<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For quarterly period ended February 28, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _______________
Commission File Number 0-22182
PATRIOT SCIENTIFIC CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 84-1070278
-------- ----------
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
10989 Via Frontera, San Diego, California 92127
-----------------------------------------------
(Address of principal executive offices)
(619) 674-5000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00001 par value 37,146,366
- ------------------------------- ----------
(Class) (Outstanding at April 3, 1998)
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
<PAGE> 2
PATRIOT SCIENTIFIC CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of February 28, 1998 (unaudited)
and May 31, 1997 3
Consolidated Statements of Operations for the nine months and three
months ended February 28, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
February 28, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
* No information provided due to inapplicability of the item.
</TABLE>
2
<PAGE> 3
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,196,644 $ 477,675
Accounts receivable 393,807 260,120
Inventories (Note 4) 528,327 529,533
Prepaid expenses and other 171,734 88,353
------------ ------------
Total current assets 2,290,512 1,355,681
Property and equipment - net 440,982 380,312
Patents, trademarks, net 147,713 193,688
Other 181,773 6,773
------------ ------------
Total Assets $ 3,060,980 $ 1,936,454
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 287,883 $ 340,983
Accrued liabilities 178,065 165,236
Current portion- capital lease obligations 2,135 2,721
------------ ------------
Total current liabilities 468,083 508,940
Long-term Liabilities
Capital lease obligations 1,917 3,534
5% Convertible Term Debentures (Note 7) 1,550,000 --
------------ ------------
Total Liabilities 2,020,000 512,474
Stockholders' Equity
Preferred stock $.00001 par value; authorized
5,000,000 shares; none outstanding -- --
Common stock $.00001 par value; authorized
60,000,000 shares; 36,414,153 and 33,068,329
shares issued and outstanding (Note 6) 365 331
Additional paid-in capital (Note 6) 15,507,480 12,768,487
Accumulated deficit (14,466,865) (11,344,838)
------------ ------------
1,040,980 1,423,980
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,060,980 $ 1,936,454
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 253,691 $ 485,199 $ 1,140,711 $ 1,377,228
Cost of sales 109,430 284,797 546,130 658,868
------------ ------------ ------------ ------------
Gross profit 144,261 200,402 594,581 718,360
Operating expenses:
Research and development 475,214 292,174 1,299,975 1,025,235
Selling, general and
administrative 389,043 397,923 1,750,908 1,064,575
Amortization -- 163,136 -- 489,455
------------ ------------ ------------ ------------
864,257 853,233 3,050,883 2,579,265
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 16,197 11,569 51,313 34,516
Interest expense (32,563) (2,014) (92,360) (31,967)
Non-cash interest expense
related to convertible
debentures (Note 7) -- (375,000) (624,678) (375,000)
------------ ------------ ------------ ------------
(16,366) (365,445) (665,725) (372,451)
------------ ------------ ------------ ------------
Net loss before extraordinary
item (736,362) (1,018,276) (3,122,027) (2,233,356)
Extraordinary income (Note 8) -- -- -- 1,779,457
------------ ------------ ------------ ------------
Net loss $ (736,362) $ (1,018,276) $ (3,122,027) $ (453,899)
============ ============ ============ ============
Basic loss per common share:
Before extraordinary item $ (0.02) $ (0.04) $ (0.10) $ (0.08)
Extraordinary item -- -- -- 0.06
------------ ------------ ------------ ------------
Basic loss per common share $ (0.02) $ (0.04) $ (0.10) $ (0.02)
============ ============ ============ ============
Weighted average number of
common shares outstanding
during the period (Note 6) 31,914,153 27,858,329 29,864,424 26,894,897
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended February 28,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows from Operating Activities
Net loss $(3,122,027) $ (453,899)
Adjustments to reconcile net loss
to cash used in operating activities:
Adjustment for Metacomp Inc. pooling of
interests from year-end change (Note 3) -- (1,741,699)
Amortization and depreciation 225,031 623,336
Stock compensation expense 375,000 28,927
Non -cash interest expense related to
convertible debentures (Note 7) 624,678 375,000
Changes in:
Accounts receivable (133,687) (83,842)
Inventories 1,206 29,097
Prepaid and other assets (212,406) 37,010
Accounts payable and accrued expenses 8,295 (155,214)
----------- -----------
Net cash used in operating activities (2,233,910) (1,341,284)
----------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment (285,701) (195,885)
----------- -----------
Net cash used in investing activities (285,701) (195,885)
----------- -----------
Cash Flows from Financing Activities
Principal payments on notes payable and
long-term debt (2,203) (318,478)
Value of warrants 10,500 --
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 230,283 294,362
Proceeds from issuance of convertible notes 3,000,000 1,517,015
----------- -----------
Net cash provided by financing activities 3,238,580 1,492,899
----------- -----------
Net Increase (Decrease) in Cash 718,969 (44,270)
Cash and cash equivalents at
beginning of period 477,675 863,944
----------- -----------
Cash and cash equivalents at
end of period $ 1,196,644 $ 819,674
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Convertible debentures and accrued interest
exchanged for common stock $ 1,498,566 $ 1,517,015
=========== ===========
Cash payments for interest 43,794 --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Patriot Scientific Corporation ("the
Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles. These statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended May
31, 1997 and the Company's Form 8Ks dated June 16, 1997 and February 27, 1998.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three month and nine
month periods are not necessarily indicative of the results that may be expected
for the year.
As a result of the business combination discussed below, the Company no longer
qualifies as a development stage company. Accordingly, the consolidated
statements of operations and statements of cash flows do not include development
stage cumulative results.
Income (Loss) Per Share
Through November 30, 1997, the Company followed the provisions of Accounting
Principles Board Opinion ("APB") 15, "Earnings Per Share." Effective for the
quarter ended February 28, 1998, the Company implemented SFAS No. 128, "Earnings
per Share." SFAS No. 128 provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. In loss
periods, dilutive common equivalent shares are excluded as the effect would be
anti-dilutive. For the three and nine month periods ended February 28, 1998 and
1997, 1,458,570, 1,440,632, 1,458,570 and 1,440,632 dilutive common equivalent
shares of common stock were not included in the computation of diluted earnings
per share because their effect was anti-dilutive. All prior period earnings per
share data has been restated to reflect the requirements of SFAS No. 128.
2. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owner and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS No. 131 supersedes SFAS No.
14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of the standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of the standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other Postretirement benefits and requires
additional information on
6
<PAGE> 7
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis. SFAS No. 132 is effective for years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available. Management
believes the adoption of this statement will have no material impact on the
Company's financial statements.
3. ACQUISITION OF METACOMP, INC. COMMON STOCK
On December 26, 1996, the Company acquired 96.9% of the common stock of Metacomp
in exchange for 1,272,068 shares of the Company's common stock. Metacomp
designs, manufactures, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and digital
telecommunications requirements. The business combination was accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to include the results of Metacomp for all periods presented.
Metacomp's fiscal year-end has been changed from July 31 to May 31 to conform to
the Company's fiscal year-end. Based on the difference in fiscal year-ends,
results of operations for the two months ended July 31, 1996 have been included
in the consolidated statements of operations for the nine months ended February
28, 1997. For the two months ended July 31, 1996, Metacomp recorded total
revenues of $239,501, a net loss before extraordinary item of $37,758,
extraordinary income of $1,779,457 and net income after extraordinary items of
$1,741,699. The accompanying consolidated statements of cash flows has been
adjusted to eliminate the net income after extraordinary items for the nine
months ended February 28, 1997.
4. INVENTORIES
Inventories are stated at cost ( determined primarily by the weighted average
cost method which approximates cost on a first-in, first-out basis) not in
excess of market value.
Inventories at February 28, 1998 and May 31, 1997, consist of the following:
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
<S> <C> <C>
Raw material $316,711 $344,334
Work in process 112,714
90,086
Finished goods 98,902 95,113
-------- --------
$528,327 $529,533
======== ========
</TABLE>
5. PURCHASED TECHNOLOGY
Effective May 31, 1994, the Company acquired certain proprietary semiconductor
microprocessor technology (the "ShBoom Chip") and related computer software from
a corporation in exchange for 10,000,000 restricted shares of the Company's
common stock (5,000,000 of which were placed in escrow subject to release as
discussed below). The original cost of this technology, $1,837,000, was based
upon the estimated fair market value of the 5,000,000 non-contingent shares of
the Company's common stock issued under the agreement. The remaining 5,000,000
shares issued for this technology are subject to an earnout escrow arrangement.
As such, when the escrowed shares are earned, they are charged to compensation
in a manner similar to a variable stock option plan. The terms of the escrow
arrangement provide for the release from escrow of 500,000 shares for each
$500,000 of revenues earned by the Company during the period from June 1, 1994
through May 31, 1999. Additionally, this agreement also provides for the release
of these shares upon the occurrence of certain defined major corporate events.
Any of the contingent shares not released by May 31, 1999 would be returned to
the Company and canceled.
During the nine months ended February 28, 1998, 500,000 shares were released
from escrow and $375,000 was charged to compensation costs.
Purchased technology at a cost of $1,837,000 relating to the Company's ShBoom
Technology was amortized over its estimated useful life of three years.
Amortization expense of $163,136 and $489,455 was recorded related to this
technology for the three months and nine months ended February 28, 1997,
respectively.
7
<PAGE> 8
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the nine months ended
February 28, 1998:
<TABLE>
<CAPTION>
Common
Shares Dollars
<S> <C> <C>
Balance June 1, 1997 33,068,329 $12,768,818
Exercise of stock options 449,153 230,183
Stock issued for conversion of debentures and related
accrued interest 2,896,671 1,498,566
Stock released from escrow for purchased technology 375,000
Value of warrants issued 10,500
Non-cash interest expense related to convertible debentures
recorded to additional paid-in capital -- 624,678
----------- -----------
Balance February 28, 1998 36,414,153 $15,507,845
=========== ===========
</TABLE>
A total of 5,000,000 shares of the Company's outstanding common stock was issued
as a contingent cost of the Company's acquisition of its ShBoom Technology.
During the nine months ended February 28, 1998, 500,000 shares were released
from escrow and 4,500,000 shares remain subject to an escrow arrangement. The
escrowed shares are releasable from escrow at the rate of 500,000 shares for
each $500,000 of revenues earned by the Company and upon the occurrence of
certain defined major corporate events. These shares are issued and outstanding
and carry all shareholder rights. Any of the escrowed shares not released prior
to May 31, 1999 are to be returned to the Company and canceled. The 4,500,000
shares are excluded from the calculation of weighted average number of common
shares outstanding for the computation of loss per share until the release
conditions are met.
At February 28, 1998, the Company had 165,000 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at prices ranging from $0.50 to $2.30
per share expiring beginning 1998 through 2001. The Company had 511,753 options
outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at prices
ranging from $0.18 to $2.30 per share expiring beginning 1998 through 2002. The
Company also had 3,471,817 options outstanding pursuant to its 1996 Stock Option
Plan exercisable at $0.18 to $2.30 per share expiring beginning in 1999 through
2002. Some of the options described in this paragraph are not presently
exercisable and are subject to meeting vesting criteria.
As of October 1, 1995 the Board of Directors adopted the 1995 Employee Stock
Compensation Plan providing for the issuance of up to 250,000 common shares to
Employees, as defined. Executive officers and directors are not eligible under
the Plan. Through February 28, 1998 the Company had issued 217,600 common shares
pursuant to the plan.
At February 28, 1998 the Company had warrants outstanding exercisable into
1,047,600 common shares at exercise prices ranging from $1.50 to $7.50 per share
expiring beginning in 1999 through 2002.
7. 5% CONVERTIBLE TERM DEBENTURES
In June, 1997 the Company issued to a limited number of investors for cash an
aggregate of $2,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 ("Debentures") and Stock Purchase Warrants ("Warrants") with a right to
purchase an aggregate 611,733 shares of common stock, par value $.00001 per
share, at an exercise price of $1.69125 and in November, 1997 the Company issued
to the same investors for cash an aggregate of $1,000,000 of Debentures due June
2, 1999 and Warrants with a right to purchase an aggregate 305,867 shares of
common stock, par value $.00001 per share, at an exercise price of $1.50. The
principal and interest amount of each Debenture may, at the election of the
holder, be converted in whole or in part and from time to time into fully paid
and nonassessable shares of common stock, $.00001 par value, of the Company, at
a price which is the lower of (i) $1.1646 per share or (ii) depending on the
number of days the Debentures have been
8
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PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
held after the funding date, from 75% to 91% of the average of the closing bid
prices for the common stock for the ten consecutive trading days ending on the
trading day immediately preceding such conversion date. If the Debentures have
not been converted into common shares of the Company by June 2, 1999, under
certain conditions the Debentures will automatically be converted into shares of
the common stock of the Company.
As of February 28, 1998, $1,450,000 of the Debentures and the accrued interest
thereon, $48,566, had been converted into 2,896,671 common shares of the
Company.
Convertible debt instruments which are convertible at a discount to market are
accounted for by treating such discount as additional interest expense. The
Company computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the dates the
Debentures were issued. The Company recorded $624,678 of additional paid-in
capital for the discount related to the embedded interest in the Debentures
during the first nine months of the current fiscal year. The same amount,
$624,678, was expensed during the first nine months of the current fiscal year
and is included in the nine months results ended February 28, 1998 under the
caption "Non-cash interest expense related to convertible debentures."
8. EXTRAORDINARY INCOME
The extraordinary income is a gain from the discharge of debt as a result of the
completion of Metacomp's Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code as of July, 1996.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"FUTURE PERFORMANCE AND RISK FACTORS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1997.
The Company's results of operations have and may continue to be subject to
significant quarterly variation. The results for a particular quarter may vary
due to a number of factors, including the overall state of the microprocessor
and communications segments of the economy, the development status and demand
for the Company's products, economic conditions in the Company's markets, the
timing of orders, the timing of expenditures in anticipation of future sales,
the mix of products sold by the Company, the introduction of new products and
product enhancements by the Company or its competitors and pricing and other
competitive conditions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Net sales. Total net sales for the third quarter of fiscal 1998 decreased 47.7%
to $253,691 from $485,199 for the third quarter of fiscal 1997. This decrease
was due to a reduction in the shipment of the Company's older communication
products as a result of anticipated orders slipping into the next fiscal
quarter. Favorable bookings, in excess of $500,000 for the month of March, 1998,
should enable a return to previous year fiscal period levels. Net sales for the
current fiscal period were derived from shipments of the Company's
communication, microprocessor and radar/antenna product lines.
Cost of sales. Cost of sales as a percentage of net sales was 43.1% for the
third quarter of fiscal 1998 compared to 58.7% for the corresponding quarter of
the previous fiscal year. This reduction in the cost of sales percentage was due
to royalties and research billings, revenue items with little or no associated
cost of sales, having a favorable impact on the cost of sales percentage for the
current fiscal period.
Research and development expenses increased by 62.6% from $292,174 for the third
fiscal quarter of 1997 to $475,214 for the third fiscal quarter of 1998. This
increase was due to an increase in licensed software support and update fees and
development and fabrication expenses on the microprocessor.
Selling, general and administrative expenses decreased slightly from $397,923
for the third quarter of fiscal 1997 to $389,043 for the third quarter of fiscal
1998.
Amortization of purchased ShBoom technology was $163,136 for the third fiscal
quarter of 1997. The technology was totally amortized during fiscal year 1997
and, accordingly, there was no corresponding expense for the third quarter of
fiscal year 1998.
Other income (expense) was significantly lower for the third quarter of fiscal
1998 as a result of the 1997 third fiscal quarter non-cash interest related to
discounted notes discussed in Note 7 to the consolidated financial statements
and the interest on the same notes.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1997
Net sales. Total net sales for the first nine months of fiscal 1998 were 17.2%
lower, $1,140,711, compared to the corresponding period of fiscal 1997,
$1,377,228. This reduction in net sales was a result of the slippage in bookings
discussed above. Net sales for the current fiscal period were derived from the
Company's communication, microprocessor and radar/antenna product lines.
Cost of sales. Cost of sales as a percentage of net sales was 47.9% for the
first nine months of fiscal 1998 compared to 47.8% for the corresponding period
of fiscal 1997.
Research and development expenses increased by 26.8% from $1,025,235 for the
first nine months of 1997 to $1,299,975 for the first nine months of fiscal
1998. This increase was due to an increase in licensed software support and
update fees.
10
<PAGE> 11
Selling, general and administrative expenses increased by 64.5% from $1,064,575
for the first nine months of fiscal 1997 to $1,750,908 for the first nine months
of fiscal 1998. This increase was due primarily to the costs related two
financings accumulating $3,000,000, an increase in personnel costs related to
the Company's addition of two executives, one marketing and one financial, the
compensation costs related to the release from escrow of 500,000 shares of
common stock as discussed in Note 4, and the increase in marketing costs related
to introducing the Company's products to the marketplace.
Amortization of purchased ShBoom technology was $489,455 for the first nine
months of fiscal 1997. The technology was totally amortized during fiscal year
1997 and, accordingly, there was no corresponding expense for the comparable
period of fiscal year 1998.
Other income (expense) was significantly higher for the first nine months of
fiscal 1998 as a result of the non-cash interest related to discounted notes
discussed in Note 7 to the consolidated financial statements and the interest on
the same notes.
An extraordinary income item of $1,779,457 was included in the first nine months
of fiscal 1997. This item was the result of the discharge of debts by Metacomp
in July, 1996 as a result of their successful completion of their Chapter 11
case.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 1998, working capital was $1,822,429 and cash and cash
equivalents totaled $1,196,644. The Company has funded its operations primarily
through the issuance of securities. The cash and cash equivalents increased
$718,969 during the nine months ended February 28, 1998. The net cash used in
operating activities of $2,233,910 and additions to property and equipment of
$285,701 was offset by a new issuance of convertible debt in the amount of
$3,000,000.
The Company's liquidity for the next twelve months is anticipated to be
supplemented by introducing to market and commencing sales and licensing of the
ShBoom, the technology used in the PSC1000 family of microprocessor computer
chips, designing future generations of communication product technologies,
exploiting the radar and antenna technology and by expanding the marketing of
communication products.
The Company anticipates that it may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development of
the Company's technologies. Product introductions such as those currently
underway for communication products and the PSC1000 may require significant
inventory, product launch and other expenditures not presently estimable by
management. Further, if expanded development is commenced or new generations of
microprocessors or radar are accelerated beyond current plans, additional
expenditures, not currently estimable by management, may be required. It is
possible therefore, that higher levels of expenditures may be required than
currently contemplated by management resulting from changes in development plans
or as required to support new developments or commercialization activities or
otherwise.
Based on the current fiscal year's rate of cash operating expenditures and
current plans, management anticipates additional cash requirements for the next
twelve months will be met from debt or equity financings, improved product sales
or the sale or licensing of certain of the Company's technologies. There can be
no assurance that any funds required during the next twelve months or thereafter
can be generated from operations or that if such required funds are not
internally generated that funds will be available from external sources such as
debt or equity financings or other potential sources. The lack of additional
capital could force the Company to substantially curtail or cease operations and
would therefore have a material adverse effect on the Company's business.
Further there can be no assurance that any such required funds, if available,
will be available on attractive terms or that they will not have a significantly
dilutive effect on existing shareholders of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owner and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS No. 131 supersedes SFAS No.
14 "Financial Reporting for
11
<PAGE> 12
Segments of a Business Enterprise." SFAS No. 131 establishes standards on the
way that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosure regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of the standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of the standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
Year 2000 Compliance
The Company, like most owners of computer software, will be required to modify
significant portions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $20,000 to $30,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
12
<PAGE> 13
FUTURE PERFORMANCE AND RISK FACTORS
THIS REPORT CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECTS THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE SUMMARIZED BELOW.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES
NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS, TO REFLECT
EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT.
Since the business combination with Metacomp, the Company has segregated its
operations into microprocessor, communication, and radar/antenna segments.
However, synergistic technical and other resources can and will be deployed
across all three segments.
Product revenues have been primarily from the communication segment. The
communication products are specifically designed to fill both the high speed
data as well as the video conferencing requirements of the Internet.
The microprocessor continues to be the Company's primary development focus. The
Company is currently shipping a 0.5 micron version of the PSC1000 that has
increased processing speed and performance over an earlier version. The Company
is currently developing a 0.35 micron version of the PSC1000 which will further
increase the processing speed and performance. Shipments of the 0.35 micron
version are anticipated during the third calendar quarter of 1998. In addition,
the Company is running the Sun Microsystems's Java OS on the PSC1000. The
PSC1000 is expected to execute Java very efficiently, and to be the
price/performance leader in the Java processor marketplace. This enhancement is
expected to increase potential market opportunities in areas such as TV set top
boxes, smart phones, PDAs, network computers, and other Internet related
products.
The Company's primary focus for the radar and antenna technology segment
continues to be various government agencies and commercial entities to fund
additional development efforts and to establish business partnerships that will
enable the Company to commercialize this technology. The Company has completed
one development contract and has commenced work on a research contract with the
Navy to demonstrate characterization of the gas antenna.
The Company is focusing its sales efforts on original equipment manufacturers,
system integrators, and Internet service providers for both the microprocessor
and communication segments. In addition, the Company anticipates using the
microprocessor in existing and future products developed in all three product
segments.
The Company has retained the services of an investment bank to assist the
Company in identifying strategic partnerships for the Company's products.
The Company has experienced in the past and may experience in the future many of
the problems, delays and expenses encountered by any business in the early
stages of development, some of which are beyond the Company's control. The
Company has limited operating history, has incurred significant cumulated
losses, has only recently commenced marketing and sales of its products and has
not achieved a profitable level of operations. There can be no assurance of
future profitability. The Company may require additional funds in the future for
operations or to exploit its technologies. There can be no assurance that any
funds required during the next twelve months or thereafter can be generated from
operations or that such required funds will be available from the aforementioned
or other potential sources. The lack of additional capital could force the
Company to substantially curtail or cease operations and would therefore have a
material adverse effect on the Company's business. Further there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significantly dilutive effect on
existing shareholders of the Company. The Company's technologies are in various
stages of development. The Company's CyberShark(TM) digital modem and certain
communication products have been developed to the point of production of
marketable product and the PSC1000 is in the first stages of production. There
can be no assurance that any of the technologies in development can be completed
to commercial exploitation due to the inherent risks of new technology
development limitations on financing, competition, obsolescence, loss of key
technical personnel and other factors. The Company's development projects are
high risk in nature, where unanticipated technical obstacles can arise at any
time and result in lengthy and costly delays or result in determination that
further development is unfeasible. There can be no assurance that the
technologies, if completed, will achieve market acceptance sufficient to sustain
the Company or achieve profitable operations.
The Company acquired the basic ShBoom technology from nanoTronics Corporation in
return for 10,000,000 shares of the Company's common stock in 1994. The Company
does not believe it is obligated to pay any royalties on aspects of the ShBoom
technology specified in prior agreements between nanoTronics Corporation and a
previous inventor. The Company believes, should there be royalties due to the
previous inventor, that the obligation is that of nanoTronics.
13
<PAGE> 14
The Company has been informed by nanoTronics that a tender of a part of the
consideration paid by the Company to nanoTronics for the basic ShBoom technology
has initially been rejected by the inventor and that the inventor has proposed
that he is entitled to royalties and that the basic technology be returned by
nanoTronics and licensed back to the Company. The Company believes the inventors
claims are without merit and frivolous. nanoTronics has rejected this proposal;
and the Company and nanoTronics are continuing discussions with the inventor in
an effort to resolve these issues. However, if it is ultimately determined that
the inventor is entitled to royalties, the Company could be subject to
indemnification claims by nanoTronics of up to $1,250,000 pursuant to its
agreement with nanoTronics.
The Company relies primarily on patents to protect its intellectual property
rights. There can be no assurance that patents held by the Company will not be
challenged and invalidated, that patents will issue from any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be sufficient in scope or strength or be issued in all countries where the
Company's products can be sold to provide meaningful protection or commercial
advantage to the Company. Competitors may also be able to design around the
Company's patents. The Company's common shares are traded on the OTC Bulletin
Board, are thinly traded and are subject to special regulations imposed on
"penny stocks." The Company's shares may experience significant price and volume
volatility, increasing the risk of ownership to investors.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - NONE
(b) Reports on Form 8-K
A Report on Form 8-K was filed on February 27, 1998 related to a change
in the President and Chief Executive Officer of the Company effective March 31,
1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PATRIOT SCIENTIFIC CORPORATION
Date: April 7, 1998 By: /s/ LOWELL W. GIFFHORN
-----------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED INTERIM STATEMENTS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM
10QSB FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 1,196,644
<SECURITIES> 0
<RECEIVABLES> 393,807
<ALLOWANCES> 0
<INVENTORY> 528,327
<CURRENT-ASSETS> 2,290,512
<PP&E> 1,521,736
<DEPRECIATION> 1,080,754
<TOTAL-ASSETS> 3,060,980
<CURRENT-LIABILITIES> 468,083
<BONDS> 1,551,917
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<COMMON> 365
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<TOTAL-LIABILITY-AND-EQUITY> 3,060,980
<SALES> 1,140,711
<TOTAL-REVENUES> 1,140,711
<CGS> 546,130
<TOTAL-COSTS> 546,130
<OTHER-EXPENSES> 3,050,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 717,038
<INCOME-PRETAX> (3,122,027)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,122,027)
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