THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING
FUTURE EVENTS AND PERFORMANCE OF OUR COMPANY. YOU SHOULD NOT RELY ON THESE
FORWARD-LOOKING STATEMENTS, BECAUSE THEY ARE ONLY PREDICTIONS BASED ON OUR
CURRENT EXPECTATIONS AND ASSUMPTIONS. MANY FACTORS COULD CAUSE OUR ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THESE FORWARD-LOOKING
STATEMENTS. YOU SHOULD REVIEW CAREFULLY THE RISK FACTORS IDENTIFIED IN THIS
REPORT AS SET FORTH BELOW AND UNDER THE CAPTION "RISK FACTORS." WE DISCLAIM ANY
INTENT TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT ACTUAL
EVENTS OR DEVELOPMENTS.
Overview
We have been a licensing company of patented microprocessor technologies that
offered broad and open licensing and by litigating against those who may have
infringed on its patents. These licensing efforts were performed through our
joint venture with Phoenix Digital Solutions, LLC ("PDS"). PDS has not generated
significant license revenues since September 2013. Furthermore, on November 4,
2019, the Supreme Court of the United States denied our application to review a
lower court's decision that was adverse to our patented microprocessor
technologies. As result of this denial to review the lower court's decision, our
patented microprocessor technologies were no longer enforceable, and we have no
other options to appeal the lower court's adverse decision. As a result, there
are no future licensing opportunities or sources of revenue and we need to
either pursue a new line of business, liquidate the Company in a dissolution
under Delaware law, or seek protection under the provisions of the U.S.
Bankruptcy Code.
On August 19, 2020, Patriot Scientific Corporation (referred to as "Parent" in
the transaction), entered into a stock purchase agreement (the "Stock Purchase
Agreement") among Parent, PTSC Sub One Inc., a Delaware corporation (as "Buyer"
and together with the Parent, the "Buyer Parties"), Mosaic ImmunoEngineering
Inc., a Delaware corporation (the "Target"), certain stockholders of the Target
set for therein (as "Sellers"), and Steven King (as the "Sellers'
Representative" and together with the Target and Sellers, the "Seller Parties")
pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A
common stock ("Class A Stock"), par value $0.0001 per share, and 70,000 shares
of its Class B common stock ("Class B Stock"), par value $0.0001 per share,
together the Class A Stock and Class B Stock shall collectively be referred to
as "Target Common Stock", representing 100% of the issued and outstanding common
stock of the Target as of August 19, 2020. Upon closing, in exchange for the
Target Common Stock, the holders of the Class A Stock shall receive 630,000
shares of the Parent's preferred stock to be designated Series A Convertible
Preferred Stock ("Series A Preferred") and holders of the Class B Stock shall
receive 70,000 shares of the Parent's preferred stock to be designated Series B
Convertible Preferred Stock ("Series B Preferred"). Each share of the Series A
Preferred; shall (a) convert into 5,097.053 shares of common stock of the
Parent, (b) possess full voting rights, on an as-converted basis, as the common
stock of the Parent, and (c) have no dividend rate. Each share of the Series B
Preferred; shall (a) convert into 5,734.185 shares of common stock of the
Parent, (b) possess full voting rights, on an as-converted basis, as the common
stock of the Parent, (c) have no dividend rate, and (d) shall possess certain
anti-dilution protections as defined in the Series B Certificate of
Designations. On a fully diluted, as converted basis, the Sellers shall own 90%
of the issued and outstanding common stock of the Parent (see Note 10 to
Patriot's consolidated financial statements included elsewhere herein).
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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and judgments that significantly affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates, and such differences could affect the results of
operations reported in future periods. We believe the following critical
accounting policies affect our most significant estimates and judgments used in
the preparation of our consolidated financial statements.
1. Investments in Marketable Securities
We classify our investments in marketable securities in certificates of deposit
at the time of purchase as held-to-maturity and reevaluate such classifications
at each balance sheet date. Held-to-maturity investments consist of securities
that we have the intent and ability to retain until maturity. These securities
are recorded at cost and adjusted for the amortization of premiums and
discounts, which approximates fair value. Cash inflows and outflows related to
the sale and purchase of investments are classified as investing activities in
our condensed consolidated statements of cash flows.
2. Investment in Affiliated Companies
We have a 50% interest in PDS. We account for our investment using the equity
method of accounting since the investment provides us the ability to exercise
significant influence, but not control, over the investee. Significant influence
is generally deemed to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method of accounting is appropriate. Under the
equity method of accounting, the investment, originally recorded at cost, is
adjusted to recognize our share of net earnings or losses of the investee and is
recognized in the condensed consolidated statements of operations in the caption
"Equity in loss of affiliated company" and also is adjusted by contributions to
and distributions from PDS.
PDS, as an unconsolidated equity investee, recognizes revenue from technology
license agreements at the time a contract is entered into, the license method is
determined (paid-in-advance or on-going royalty), performance obligations under
the license agreement are satisfied, and the realization of revenue is assured,
which is generally upon the receipt of the license proceeds. PDS may at times
enter into license agreements whereby contingent revenues are recognized as one
or more contractual milestones are met.
We review our investment in PDS to determine whether events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
primary factors we consider in our determination are the financial condition,
operating performance and near-term prospects of PDS. If a decline in value is
deemed to be other than temporary, we would recognize an impairment loss.
We own 100% of the preferred stock of Holocom. Prior to impairment, this
investment was accounted for at cost since we did not have the ability to
exercise significant influence over the operating and financial policies of
Holocom.
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3. Income Taxes
We follow authoritative guidance in accounting for uncertainties in income
taxes. This authoritative guidance prescribes a recognition threshold and
measurement requirement for the financial statement recognition of a tax
position that has been taken or is expected to be taken on a tax return and also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Under this guidance we
may only recognize tax positions that meet a "more likely than not" threshold.
We follow authoritative guidance to evaluate whether a valuation allowance
should be established against our deferred tax assets based on the consideration
of all available evidence using a "more likely than not" standard. In making
such judgments, significant weight is given to evidence that can be objectively
verified. We are assessing our deferred tax assets under more likely than not
scenarios in which they may be realized through future income.
We have determined that it was more likely than not that all of our deferred tax
assets will not be realized in the future due to our continuing pre-tax and
taxable losses. As a result of this determination, we have recorded a full
valuation allowance against our deferred tax assets.
4. Assessment of Contingent Liabilities
We may be involved in various legal matters, disputes, and patent infringement
claims which arise in the ordinary course of our business. We accrue for any
estimated losses at the time when we can make a reliable estimate of such loss
and it is probable that it has been incurred. By their very nature,
contingencies are difficult to estimate. We continually evaluate information
related to all contingencies to determine that the basis on which we have
recorded our estimated exposure is appropriate.
RESULTS OF OPERATIONS
Comparison of fiscal year 2020 and 2019
May 31, 2020 May 31, 2019
Selling, general and administrative $ 996,019 $ 734,062
Selling, general and administrative expenses increased from $734,062 for the
fiscal year ended May 31, 2019 to $996,019 for the fiscal year ended May 31,
2020. The current fiscal year increase in expenses was primarily due to higher
compensation expense mostly associated with severance expense paid to Mr.
Flowers, our former Chief Financial Officer. Mr. Flowers resigned on September
30, 2019 and agreed to severance compensation of $327,750, in lieu of any
amounts owed under his amended and restated employment agreement, payable in
seven equal monthly installments commencing October 30, 2019. In addition,
during the current fiscal year, we had an increase in consulting fees, mostly
associated with the evaluation of new business opportunities in collaboration
with Artius Bioconsulting LLC. These current fiscal year increases in expenses
were offset by lower board fees as our board member volunteered to cease taking
board fees.
May 31, 2020 May 31, 2019
Other income (expense):
Interest income $ 12,068 $ 28,711Equity in loss of affiliated company (74,977 ) (91,512 )
Total other expense, net
$ (62,909 ) $ (62,801 )
Total other expenses, net increased slightly from $62,801 for the fiscal year
ended May 31, 2019 to $62,909 for the fiscal year ended May 31, 2020. The
increase was primarily due to a decrease in the equity in the loss of PDS
resulting from a decrease in PDS legal expenses. The current fiscal year
increase was partially offset by a decrease in interest income due to a lower
cash balance on hand combined with lower overall interest rates. Our investment
in PDS continues to be accounted for in accordance with the equity method of
accounting for investments.
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May 31, 2020 May 31, 2019
Loss before provision for income taxes $ (1,058,928 ) $ (796,863 )
Loss before provision for income taxes increased from approximately $796,863 for
the fiscal year ended May 31, 2019 to $1,058,928 for the fiscal year ended May
31, 2020 primarily due to increases in selling, general and administrative
expenses as discussed above.
Provision for income taxes
During each of the fiscal years ended May 31, 2020 and 2019, we recorded a
provision for income taxes of $1,600 related to California state taxes.
Net loss
Net loss increased from $798,463 for the fiscal year ended May 31, 2019 to
$1,060,528 for the fiscal year ended May 31, 2020 primarily due to increases in
selling, general and administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and investments in marketable securities balances
decreased from approximately $1,537,086 as of May 31, 2019 to $571,921 as of May
31, 2020. We also have restricted cash of $198,843 and $177,247 as of May 31,
2019 and 2020, respectively. Total current assets decreased from $1,790,010 as
of May 31, 2019 to $785,408 as of May 31, 2020. Total current liabilities were
$228,212 and $182,595 as of May 31, 2019 and 2020, respectively. The decrease in
our net working capital during fiscal year 2020 was primarily due to our
reported net loss for the fiscal year ended May 31, 2020 as PDS was unable to
generate revenues and provide partnership distributions sufficient to cover our
operating expenses.
PDS has not generated significant license revenues since September 2013.
Furthermore, on November 4, 2019, the Supreme Court of the United States denied
our application to review a lower court's decision that was adverse to our
patented microprocessor technologies. As result of this denial to review the
lower court's decision, our patented microprocessor technologies were no longer
enforceable, and we have no other options to appeal the lower court's adverse
decision. As a result, there are no future licensing opportunities or sources of
revenue from PDS and we need to either pursue a new line of business, liquidate
the Company in a dissolution under Delaware law, or seek protection under the
provisions of the U.S. Bankruptcy Code.
On August 19, 2020, Patriot Scientific Corporation (referred to as "Parent" in
the transaction), entered into a stock purchase agreement (the "Stock Purchase
Agreement") among Parent, PTSC Sub One Inc., a Delaware corporation (as "Buyer"
and together with the Parent, the "Buyer Parties"), Mosaic ImmunoEngineering
Inc., a Delaware corporation (the "Target"), certain stockholders of the Target
set for therein (as "Sellers"), and Steven King (as the "Sellers'
Representative" and together with the Target and Sellers, the "Seller Parties")
pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A
common stock ("Class A Stock"), par value $0.0001 per share, and 70,000 shares
of its Class B common stock ("Class B Stock"), par value $0.0001 per share,
together the Class A Stock and Class B Stock shall collectively be referred to
as "Target Common Stock", representing 100% of the issued and outstanding common
stock of the Target as of August 19, 2020. Upon closing, in exchange for the
Target Common Stock, the holders of the Class A Stock shall receive 630,000
shares of the Parent's preferred stock to be designated Series A Convertible
Preferred Stock ("Series A Preferred") and holders of the Class B Stock shall
receive 70,000 shares of the Parent's preferred stock to be designated Series B
Convertible Preferred Stock ("Series B Preferred"). Each share of the Series A
Preferred; shall (a) convert into 5,097.053 shares of common stock of the
Parent, (b) possess full voting rights, on an as-converted basis, as the common
stock of the Parent, and (c) have no dividend rate. Each share of the Series B
Preferred; shall (a) convert into 5,734.185 shares of common stock of the
Parent, (b) possess full voting rights, on an as-converted basis, as the common
stock of the Parent, (c) have no dividend rate, and (d) shall possess certain
anti-dilution protections as defined in the Series B Certificate of
Designations. On a fully diluted, as converted basis, the Sellers shall own 90%
of the issued and outstanding common stock of the Parent (see Note 10 to
Patriot's consolidated financial statements included elsewhere herein).
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Therefore, our ability to continue our operations and new line of business is
highly dependent on the amount of cash and cash equivalents on hand combined
with our ability to raise additional capital to fund future operations. We
anticipate, based on currently proposed plans and assumptions that our cash on
hand will not satisfy our operational and capital requirements through twelve
months from the date of filing on this Form 10-K.
There are a number of uncertainties associated with our ability to raise
additional capital and we have no current arrangements with respect to any
additional financing. In addition, the continuation of disruptions caused by
COVID-19 may cause investors to slow down or delay their decision to deploy
capital based on volatile market conditions which will adversely impact our
ability to fund future operations. Consequently, there can be no assurance that
any additional financing on commercially reasonable terms, or at all, will be
available when needed. The inability to obtain additional capital will delay our
ability to continue to conduct our business operations. Any additional equity
financing may involve substantial dilution to our then existing stockholders. If
we are unable to raise additional capital, we may either liquidate the Company
in a dissolution under Delaware law, or seek protection under the provisions of
the U.S. Bankruptcy Code. The above matters raise substantial doubt regarding
our ability to continue as a going concern.
Cash Flows From Operating Activities
Cash used in operating activities for the fiscal years ended May 31, 2020 and
2019 was $986,761 and $760,766, respectively. The principal components of the
current fiscal year included a net loss of $1,060,528 combined with a decrease
in accounts payable, accrued expenses and other of $45,617. These current fiscal
year amounts were offset by a decrease in prepaid expenses and other current
assets of $17,841, a decrease in deferred income taxes of $26,078, and by equity
in loss of affiliated company of $74,977. The principal components of the prior
fiscal year were the net loss of $798,463 combined with an increase in prepaid
expenses and other current assets of $22,716 and a decrease in accounts payable,
accrued expenses and other of $33,873. These prior fiscal year amounts were
offset by decrease in prepaid income tax of $2,285 and by equity in loss of
affiliated company of $91,512.
Cash Flows From Investing Activities
Cash provided by investing activities for the fiscal year ended May 31, 2020 was
$750,000 and attributable to net sales of marketable securities. Cash used in
investing activities for the fiscal year ended May 31, 2019 was $572,754
comprised of the purchase of marketable securities of $750,000 offset by the
receipt of $177,246 in restricted cash that was previously held by a third party
in conjunction with the Company's acquisition of Crossflo.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers,"
which was subsequently amended by ASUs 2015-14, 2016-08, 2016-10, 2016-12, and
2016-20. ASU 2014-09, as amended, supersedes the revenue recognition
requirements in ASC Topic 605, "Revenue Recognition", and creates a new ASC
Topic 606 ("ASC 606"). ASU 2014-09, as amended, implements a five-step process
for customer contract revenue recognition that focuses on transfer of control,
as opposed to transfer of risk and rewards. The amendment also requires enhanced
disclosures regarding the nature, amount, timing and uncertainty of revenues and
cash flows from contracts with customers. Other major provisions include the
capitalization and amortization of certain contract costs, ensuring the time
value of money is considered in the transaction price, and allowing estimates of
variable consideration to be recognized before contingencies are resolved in
certain circumstances. Entities can transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Our adoption of this guidance effective June 1, 2018 did not have a significant
impact on the financial statements of PDS.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows -
Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides
guidance intended to reduce diversity in practice in how certain transactions
are classified in the statement of cash flows. The issue addressed in ASU
2016-15 that will affect the Company is classifying distributions received from
equity method investments. The guidance provides an accounting policy election
for classifying distributions received from equity method investments using
either a cumulative earnings approach or a nature of distributions approach. The
Company adopted this standard on June 1, 2018. The adoption did not have a
material effect on our consolidated financial statements.
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In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows
(Topic 230): Restricted Cash". ASU 2016-18 requires that a statement of cash
flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. The Company adopted this standard on June 1,
2018 by using the retrospective transition method.
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