<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, 2000
[ ] 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)
<TABLE>
<S> <C>
Delaware 84-1070278
-------- ----------
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
</TABLE>
10989 Via Frontera, San Diego, California 92127
-----------------------------------------------
(Address of principal executive offices)
(858) 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:
<TABLE>
<S> <C>
Common Stock, $.00001 par value 54,000,711
------------------------------- ----------
(Class) (Outstanding at January 8, 2001)
</TABLE>
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 November 30, 2000 (unaudited)
and May 31, 2000 3
Consolidated Statements of Operations for the three and six months
ended November 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
November 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-16
PART II. OTHER INFORMATION 16
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 16
SIGNATURES 16
</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
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,073,840 $ 2,100,242
Accounts receivable, net of allowance
of $5,000 for uncollectible accounts 107,597 61,152
Inventories (Note 3) 267,395 71,164
Prepaid expenses 156,216 60,048
------------ ------------
Total current assets 1,605,048 2,292,606
Property and equipment, net 269,800 289,880
Patents and trademarks, net 121,701 150,662
Note receivable (Note 7) 80,000 --
Other assets 25,000 --
------------ ------------
$ 2,101,549 $ 2,733,148
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,603 $ 393,150
Accrued liabilities 111,021 130,116
------------ ------------
Total current liabilities 171,624 523,266
Commitment (Note 8)
Stockholders' equity (Note 6):
Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding -- --
Common stock, $.00001 par value; 100,000,000 shares
authorized; issued and outstanding 53,543,491 and 51,126,675 535 511
Additional paid-in capital 35,352,380 33,559,158
Accumulated deficit (33,422,990) (31,349,787)
------------ ------------
Total stockholders' equity 1,929,925 2,209,882
------------ ------------
$ 2,101,549 $ 2,733,148
============ ============
</TABLE>
See accompanying summary of accounting policies and 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, November 30, November 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales $ 57,623 $ 239,884 $ 176,724 $ 438,908
Cost of sales 113,214 96,953 247,420 223,563
------------ ------------ ------------ ------------
Gross profit (loss) (55,591) 142,931 (70,696) 215,345
Operating expenses:
Research and development 527,310 391,619 1,082,172 825,019
Selling, general and
administrative 619,100 276,065 949,545 621,779
------------ ------------ ------------ ------------
1,146,410 667,684 2,031,717 1,446,798
------------ ------------ ------------ ------------
Operating loss (1,202,001) (524,753) (2,102,413) (1,231,453)
------------ ------------ ------------ ------------
Other income (expenses):
Gain on sale of technology -- -- -- 250,000
Interest income 17,007 2 31,626 100
Interest expense (1,669) (29,481) (2,416) (55,836)
Non-cash interest expense
related to notes payable
(Note 4) -- (347,771) -- (613,592)
------------ ------------ ------------ ------------
15,338 (377,250) 29,210 (419,328)
------------ ------------ ------------ ------------
Net loss $ (1,186,663) $ (902,003) $ (2,073,203) $ (1,650,781)
============ ============ ============ ============
Basic and diluted loss
per common share $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============ ============ ============ ============
Weighted average number of
common shares outstanding
during the period (Note 1) 52,654,165 39,585,245 51,953,575 39,580,532
============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
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PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
November 30, November 30,
2000 1999
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating activities:
Net loss $(2,073,203) $(1,650,781)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 110,547 176,435
Non -cash interest expense related to
notes payable (Note 4) -- 613,592
Issuance of options for services 47,691 --
Gain on sale of technology -- (250,000)
Changes in:
Accounts receivable (46,445) (79,586)
Inventories (196,231) 47,973
Prepaid and other assets (72,910) 28,787
Accounts payable and accrued expenses (351,642) 347,831
----------- -----------
Net cash used in operating activities (2,582,193) (765,749)
----------- -----------
Investing activities:
Note receivable (Note 7) (80,000) --
Web site development costs (25,000) --
Purchase of property and equipment (61,506) (33,014)
Proceeds from sale of technology -- 250,000
----------- -----------
Net cash provided by (used in) investing activities (166,506) 216,986
----------- -----------
Financing activities:
Proceeds from issuance of short term notes payable -- 335,000
Proceeds from sale of accounts receivable -- 142,000
Principal payments on notes payable and
long-term debt -- (1,158)
Proceeds from sale of common stock 1,562,844 193,554
Proceeds from exercise of common stock
warrants and options 159,453 9,400
----------- -----------
Net cash provided by financing activities 1,722,297 678,796
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,026,402) 130,033
Cash and cash equivalents, beginning of period 2,100,242 35,813
----------- -----------
Cash and cash equivalents, end of period $ 1,073,840 $ 165,846
----------- -----------
Supplemental Disclosure of Cash Flow Information:
Notes payable and accrued interest exchanged
for common stock $ -- $ 116,182
Issuance of options for prepaid services $ 23,258 $ --
Cash payments for interest $ 2,416 $ 15,272
Unamortized debt discount $ -- $ 234,452
----------- -----------
</TABLE>
See accompanying summary of accounting policies and 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, 2000.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair presentation of
the results for interim periods. Operating results for the three and six month
periods are not necessarily indicative of the results that may be expected for
the year.
LOSS PER SHARE
The Company follows Standard of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." Under SFAS No. 128, basic loss per share is calculated as
loss available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted loss per share is calculated as net 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 and
common stock warrants. Common stock options and warrants of 7,598,899 and
8,835,673 for the three and six months ended November 30, 2000 and 1999,
respectively, were not included in diluted loss per share for the periods as the
effect was antidilutive due to the Company recording losses in each of those
periods.
SALE OF ACCOUNTS RECEIVABLE
The Company follows SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. A factoring line established
by the Company with a bank enables the Company to sell selected accounts
receivable invoices to the bank with full recourse against the Company. These
transactions qualify for a sale of assets since (1) the Company has transferred
all of its right, title and interest in the selected accounts receivable
invoices to the bank, (2) the bank may pledge, sell or transfer the selected
accounts receivable invoices, and (3) the Company has no effective control over
the selected accounts receivable invoices since it may not redeem the invoices
sold previous to the invoices being greater than 90 days past due. Under SFAS
No.125, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. During the first six months of
fiscal 2000, the Company sold approximately $178,000 of its accounts receivable
to a bank under a factoring agreement for approximately $142,000. Pursuant to
the provisions of SFAS No. 125, the Company reflected the transactions as sales
of assets and established an accounts receivable from the bank for the retained
amount less the costs of the transaction and less any anticipated future loss in
the value of the retained asset. The retained amount was equal to 20% of the
total accounts receivable invoice sold to the bank less 1% of the total invoice
as an administrative fee and 1.75% per month of the total outstanding accounts
receivable invoices as a finance fee. The estimated future loss reserve for each
receivable included in the estimated value of the retained asset was based on
the payment history of the accounts receivable customer. As of November 30,
2000, there were no balances outstanding under the factoring line.
ACCOUNTS RECEIVABLE
The Company's accounts receivable includes a past due amount of $85,606 due from
one customer. The Company is currently working with the customer on a payment
plan. Management believes the amount to be collectible.
6
<PAGE> 7
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," amended by
SFAS No. 138, 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 all fiscal quarters of all
fiscal periods beginning after June 15, 2000. The Company believes the adoption
of this statement will have no material impact on its financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." The Company adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce the
exercise price be accounted for using variable accounting. The Company repriced
certain stock options on October 5, 1999 and in accordance with generally
accepted accounting principles accounted for the repriced stock options using
fixed accounting. As a result of adopting the Interpretation, the Company is
required to apply variable accounting to these options. Accordingly, if the
market price of the Company's stock increases subsequent to July 1, 2000, it
will recognize additional compensation expense that it otherwise would not have
incurred. As of November 30, 2000, there was no additional compensation expense
recorded because the market price of the Company's common stock was lower than
the price at July 1, 2000. However, the ultimate impact cannot be determined as
it is dependent on the change in the market price of the stock from July 1, 2000
until the stock options are exercised, forfeited or expire unexercised.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective as of the fourth quarter of fiscal year ending May 31, 2001. The
Company believes the adoption of this bulletin will have no material impact on
its financial statements.
In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. The Company has capitalized
$25,000 in web site development costs during the current quarter.
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 November 30, 2000 and May 31, 2000, consist of the following:
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
(unaudited)
<S> <C> <C>
Component parts $ 347,059 $ 332,271
Work in process 62,123
38,213
Finished goods 197,213 39,680
--------- ---------
606,395 410,164
Reserve for obsolescence (339,000) (339,000)
--------- ---------
$ 267,395 $ 71,164
========= =========
</TABLE>
7
<PAGE> 8
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE
As of November 30, 1999, the Company had short term notes payable aggregating
$933,000 with a group of individual investors, one of which was a major
shareholder in the Company. Of this amount, $355,000 was issued during the first
two fiscal quarters of 2000. The notes typically had four month maturity dates
and accrued interest at the rate of 10%. These notes were paid in full during
the balance of fiscal 2000.
In addition to the interest on the notes, warrants exercisable for three years,
for an aggregate of 5,120,251 common shares of the Company were issued to
investors at exercise prices ranging from $.25 to $.59 which was equal to the
market price of the common stock on the date of the issuances. During the six
months ended November 30, 1999, warrants to purchase 1,338,342 common shares of
the Company were issued related to the $335,000 short term notes placed during
the six months and warrants to purchase 2,103,447 common shares of the Company
were issued to the individual investors to extend the due dates of their short
term notes. These warrants were valued using the Black-Scholes model and the
value of $924,218 was reflected as a discount to the debt and was amortized over
the life of the debt. In the first six months of fiscal 2000, $613,592 of the
debt discount was amortized and reflected as non-cash interest expense.
5. INVESTMENT AGREEMENT
In May 2000, the Company entered into an investment agreement with Swartz
Private Equity LLC ("Swartz"). The investment agreement entitles the Company, at
the Company's option, to issue and sell its common stock for up to an aggregate
of $30 million from time to time during a three-year period through June 23,
2003, subject to certain conditions including (1) an effective registration
statement must be on file with the SEC registering the resale of the common
shares, and (2) a limitation on the number of common shares that can be sold to
Swartz within a 30 day time period based on the trading volume of the stock,
among others. Swartz can purchase the common stock from the Company at a
discount ranging from 7% to 10% depending on the price of the common stock. In
addition to the common stock purchased, Swartz will receive warrants to purchase
additional shares equal to 15% of the common stock at a price equal to 110% of
the market price as determined during the pricing period. The warrant exercise
price is subject to further semi-annual price adjustments if the price of the
common stock goes down. The Company had previously entered into a similar
investment agreement with Swartz.
The registration statement went effective on June 23, 2000. During the three
months ended November 30 ,2000, the Company received proceeds of $1,562,844 from
the sale of 1,835,400 shares of common stock . Per the terms of the investment
agreement, the Company issued two five year warrants for 275,310 shares of
common stock exercisable initially at prices ranging from $0.9625 to $1.562 per
share. In January 2001, the Company received proceeds of $130,253 from the sale
of 157,220 shares of common stock and issued a five year warrant for 23,583
shares of common stock exercisable initially at a price of $1.089. See note 6
for further information on the warrants.
6. STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the six months ended
November 30, 2000:
<TABLE>
<CAPTION>
Common
Shares Dollars
<S> <C> <C>
Balance June 1, 2000 51,126,675 $33,559,669
Sale of common stock 1,835,400 1,562,844
Exercise of common stock warrants 581,416 159,453
Issuance of options for services -- 70,949
----------- -----------
Balance November 30, 2000 53,543,491 $35,352,915
=========== ===========
</TABLE>
8
<PAGE> 9
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At November 30, 2000, the Company had 262,500 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at a range of $0.32 to $1.325 per
share expiring beginning in 2001 through 2005. The Company had 135,753 options
outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at a range of
$0.18 to $1.325 per share expiring beginning in 2001 through 2005. The Company
also had 2,650,571 options outstanding pursuant to its 1996 Stock Option Plan
exercisable at a range of $0.32 to $1.61 per share expiring beginning in 2001
through 2005. Some of the options outstanding under these plans are not
presently exercisable and are subject to meeting vesting criteria.
At November 30, 2000, the Company had warrants outstanding exercisable into
4,550,075 common shares at exercise prices ranging from $0.25 to $1.562 per
share expiring beginning in 2002 through 2005. During fiscal year 2000 and the
first six months of fiscal year 2001, the Company issued 1,052,219 and 275,310
warrants to purchase common stock which are subject to repricings at the six
month anniversary of the issuance of the warrant. At each six month anniversary
date the warrants will be repriced to the lesser of the initial exercise price
or 110% of the lowest closing bid price of the Company's common stock for the
five trading days ending on such six month anniversary date of the date of
issuance. As of November 30, 2000, a warrant to purchase 667,454 common shares
of the Company's stock was repriced from $1.265 to $1.078.
7. NOTE RECEIVABLE
In June 2000, the Company entered into a three-year, $80,000 Secured Promissory
Note Receivable with an individual who was, at the time of the issuance of the
note, an executive officer of the Company. On September 25, 2000, he requested
and was relieved of his duties as an executive officer and director of the
Company. The note bears interest at the rate of 6% per annum with interest
payments due semi-annually and the principal due at the maturity of the note.
The individual pledged 100,000 shares of the Company's common stock that he held
on the date of issuance as security for this note.
8. COMMITMENT
In July 2000, the Company entered into a purchase agreement whereby it planned
to purchase a two-story, 12,760 square foot building which was under
construction and anticipated to be completed and ready for occupancy in the
second calendar quarter of 2001. The agreement was subject to the Company
completing its due diligence and obtaining satisfactory financing on the
completed building. The cost of the completed project was anticipated to be
approximately $2,200,000 and the Company anticipated that, initially, it would
rent out to third parties approximately one-half of the total space. In December
2000, the Company decided to renegotiate its lease on its current facility and
to cancel the escrow related to the purchase agreement.
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, 2000.
The Company's results of operations have been and may continue to be
subject to significant variations. The results for a particular period may vary
due to a number of factors. These include:
- the overall state of the semiconductor and
communications segments of the economy,
- the development status of and demand for its products,
- economic conditions in its 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,
- product enhancements by the Company or its competitors,
and
- pricing and other competitive conditions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER
30, 1999
Net sales. Total net sales for the second fiscal quarter ended November
30, 2000 decreased 76.0% to $57,623 from $239,884 for the corresponding period
of the previous fiscal year. This decrease was due to a reduction in follow-on
shipments for the Company's matured communication products, several that are
being phased out as they approach the end of their life cycles, coupled with a
reduction in license fee income. The Company anticipates this trend in
communication product revenue to continue since many of the communication
products are approaching the end of their life cycles and its efforts are being
focused on the microprocessor product line. Microprocessor sales remained
constant at $10,766 for the current quarter compared to $10,757 for the
corresponding quarter of the previous fiscal year.
Cost of sales. Cost of sales as a percentage of net sales increased to
196.5% in the second fiscal quarter ended November 30, 2000 compared to 40.4%
for the corresponding period of the previous fiscal year. This significant
increase was due in part to, in the previous fiscal year period, $125,100 of
communication product royalty revenue was recognized with no associated costs
which adversely impacted the cost of sales as a percentage of net sales
percentage. Also, as a result of the decreased activity during the current
fiscal period in the communications product revenue, the fixed manufacturing
overhead was allocated to a smaller revenue base which contributed to the
increase in the cost of sales as a percentage of net sales percentage and the
costs of the new microprocessor development kits which are now being provided to
potential customers some of which are provided at no cost to the customer.
Research and development expenses increased 34.6% from $391,619 for the
second fiscal quarter ended November 30, 1999 to $527,310 for the second fiscal
quarter ended November 30, 2000. This increase was due primarily to a ramp up in
personnel and consulting services to introduce a new soft core version of the
microprocessor technology and the accelerated effort to complete and improve the
marketability of the Ignite I microprocessor product family.
Selling, general and administrative expenses increased 124.3% to
$619,100 for the second fiscal quarter ended November 30, 2000 compared to
$276,065 for the second fiscal quarter ended November 30, 1999. This increase
was primarily due to an increase in employment and consulting costs to support
the Company's increased emphasis on marketing the microprocessor family of
products coupled with additional compensation costs related to changes in the
chief executive officer position of the Company.
10
<PAGE> 11
Other income (expense) increased significantly for the second fiscal
quarter ended November 30, 2000 to $15,338 compared to ($377,250) for the
corresponding period of the previous fiscal year. This increase in income
resulted primarily from the recognition in the second fiscal quarter ended
November 30, 1999 of $347,771 of non-cash interest expense related to the
amortization of the debt discount, as discussed in Note 4 to the consolidated
financial statements. Also interest expense was $29,481 for the corresponding
period of the previous fiscal year as compared to $1,669 in the current period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER
30, 1999
Net sales. Total net sales for the six months ended November 30, 2000
decreased 59.7% to $176,724 from $438,908 for the corresponding period of the
previous fiscal year. This decrease was due to a reduction in follow-on
shipments for the Company's matured communication products, several that are
approaching the end of their life cycles, coupled with a reduction in license
fee income. Development and sales of new communications products have not
achieved a level to replace the maturing products. The Company anticipates this
trend in communication product revenue to continue since many of the
communication products are approaching the end of their life cycles and its
efforts are being focused on the microprocessor product line. Microprocessor
sales increased slightly to $23,861 compared to $17,102 for the same period of
the previous year. This increase is the result of the revenues from initial
shipments of development kits containing the latest version of the 0.35 micron
chip.
Cost of sales. Cost of sales as a percentage of net sales increased to
140.0% in the six months ended November 30, 2000 compared to 50.9% for the
corresponding period of the previous fiscal year. This significant increase was
due in part to the costs of the new development kits which are now being
provided to potential customers. Some of these kits are provided at no cost to
the customer. Also, in the previous fiscal year period $163,229 of communication
product royalty revenue was recognized with no associated costs which adversely
impacted the cost of sales as a percentage of net sales percentage. Also, as a
result of the decreased activity during the current fiscal period in the
communications product revenue, the fixed manufacturing overhead was allocated
to a smaller revenue base which contributed to the increase in the cost of sales
as a percentage of net sales percentage.
Research and development expenses increased 31.2% from $825,019 for the
six months ended November 30, 1999 to $1,082,172 for the six months ended
November 30, 2000. This increase was due primarily to a ramp up in personnel and
consulting services to introduce a new soft core version of the microprocessor
technology.
Selling, general and administrative expenses increased 52.7% to $949,545
for the six months ended November 30, 2000 compared to $621,779 for the six
months ended November 30, 1999. This increase was primarily due to an increase
in employment and consulting costs to support the Company's increased emphasis
on marketing the microprocessor family of products coupled with additional
compensation costs related to changes in the chief executive officer position of
the Company.
Other income (expense) increased significantly for the six months ended
November 30, 2000, $29,210, compared to ($419,328) for the corresponding period
of the previous fiscal year. This increase in income resulted primarily from the
recognition in the six months ended November 30, 1999 of $613,592 of non-cash
interest related to the amortization of the debt discount, as discussed in Note
4 to the consolidated financial statements, offset by the gain on sale of the
gas plasma antenna technology of $250,000. Also interest expense was $55,836 for
the corresponding period of the previous fiscal year as compared to $2,416 in
the current period.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2000, the Company had working capital of $1,433,424 and
cash and cash equivalents of $1,073,840. The Company has historically funded its
operations primarily through the issuance of securities and debt financings.
Cash and cash equivalents decreased $1,026,402 during the six months ended
November 30, 2000 due to net cash used in operations of $2,582,193, additions to
property and equipment of $61,506, web site development costs of $25,000 and the
issuance of a note receivable of $80,000 to an officer of the Company offset by
funds generated from the exercise of warrants to purchase common stock of the
Company of $159,453 and the sale of common stock under an investment agreement
of $1,562,844. The net cash used in operations is primarily a result of
operating losses offset with a reduction of accounts payable and accrued
expenses of $351,642, related to a settlement of a major software vendor, an
increase in inventory of $196,231 which was a result of receiving the next
generation
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microprocessor and related development kits, an increase in accounts receivable
of $46,445, and the issuance of options for services of $47,691.
The Company estimates its current cash requirements to sustain its
operations for the next twelve months through November 2001 to be $3.5 million.
The Company expects that these requirements will be provided by the current
working capital of $1,433,424, available funds under the $30 million equity line
of credit, as discussed below, the exercise of outstanding stock options and
warrants, and anticipated increased microprocessor and license revenues. In
addition, the Company has a $500,000 factoring agreement with its bank. The
Company's ability to draw on the equity line of credit is subject to limitations
based on the Company's trading volume as discussed below.
The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of its technologies. Product introductions such as those currently
underway for the Ignite I family of microprocessor technology may require
significant inventory, product launch, marketing personnel and other
expenditures that can not be currently estimated. Further, if expanded
development is commenced or new generations of microprocessors are accelerated
beyond their current plans, additional expenditures that the Company can not
currently estimate, may be required. It is possible therefore, that higher
levels of expenditures may be required than the Company currently contemplates
resulting from changes in development plans or as required to support new
developments or commercialization activities or otherwise. The Company
anticipates that, if needed, the equity line of credit and revenues from the
sale of the microprocessor and licenses of the microprocessor technology will
generate the additional resources necessary to accelerate the marketing and
production activity.
$30 MILLION EQUITY LINE OF CREDIT
Overview. On May 2, 2000, the Company entered into an investment
agreement with Swartz Private Equity, LLC. The investment agreement entitles it
to issue and sell its common stock for up to an aggregate of $30 million from
time to time during a three-year period starting June 23, 2000, the effective
date of the registration statement. This is also referred to as a put right.
During the three months ended November 30 ,2000, the Company received proceeds
of $1,562,844 from the sale of 1,835,400 shares of common stock. In January
2001, the Company received proceeds of $130,253 from the sale of 157,220 shares
of common stock.
Put Rights. In order to invoke a put right, the Company must have an
effective registration statement on file with the SEC registering the resale of
the common shares which may be issued as a consequence of the invocation of that
put right. Additionally, the Company must give at least ten but not more than
twenty business days advance notice to Swartz of the date on which it intends to
exercise a particular put right and it must indicate the number of shares of
common stock it intends to sell to Swartz. At its option, the Company may also
designate a maximum dollar amount of common stock (not to exceed $3 million)
which it will sell to Swartz during the put and/or a minimum purchase price per
common share at which Swartz may purchase shares during the put. The number of
common shares sold to Swartz may not exceed 20% of the aggregate daily reported
trading volume during a period which begins on the business day immediately
following the day the Company invoked the put right and ends on and includes the
day which is twenty business days after the date it invoked the put right.
Swartz will pay the Company a percentage of the market price for each
share of common stock under the put. If the market price is less than $2.00 per
share, the percentage will be 90%; and if the market price is $2.00 or greater,
the percentage will be 93%. Market price is defined as the lowest closing bid
price for the common stock during the applicable pricing period which consists
of two consecutive ten business day periods following the date notice of the put
was provided to Swartz. However, the market price may not be less than the
designated minimum per share price, if any, that the Company indicated in its
notice.
Warrants. Within five business days after the end of each pricing
period, the Company is required to issue and deliver to Swartz a warrant to
purchase a number of shares of common stock equal to 15% of the common shares
issued to Swartz in the applicable put. Each warrant will be exercisable at a
price which will initially equal 110% of the closing bid price on the put date
for the applicable put. The warrants will have semi-annual reset provisions.
Each warrant will be immediately exercisable and have a term beginning on the
date of issuance and ending five years thereafter.
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Limitations and Conditions Precedent to the Company's Put Rights. Swartz
is not required to acquire and pay for any common shares with respect to any
particular put for which:
- The Company has announced or implemented a stock split or
combination of its common stock;
- The Company has paid a common stock dividend;
- The Company has made a distribution of its common stock or of
all or any portion of its assets between the put notice date and
the date the particular put closes; or
- The Company has consummated a major transaction (including a
transaction, which constitutes a change of control) between the
advance put notice date and the date the particular put closes.
Short Sales. Swartz and its affiliates are prohibited from engaging in
short sales of its common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
Cancellation of Puts. The Company must cancel a particular put between
the date of the advance put notice and the last day of the pricing period if:
- the Company discovers an undisclosed material fact relevant to Swartz's
investment decision;
- the registration statement registering resales of the common shares
becomes ineffective; or
- shares are delisted from the then primary exchange.
However, the Company will be required to issue common shares
equal to the lesser of:
- 20% of the daily reported trading volume of its common stock during the
pricing periods up to the applicable put cancellation date;
- the number of shares of common stock put to Swartz which when multiplied
by the applicable put share price equals the designated maximum dollar
amount for the put; or
- 9.9% of the total amount of its common stock that would be outstanding
upon completion of the put.
Shareholder Approval. The Company may currently issue more than 20% of
its outstanding shares. If the Company becomes listed on the Nasdaq Small Cap
Market or Nasdaq National Market, then the Company must get shareholder approval
to issue more than 20% of its outstanding shares. Since the Company is currently
a bulletin board company, it does not need shareholder approval.
Termination of Investment Agreement. The Company may also terminate its
right to initiate further puts or terminate the investment agreement by
providing Swartz with notice of such intention to terminate; however, any such
termination will not affect any other rights or obligations the Company has
concerning the investment agreement or any related agreement.
Restrictive Covenants. During the term of the investment agreement and
for a period of one-year thereafter, the Company is prohibited from certain
transactions. These include the issuance of any debt or equity securities in a
private transaction which are convertible or exercisable into shares of common
stock at a price based on the trading price of the common stock at any time
after the initial issuance of such securities or with a fixed conversion or
exercise price subject to adjustment. The Company is also prohibited from
entering into any private equity line type agreements similar to the investment
agreement without obtaining Swartz's prior written approval.
Right of First Refusal. Swartz has a right of first refusal to purchase
any variable priced securities offered by the Company in any private transaction
which closes on or prior to six months after the termination of the investment
agreement.
Swartz's Right of Indemnification. The Company is obligated to indemnify
Swartz (including their stockholders, officers, directors, employees and agents)
from all liability and losses resulting from any misrepresentations or breaches
the Company made in connection with the investment agreement, its registration
rights agreement, other related agreements, or the registration statement.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
amended by SFAS No. 138, 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 all fiscal quarters of all
fiscal periods beginning after June 15, 2000. Management of the Company believes
the adoption of this statement will have no material impact on its financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." The Company adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce the
exercise price be accounted for using variable accounting. The Company repriced
stock options on October 5, 1999 and in accordance with generally accepted
accounting principles accounted for the repriced stock options using fixed
accounting. As a result of adopting the Interpretation, the Company is required
to apply variable accounting to these options. Accordingly, if the market price
of the Company's stock increases subsequent to July 1, 2000, it will recognize
additional compensation expense that it otherwise would not have incurred. As of
November 30, 2000, there was no additional compensation expense recorded because
the market price of the Company's common stock was lower than the price at July
1, 2000. However, the ultimate impact cannot be determined as it is dependent on
the change in the market price of the stock from July 1, 2000 until the stock
options are exercised, forfeited or expire unexercised.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which provides additional guidance in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective as of the fourth quarter of fiscal year ending May 31,
2001. Management of the Company believes the adoption of this bulletin will have
no material impact on its financial statements.
In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. The Company has capitalized
$25,000 in web site development costs during the current quarter.
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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 product lines.
The stages of development of the three major technologies is as follows:
- Ignite I family of microprocessor technology. This technology is
generating minor amounts of revenue from the sale of development boards,
microprocessors and initial license fees related to the microprocessor
application. The Company runs the technology on a 0.35-micron
microprocessor, which is in current production. The Company has ported
the VxWorks operating system and the Sun Microsystems personalJava
virtual machine to the microprocessor. Although the Company anticipates
the microprocessor to be its main product line, it currently accounts
for only 14% of its revenue.
- High-speed data communications. Revenue from this technology is being
generated primarily from mature communication products that are nearing
the end of their life cycles. The Company has decided to concentrate its
efforts on the Ignite I microprocessor technology and has suspended its
efforts to introduce new communication products to the market. Although
the communications product line accounted for approximately 86% of its
revenue, the Company anticipates that the microprocessor will be its
main product line in the future.
- Radar and antenna. The Company sold the gas plasma antenna technology in
August 1999. Its radar technology has not generated any revenue and the
Company has suspended further development of this technology in order to
concentrate its resources on the Ignite I microprocessor technology.
Due to its small size and staffing overlaps among the technologies,
certain personnel work on both the microprocessor and communication technologies
from time to time.
During at least the last three years, the Company has focused the
majority of its efforts on the PSC1000 and high-speed data communications
technologies. The PSC1000 technology and its initial microprocessors, the
PSC1000 family, were targeted for the embedded controller and Java language
processor marketplaces and have recently been replaced with Ignite I
microprocessor technology which addresses the same marketplaces.
In reviewing its communication technology markets, the Company
determined that it could not effectively compete in the ISDN (which stands for
integrated services digital network, a high-speed method of transmitting data
over the Internet) market. However, the Company continues to sell matured
communication products to a select number of customers who have requirements for
older generation products. The Company will continue to serve this sector of the
market as long as doing so is cost beneficial and is not disruptive to its major
product line, the Ignite I microprocessor technology.
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 in the future can be generated from operations or that such
required funds will be available from 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
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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 the Company's existing shareholders. The
Company's technologies are in various stages of development. The Ignite I 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 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
<TABLE>
<CAPTION>
Exh. No. Document
<S> <C>
10.24 Employment Agreement dated October 2, 2000 between the Company and
Miklos B. Korodi
10.25 Employment Agreement dated December 1, 2000 between the Company and
Richard G. Blum
</TABLE>
(b) Reports on Form 8-K
A Report on Form 8-K was filed on September 28, 2000 related to a change
in the Chairman of the Board of Directors, Chief Executive Officer and
President of the Company effective September 25, 2000.
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 12, 2001 By: /s/ LOWELL W. GIFFHORN
--------------------------------------
Exec. V.P. and Chief Financial Officer
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exh. No. Document
<S> <C>
10.24 Employment Agreement dated October 2, 2000 between the Company and
Miklos B. Korodi
10.25 Employment Agreement dated December 1, 2000 between the Company and
Richard G. Blum
</TABLE>
