<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 November 30, 1997
[ ] 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 33,496,798
(Class) (Outstanding at January 5, 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 November 30, 1997 (unaudited)
and May 31, 1997 3
Consolidated Statements of Operations for the six months and three
months ended November 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
November 30, 1997 and 1996 (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 14
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
* 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>
November 30, May 31,
1997 1997
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,749,715 $ 477,675
Accounts receivable 418,058 260,120
Inventories (Note 4) 467,482 529,533
Prepaid expenses and other 242,786 88,353
------------ ------------
Total current assets 2,878,041 1,355,681
Property and equipment - net 549,348 380,312
Patents, trademarks, net 163,038 193,688
Other 216,774 6,773
============ ============
Total Assets $ 3,807,201 $ 1,936,454
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 356,501 $ 340,983
Accrued liabilities 193,981 165,236
Current portion- capital lease obligations 2,721 2,721
------------ ------------
Total current liabilities 553,203 508,940
Long-term Liabilities
Capital lease obligations 2,738 3,534
5% Convertible Term Debentures (Note 7) 2,990,000 --
------------ ------------
Total Liabilities 3,545,941 512,474
Stockholders' Equity
Preferred stock $.00001 par value; authorized
5,000,000 shares; none outstanding -- --
Common stock $.00001 par value; authorized
60,000,000 shares; 33,451,838 and 33,068,329
shares issued and outstanding (Note 6) 335 331
Additional paid-in capital (Note 6) 13,991,428 12,768,487
Accumulated deficit (13,730,503) (11,344,838)
------------ ------------
261,260 1,423,980
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,807,201 $ 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 Six Months Ended
November 30, November 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 408,856 $ 480,433 $ 887,020 $ 892,029
Cost of sales 183,409 218,278 436,700 374,071
------------ ------------ ------------ ------------
Gross profit 225,447 262,155 450,320 517,958
Operating expenses:
Research and development 452,489 350,255 824,761 733,061
Selling, general and
administrative 710,246 405,411 1,361,865 666,652
Amortization -- 163,160 -- 326,319
------------ ------------ ------------ ------------
1,162,735 918,826 2,186,626 1,726,032
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 14,739 14,485 35,116 22,947
Interest expense (59,797) (11,594) (59,797) (29,953)
Non-cash interest expense
related to convertible
notes (Note 7) (244,203) -- (624,678) --
------------ ------------ ------------ ------------
(289,261) 2,891 (649,359) (7,006)
------------ ------------ ------------ ------------
Net loss before extraordinary
item (1,226,549) (653,780) (2,385,665) (1,215,080)
Extraordinary income (Note 8) -- -- -- 1,779,457
------------ ------------ ------------ ------------
Net income (loss) $ (1,226,549) $ (653,780) $ (2,385,665) $ 564,377
============ ============ ============ ============
Net loss per share before
extraordinary item $ (0.04) $ (0.02) $ (0.08) $ (0.05)
Extraordinary income -- -- -- 0.07
------------ ------------ ------------ ------------
Net income (loss) per share $ (0.04) $ (0.02) $ (0.08) $ 0.02
============ ============ ============ ============
Weighted average number of
common shares outstanding
during the period (Note 6) 28,951,838 26,689,523 28,839,560 26,413,182
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended November 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(2,385,665) $ 564,377
Adjustments to reconcile net income (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 133,824 390,649
Stock compensation expense 375,000 28,927
Non-cash interest expense related to
convertible notes (Note 7) 624,678 --
Changes in:
Accounts and note receivable (157,938) (107,230)
Inventories 62,051 25,000
Prepaid and other assets (333,784) 30,955
Accounts payable and accrued expenses 44,497 (84,637)
----------- -----------
Net cash used in operating activities (1,637,337) (893,658)
----------- -----------
Cash Flows from Investing Activities
Purchase of property and equipment (302,860) (90,000)
----------- -----------
Net cash used in investing activities (302,860) (90,000)
----------- -----------
Cash Flows from Financing Activities
Principal payments on notes payable and
long-term debt (796) (63,481)
Value of warrants 10,500 --
Proceeds from issuance of common stock
and exercise of common stock warrants
and options 202,533 256,862
Proceeds from issuance of convertible notes 3,000,000 1,500,000
----------- -----------
Net cash provided by financing activities 3,212,237 1,693,381
----------- -----------
Net Increase in Cash 1,272,040 709,723
Cash and cash equivalents at
beginning of period 477,675 863,944
----------- -----------
Cash and cash equivalents at
end of period $ 1,749,715 $ 1,573,667
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Convertible notes and accrued interest
exchanged for common stock $ 10,234 $ 450,000
=========== ===========
Cash payments for interest -- 29,953
=========== ===========
</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, 1997 and the Company's Form 8K dated June 16, 1997.
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 six 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.
2. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders 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. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
December 15, 1997. Their implementation is not expected to have a material
effect on the financial statements.
The Financial Accounting Standards Board has also 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.
6
<PAGE> 7
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 six months ended November
30, 1996. 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 six
months ended November 30, 1996.
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 November 30, 1997 and May 31, 1997, consist of the following:
<TABLE>
<CAPTION>
November 30, 1997 May 31, 1997
<S> <C> <C>
Raw material $309,634 $344,334
Work in process 73,863 90,086
Finished goods 83,985 95,113
-------- --------
$467,482 $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 three months and six months ended November 30, 1997, 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 $163,160 and $326,319 was recorded related to this
technology for the three months and six months ended November 30, 1996,
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 six months ended
November 30, 1997:
<TABLE>
<CAPTION>
Common
Shares Dollars
<S> <C> <C>
Balance June 1, 1997 33,068,329 $12,768,818
Exercise of stock options 374,153 202,533
Stock issued for conversion of notes and related
accrued interest 9,356 10,234
Stock released from escrow for purchased technology 375,000
Value of warrants issued 10,500
Non-cash interest expense related to convertible notes
recorded to additional paid-in capital -- 624,678
----------- -----------
Balance November 30, 1997 33,451,838 $13,991,763
=========== ===========
</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 six months ended November 30, 1997, 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 November 30, 1997, the Company had 215,000 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at prices ranging from $0.50 to $2.30
per share expiring beginning 1997 through 2001. The Company had 611,753 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 3,221,817 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 November 30, 1997 the Company had issued 217,600 common shares
pursuant to the plan.
At November 30, 1997 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
8
<PAGE> 9
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 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
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 November 30, 1997, $10,000 of the Debentures and the accrued interest
thereon had been converted into 9,356 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. Of
this amount, $244,203 has been expensed during the second fiscal quarter ended
November 30 ,1997 under the caption "Non-cash interest expense related to
convertible notes."
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 NOVEMBER 30, 1997 AND 1996
Net sales. Total net sales for the second quarter of fiscal 1998 decreased 14.9%
to $408,856 from $480,433 for the second quarter of fiscal 1997. This decrease
was due primarily to a reduction in engineering design revenue and a general
reduction in the shipment of the Company's older communication products. Net
sales for both periods were derived from shipments of the Company's
communication product line.
Cost of sales. Cost of sales as a percentage of net sales was slightly lower at
44.9% for the second quarter of fiscal 1998 compared to 45.4% for the
corresponding quarter of the previous fiscal year.
Research and development expenses increased by 29.2% from $350,255 for the
second fiscal quarter of 1997 to $452,489 for the second fiscal quarter of 1998.
This increase was due to an increase in licensed software support and update
fees.
Selling, general and administrative expenses increased by 75.2% from $405,411
for the second quarter of fiscal 1997 to $710,246 for the second quarter of
fiscal 1998. This increase was due primarily to the compensation costs related
to the release from escrow of 500,000 shares of common stock as discussed in
Note 4.
Amortization of purchased ShBoom technology was $163,160 for the second fiscal
quarter of 1997. The technology was totally amortized during fiscal year 1997
and, accordingly, there was no corresponding expense for the second quarter of
fiscal year 1998.
Other income (expense) was significantly higher for the second quarter 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1996
Net sales. Total net sales for the first six months of fiscal 1998 were
substantially the same, $887,020, compared to the corresponding period of fiscal
1997, $892,029. Net sales for both periods were derived from the Company's
communication and radar/antenna product lines.
Cost of sales. Cost of sales as a percentage of net sales increased to 49.2% for
the first six months of fiscal 1998 compared to 41.9% for the corresponding
period of fiscal 1997. This increase was due primarily to engineering design and
license income, revenue items with little or no associated cost of sales, having
a favorable impact on the cost of sales percentage during the first six months
of fiscal 1997.
10
<PAGE> 11
Research and development expenses increased by 12.5% from $733,061 for the first
six months of 1997 to $824,761 for the first six months of fiscal 1998. This
increase was due to an increase in licensed software support and update fees.
Selling, general and administrative expenses increased by 104.3% from $666,652
for the first six months of fiscal 1997 to $1,361,865 for the first six 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 $326,319 for the first six
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 six 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 six 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 November 30, 1997, working capital was $2,324,838 and cash and cash
equivalents totaled $1,749,715. The Company has funded its operations primarily
through the issuance of securities. The cash and cash equivalents increased
$1,272,040 during the six months ended November 30 ,1997. The net cash used in
operating activities of $1,637,337 and additions to property and equipment of
$302,860 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 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
11
<PAGE> 12
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders 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. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
December 15, 1997. Their implementation is not expected to have a material
effect on the financial statements.
The Financial Accounting Standards Board has also 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.
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 has completed development of a 0.5 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 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 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 a 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 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 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
13
<PAGE> 14
and previous inventors. The Company believes, should there be royalties due to
previous inventors, that the obligation is that of nanoTronics. The Company has
been informed by nanoTronics that an offer to the inventor to resolve these
uncertainties has been rejected. However, 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. 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 4. Submission of Matters to a Vote of Security Holders
At the Company's fiscal 1997 Annual Meeting of Shareholders held on December 4,
1997, the following members, constituting all the members, were elected to the
Board of Directors: Elwood G. Norris, Robert Putnam, Donald R. Bernier, Richard
D. McDaniel, Michael A. Carenzo, Norman J. Dawson and Helmut Falk Jr.
The following proposals were approved at the Company's Annual Meeting of
Shareholders:
1. Proposal to amend the 1996 Stock Option Plan
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
<S> <C> <C>
19,945,071 1,145,494 105,780
</TABLE>
2. Appointment of BDO Seidman, LLP as Independent Auditors of the Company
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
<S> <C> <C>
31,311,147 108,634 233,499
</TABLE>
3. Election of Directors
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Elwood G. Norris 31,545,530 104,750
Robert Putman 31,631,280 19,000
Donald Bernier 31,636,780 13,500
Richard D. McDaniel 31,649,280 1,000
Michael A. Carenzo 31,646,280 4,000
Norman J. Dawson 31,637,280 13,000
Helmut Falk Jr 31,473,280 177,000
</TABLE>
14
<PAGE> 15
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: January 13, 1998 By: /s/ LOWELL W. GIFFHORN
-----------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB FOR THE
QUARTERLY PERIOD ENDED NOVEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,749,715
<SECURITIES> 0
<RECEIVABLES> 418,058
<ALLOWANCES> 0
<INVENTORY> 467,482
<CURRENT-ASSETS> 2,878,041
<PP&E> 1,538,895
<DEPRECIATION> 989,547
<TOTAL-ASSETS> 3,807,201
<CURRENT-LIABILITIES> 553,203
<BONDS> 2,992,738
0
0
<COMMON> 335
<OTHER-SE> 13,991,428
<TOTAL-LIABILITY-AND-EQUITY> 3,807,201
<SALES> 887,020
<TOTAL-REVENUES> 887,020
<CGS> 436,700
<TOTAL-COSTS> 436,700
<OTHER-EXPENSES> 2,186,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684,475
<INCOME-PRETAX> (2,385,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,385,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,385,665)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
