affect, the registrant’s internal control overfinancial reporting.

 

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PART II. OTHERINFORMATION

Item 1:    LEGAL PROCEEDINGS

None.

Item 2:    UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

The Company closed on a $400,000 private placement ofcommon stock on February 17, 2006 in an effort to further strengthen itsbalance sheet and provide for future working capital requirements. The privateplacement was funded by the Company’s current largest shareholder, Mr. PeterR. Peterson. In the private placement, the Company issued 800,000 shares ofcommon stock at a price of $0.50 per share.

Item 3.    DEFAULTS UPON SENIOR SECURITIES

Not Applicable

Item 4:    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

The Company’s Annual Meeting of Shareholders was heldon March 9, 2006. Of the 2,998,747 shares of common stock outstanding andentitled to vote at the meeting, 2,878,952 shares were present, either inperson or by proxy. The following describes the matters considered by theCompany’s shareholders at the Annual Meeting, as well as the results of thevotes cast at the Annual Meeting:

1.             Toelect three (3) directors to hold office until the next Annual Meeting ofShareholders or until their respective successors have been elected and shallqualify.

 

| Name of Nominee | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|---------------------------|------------|-----------|------------|--------------|------------|
| Joseph C.  Christenson    |       | 2,844,895 |       | 34,057       |       |
| Robert W. Heller          |       | 2,869,419 |       | 9,533        |       |
| Peter R. Peterson         |       | 2,854,314 |       | 24,638       |       |

 

Item 5:    OTHER INFORMATION

None.

Item 6:    EXHIBITS

(a)           Thefollowing exhibits are included herein:

31.1                           Certificationof President, Chief Executive Officer and Chief Financial Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of theExchange Act).

32.1                           Certificationpursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

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SIGNATURES

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.
|                          |   | PPT VISION, INC.                                                 |
|--------------------------|--------|------------------------------------------------------------------|
| Date: June 14, 2006 |   |                                                             |
|                     |   | /s/Joseph C. Christenson                                         |
|                     |   | Joseph C. Christenson                                            |
|                     |   | President, Chief Executive Officer and   Chief Financial Officer |

 

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