<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 August 31, 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 40,019,154
- ------------------------------- ----------
(Class) (Outstanding at October 7, 1998)
Transitional Small Business Disclosure Format (check one): YES ____ NO X
<PAGE> 2
PATRIOT SCIENTIFIC CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1998 (unaudited)
and May 31, 1998 3
Consolidated Statements of Operations for the three
months ended August 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
August 31, 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
</TABLE>
* No information provided due to inapplicability of the item.
2
<PAGE> 3
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 164,632 $ 602,456
Accounts receivable 479,385 593,542
Inventories (Note 3) 186,856 230,417
Prepaid expenses and other 304,551 109,365
------------ ------------
Total current assets 1,135,424 1,535,780
Property and equipment - net 527,395 453,211
Patents, trademarks, net 181,617 196,942
Other 17,546 3,721
------------ ------------
Total Assets $ 1,861,982 $ 2,189,654
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 901,723 $ 391,184
Accrued liabilities 140,403 131,088
Current portion- capital lease obligations 2,224 2,179
------------ ------------
Total current liabilities 1,044,350 524,451
Long-term Liabilities
Capital lease obligations 782 1,355
5% Convertible Term Debentures (Note 5) 370,000 507,000
------------ ------------
Total Liabilities 1,415,132 1,032,806
Stockholders' Equity
Preferred stock $.00001 par value; authorized
5,000,000 shares; none outstanding -- --
Common stock $.00001 par value; authorized
60,000,000 shares; 38,280,736 and 37,880,776
shares issued and outstanding (Note 4) 383 379
Additional paid-in capital (Note 4) 18,709,965 18,396,092
Accumulated deficit (18,263,498) (17,239,623)
------------ ------------
446,850 1,156,848
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,861,982 $ 2,189,654
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
1998 1997
<S> <C> <C>
Net sales $ 605,592 $ 478,164
Cost of sales 379,478 253,291
------------ ------------
Gross profit 226,114 224,873
Operating expenses:
Research and development 701,992 356,947
Selling, general and
administrative 402,771 666,944
------------ ------------
1,104,763 1,023,891
------------ ------------
Operating loss (878,649) (799,018)
------------ ------------
Other income (expenses):
Interest income 3,589 20,377
Interest expense (869) --
Non-cash interest expense
related to convertible
debentures (Note 5) (147,946) (380,475)
------------ ------------
(145,226) (360,098)
------------ ------------
Net loss $ (1,023,875) $ (1,159,116)
============ ============
Basic and diluted income (loss)
per common share: $ (0.03) $ (0.04)
============ ============
Weighted average number of
common shares outstanding
during the period (Note 1) 33,580,756 28,727,282
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $(1,023,875) $(1,159,116)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 104,453 63,047
Amortization of debt issuance costs 23,000 --
Non-cash interest expense related to
convertible debentures (Note 5) 147,946 380,475
Changes in:
Accounts receivable 114,157 (188,952)
Inventories 43,561 32,777
Prepaid and other assets (209,011) (225,784)
Accounts payable and accrued expenses 519,854 451,883
----------- -----------
Net cash used in operating activities (279,915) (645,670)
----------- -----------
INVESTING ACTIVITIES-
Purchase of property and equipment (163,312) (302,860)
FINANCING ACTIVITIES:
Principal payments on notes payable and
long-term debt (528) (597)
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 5,931 64,123
Proceeds from issuance of convertible notes -- 2,000,000
----------- -----------
Net cash provided by financing activities 5,403 2,063,526
----------- -----------
Net Increase (Decrease) in Cash (437,824) 1,114,996
Cash and cash equivalents at
beginning of period 602,456 477,675
----------- -----------
Cash and cash equivalents at
end of period $ 164,632 $ 1,592,671
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Convertible notes and accrued interest
exchanged for common stock $ 165,116 $ --
=========== ===========
Cash payments for interest 69 --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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, 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 period are
not necessarily indicative of the results that may be expected for the year.
Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Standard of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which required the Company to change the method used to calculate
earnings per share. Under SFAS No. 128, basic earnings (loss) per share is
calculated as income (loss) available to common stockholders divided by the
weighted average number of common shares outstanding. Diluted earnings (loss)
per share is calculated as net income (loss) divided by the diluted weighted
average number of common shares. The diluted weighted average number of common
shares is calculated using the treasury stock method for common stock issuable
pursuant to outstanding stock options, common stock warrants, and debt
convertible into common stock. Common stock options of 206,201 and 1,600,546 and
debt convertible into 992,177 and 1,738,265 common shares of stock were not
included in diluted earnings (loss) per share for the periods ended August, 1998
or 1997, respectively, as the effect was antidilutive due to the Company
recording losses in each of those periods.
In addition, 2,500,000 shares of common stock in escrow that may have been
earned as of August 31, 1998 were not considered outstanding for diluted
earnings (loss) per share because the Company is currently negotiating whether
they will be released.
Options and warrants to purchase 4,654,291 shares of common stock at exercise
prices from $0.585 to $7.50 per share were outstanding at August 31, 1998 but
were not included in the computation of diluted earnings (loss) per share
because the exercise prices were greater than the average market price of the
common shares. Options and warrants to purchase 1,322,733 shares of common stock
at exercise prices from $1.69 to $7.50 per share were outstanding at August 31,
1997 but were not included in the computation of diluted earnings (loss) per
share because the exercise prices were greater than the average market price of
the common shares.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which 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 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 130 has
been adopted and there was no effect on the financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which 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
6
<PAGE> 7
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 131 is 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.
3. 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 August 31, 1998 and May 31, 1998, consist of the following:
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1998
<S> <C> <C>
Component parts $ 394,008 $ 418,502
Work in process 73,863 60,136
Finished goods 83,985 116,779
--------- ---------
551,856 595,417
Reserve for obsolescence (365,000) (365,000)
--------- ---------
$ 186,856 $ 230,417
========= =========
</TABLE>
7
<PAGE> 8
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the three months ended
August 31, 1998:
<TABLE>
<CAPTION>
Common
Shares Dollars
<S> <C> <C>
Balance June 1, 1998 37,880,776 $18,396,471
Exercise of stock options 32,626 5,931
Stock issued for conversion of notes and related
accrued interest 367,334 165,116
Non-cash interest expense related to convertible notes
recorded to additional paid-in capital -- 142,830
----------- -----------
Balance August 31, 1998 38,280,736 $18,710,348
=========== ===========
</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. As
of August 31, 1998, 500,000 shares have been released from escrow. At August 31,
1998, 4,500,000 shares remain in escrow of which 2,500,000 shares may have been
earned but remain in escrow pending the outcome of continuing discussions
between the Company, the seller of the ShBoom Technology and one of the
co-inventors of the technology. 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 basic and diluted weighted average
number of common shares outstanding for the computation of (loss) per share
until the shares are released or the dispute is settled.
At August 31, 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 2000 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 1999 through 2002. The
Company also had 3,536,691 options outstanding pursuant to its 1996 Stock Option
Plan exercisable at $0.45 to $2.30 per share expiring beginning in 1999 through
2003. Some of the options outstanding under these plans 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 were not eligible under
the Plan. Through August 31, 1998 the Company had issued 217,600 common shares
pursuant to the plan. The plan expired on September 30, 1998 with no additional
common shares being issued.
At August 31, 1998, the Company had warrants outstanding exercisable into
1,147,600 common shares at exercise prices ranging from $1.25 to $7.50 per share
expiring beginning in 1999 through 2002.
5. 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. In September 1998, the exercise price
for related warrants to purchase 370,000 shares of common stock was reduced from
$1.69125 to $0.36. In November 1997, the Company issued to the same investors
for cash an
8
<PAGE> 9
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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. In September 1998, the exercise price for
related warrants to purchase 185,000 shares of common stock was reduced from
$1.50 to $0.36. The additional value related to the warrants due to the
reduction in the exercise price will be reflected as additional interest expense
in the second fiscal quarter of 1999.
The principal and interest amount of each Debenture could, 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 was the lower of (i) $1.1646 per share or (ii)
depending on the number of days the Debentures had been 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.
As of August 31, 1998, $2,605,000 of the Debentures and the accrued interest
thereon had been converted into 4,700,927 common shares of the Company. The
balance of the Debentures were converted into 1,368,418 common shares of the
Company during September 1998.
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 $2,160,941 of additional paid-in
capital for the discount related to the embedded interest in the Debentures. Of
this amount, $142,830 has been expensed during the first fiscal quarter ended
August 31, 1998 under the caption "Non-cash interest expense related to
convertible notes."
6. SUBSEQUENT EVENT
In June 1998, the Company, the seller of the ShBoom technology and the
co-inventor entered into nonbinding mediation to settle the dispute. Settlement
documentation had been exchanged between the parties, although disputes remained
concerning terms contained within the documents. In September 1998, the
mediation broke off due to an inability to resolve the disputes. The Company is
unable at this time to determine whether such disputes will eventually be
resolved. The Company's Consolidated Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty.
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, 1998.
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 AUGUST 31, 1998 AND 1997
Net sales. Total net sales for the first quarter of fiscal 1999 increased 26.6%
to $605,592 from $478,164 for the first quarter of fiscal 1998. This increase
was due primarily to the initial revenue on the Company's $3.3 million kiosk
application order. The remainder of the kiosk order is scheduled to be shipped
during the balance of fiscal year 1999.
Cost of sales. Cost of sales as a percentage of net sales increased to 62.7% for
the first quarter of fiscal 1999 compared to 53.0% for the corresponding quarter
of the previous fiscal year. This increase is due to lower profit margins on the
Company's $3.3 million kiosk application order. The remainder of the kiosk
order, which is scheduled to be shipped during the balance of fiscal year 1999,
is anticipated to put upward pressure on the cost of sales as a percentage of
net sales for the current fiscal year when compared to corresponding periods of
the previous fiscal year.
Research and development expenses increased by 96.7% from $356,947 for the first
fiscal quarter of 1998 to $701,992 for the first fiscal quarter of 1999. This
increase was due to an increase in licensed software support and update fees,
increased costs of porting a real time operating system to the PSC1000, and
costs related to the development of the kiosk.
Selling, general and administrative expenses decreased by 39.6% from $666,944
for the first quarter of fiscal 1998 to $402,771 for the first quarter of fiscal
1999. This decrease was due primarily to a reduction in costs related to the $2
million financing during the first quarter of fiscal 1998 and a reduction in
legal fees.
Other income (expense) was significantly lower for the first quarter of fiscal
1999 as a result of the non-cash interest related to discounted notes discussed
in Note 5 to the consolidated financial statements and the interest on the same
notes.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998, working capital was $91,074 and cash and cash equivalents
totaled $164,632. The Company has funded its operations primarily through the
issuance of securities. Cash and cash equivalents decreased $437,824 during the
three months ended August 31, 1998. The net cash used in operating activities
was $279,915 and additions to property and equipment were $163,312.
The Company's liquidity for the next twelve months is anticipated to be provided
by an exercise of warrants to purchase 555,000 shares of common stock for
$200,000, the cash profits related to the $3.3 million kiosk order which is
anticipated to ship over the balance of the current fiscal year, short-term debt
instruments, and additional equity financings.
10
<PAGE> 11
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. 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
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which 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. 130 has been adopted and there was no effect on the
financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which 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 131 is 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.
11
<PAGE> 12
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 year 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, effective December, 1996, 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 has completed development of a 0.35 micron version of the PSC1000 which
has resulted in increased processing speed and performance. In addition, the
Company is running the Sun Microsystems's Java OS on the PSC1000. The PSC1000
executes Java very efficiently, and is 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 to pursue various government agencies and commercial entities to
fund additional development efforts to establish business partnerships that will
enable the Company to commercialize this technology. The Company recently
completed the first phase of a development contract and has submitted a proposal
for additional funding to the Navy to continue development 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 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.
13
<PAGE> 14
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 acquired its ShBoom technology pursuant to a chain of agreements and
there is uncertainty regarding royalty payments, if any, and indemnification
from prior parties. 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 previous inventors. The Company believes,
should there be royalties due to previous inventors, that the obligation is that
of nanoTronics. The Company was previously informed by nanoTronics that an offer
to the inventor to resolve these uncertainties was rejected. The Company could
become subject to unindemnified claims relating to any failure by nanoTronics to
pay such royalties, if due. Also the company could become liable for up to
$1,250,000 to nanoTronics under certain indemnification provisions.
In June 1998, the Company, the seller of the ShBoom technology and the
co-inventor entered into nonbinding mediation to settle the dispute. Settlement
documentation had been exchanged between the parties, although disputes remained
concerning terms contained within the documents. In September 1998, the
mediation broke off due to an inability to resolve the disputes. The Company is
unable at this time to determine whether such disputes will eventually be
resolved. The Company's Consolidated Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty.
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 - NONE
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: October 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 THREE MONTHS ENDED AUGUST 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10 QSB FOR THE
QUARTERLY PERIOD ENDED AUGUST 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 164,632
<SECURITIES> 0
<RECEIVABLES> 479,385
<ALLOWANCES> 0
<INVENTORY> 186,856
<CURRENT-ASSETS> 1,135,424
<PP&E> 1,748,996
<DEPRECIATION> 1,221,601
<TOTAL-ASSETS> 1,861,982
<CURRENT-LIABILITIES> 1,044,350
<BONDS> 0
0
0
<COMMON> 383
<OTHER-SE> 18,709,965
<TOTAL-LIABILITY-AND-EQUITY> 1,861,982
<SALES> 605,592
<TOTAL-REVENUES> 605,592
<CGS> 379,478
<TOTAL-COSTS> 379,478
<OTHER-EXPENSES> 1,104,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,226
<INCOME-PRETAX> (1,023,875)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,023,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,023,875)
<EPS-PRIMARY> (.03)
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