Exhibit 99.2
Index to Unaudited Pro Forma Financial Statements
Page | ||
Introduction | F-1 | |
Unaudited Pro Forma Condensed Combined Balance Sheet as of May 31, 2008 | F-2 - F-3 | |
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended May 31, 2008 | F-4 | |
Notes to Unaudited Pro Forma Condensed Combined Financial Statements | F-5 - F-6 |
Unaudited Pro Forma Financial Data
On September 1, 2008, Patriot Scientific Corporation, a Delaware corporation (“Patriot”), PTSC Acquisition 1 Corp., a California corporation and wholly-owned subsidiary of Patriot (“Merger Sub”), and Crossflo Systems, Inc., a California corporation (“Crossflo”), consummated a merger of the Merger Sub with and into Crossflo (the “Merger”) pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated as of August 4, 2008 (the “Merger Agreement ”).
The consideration for the Merger was initial cash consideration of $2,600,000 and initial stock consideration of $7,400,000 in Patriot common stock, less payments made to holders of the Company’s convertible notes payable and other payments made in accordance with the Merger Agreement related to seller transaction costs. The number of shares of Patriot common stock to be issued was determined as the average closing price of Patriot common stock as reported by NASDAQ over the ten trading days immediately preceding the closing. The Merger closed on September 2, 2008. Accordingly, Patriot issued 26,988,466 shares of its common stock in exchange for the common stock of Crossflo and the settlement of other purchase obligations.
The following unaudited pro forma condensed combined balance sheet of Patriot as of May 31, 2008 and unaudited pro forma condensed combined statement of operations for the year ended May 31, 2008, give effect to the acquisition of Crossflo as if the transaction occurred, for balance sheet purposes, on May 31, 2008, and for statement of operations purposes, on June 1, 2007.
The following unaudited pro forma condensed combined financial statements are not necessarily indicative of the results that would have been reported had such transaction actually occurred on the dates specified, nor are they indicative of future results of operations or financial condition.
The unaudited pro forma condensed combined financial statements have been prepared on currently available information and assumptions deemed appropriate by management of Patriot. Actual adjustments to these unaudited pro forma condensed combined financial statements could differ from those reflected herein. The unaudited pro forma condensed combined financial statements are based on and should be read in conjunction with, and are qualified in their entirety by, the historical financial statements and notes thereto of Patriot and in the reports and other documents filed by Patriot with the SEC.
F-1
Patriot Scientific Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
May 31, 2008
Patriot Scientific Corporation | Crossflo Systems, Inc. | Acquisition Adjustments | Pro Forma Combined | |||||||||||||
ASSETS | �� | |||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 6,424,015 | $ | 535,764 | $ | (3,234,937 | ) | (b) | $ | 3,724,842 | ||||||
Restricted cash and cash equivalents | 51,122 | - | - | 51,122 | ||||||||||||
Marketable securities and short-term investments | 298,243 | - | - | 298,243 | ||||||||||||
Accounts receivable | 538,500 | 208,527 | - | 747,027 | ||||||||||||
Work-in-process | - | 185,037 | - | 185,037 | ||||||||||||
Refundable deposits | - | 17,463 | - | 17,463 | ||||||||||||
Due from related parties | 7,501 | - | - | 7,501 | ||||||||||||
Notes receivable | 450,115 | - | (400,115 | ) | (b) | 50,000 | ||||||||||
Inventory | 388,141 | - | - | 388,141 | ||||||||||||
Prepaid expenses and other current assets | 79,840 | 21,908 | - | 101,748 | ||||||||||||
Prepaid income taxes | 222,311 | - | - | 222,311 | ||||||||||||
Deferred tax assets | 1,390,832 | - | - | 1,390,832 | ||||||||||||
Customer contracts in progress | - | - | 63,600 | (c) | 63,600 | |||||||||||
Debt issuance costs, net | - | 15,959 | (15,959 | ) | (e) | - | ||||||||||
Total current assets | 9,850,620 | 984,658 | (3,587,411 | ) | 7,247,867 | |||||||||||
Property and equipment, net | 68,504 | 41,243 | - | 109,747 | ||||||||||||
Marketable securities | 12,527,675 | - | - | 12,527,675 | ||||||||||||
Deferred tax assets | - | - | 3,501,541 | (d) | 3,501,541 | |||||||||||
Investments in affiliated companies | 2,913,614 | - | - | 2,913,614 | ||||||||||||
Other assets | 8,190 | - | - | 8,190 | ||||||||||||
Patent and trademarks, net | 63,299 | - | 5,932,400 | (c) | 5,995,699 | |||||||||||
Maintenance agreements | - | - | 75,400 | (c) | 75,400 | |||||||||||
Goodwill | - | - | 2,282,516 | (c) | 2,282,516 | |||||||||||
$ | 25,431,902 | $ | 1,025,901 | $ | 8,204,446 | $ | 34,662,249 |
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-2
Patriot Scientific Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
May 31, 2008
Patriot Scientific Corporation | Crossflo Systems, Inc. | Acquisition Adjustments | Pro Forma Combined | |||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 555,690 | $ | 47,331 | - | $ | 603,021 | |||||||||
Accrued expenses | 373,848 | 143,200 | 19,000 | (b) | 500,798 | |||||||||||
(35,250 | ) | (i) | ||||||||||||||
Accrued interest | - | 44,231 | (44,231 | ) | (e) | - | ||||||||||
Minority interest | 115,406 | - | - | 115,406 | ||||||||||||
Convertible notes payable, net of discount | - | 951,943 | (951,943 | ) | (e) | - | ||||||||||
Total current liabilities | 1,044,944 | 1,186,705 | (1,012,424 | ) | 1,219,225 | |||||||||||
Deferred tax liabilities | 1,085,181 | - | 2,473,853 | (d) | 3,559,034 | |||||||||||
Total liabilities | 2,130,125 | 1,186,705 | 1,461,429 | 4,778,259 | ||||||||||||
Stockholders' equity (deficit): | ||||||||||||||||
Convertible preferred stock | - | 10,456,651 | (10,456,651 | ) | (a) | - | ||||||||||
Common stock | 4,109 | 108,715 | (108,715 | ) | (a) | 4,379 | ||||||||||
270 | (b) | |||||||||||||||
Additional paid-in capital | 70,004,814 | 2,233,007 | (2,233,007 | ) | (a) | 76,586,757 | ||||||||||
6,581,943 | (b) | |||||||||||||||
Treasury stock (at cost) | (12,723,172 | ) | - | - | (12,723,172 | ) | ||||||||||
Accumulated other comprehensive loss | (220,617 | ) | - | - | (220,617 | ) | ||||||||||
Accumulated deficit | (33,763,357 | ) | (12,959,177 | ) | 12,959,177 | (a) | (33,763,357 | ) | ||||||||
Total stockholders' equity (deficit) | 23,301,777 | (160,804 | ) | 6,743,017 | 29,883,990 | |||||||||||
$ | 25,431,902 | $ | 1,025,901 | $ | 8,204,446 | $ | 34,662,249 |
F-3
Crossflo Systems, Inc. | ||||||||||||||||||
Unaudited Pro Forma Condensed Combined Statement of Operations | ||||||||||||||||||
For the Year Ended May 31, 2008 | ||||||||||||||||||
Patriot | Crossflo | |||||||||||||||||
Scientific | Systems, | Acquisition | Pro Forma | |||||||||||||||
Corporation | Inc. | Adjustments | Combined | |||||||||||||||
Revenues, net | $ | 3,708,218 | $ | 902,968 | $ | - | $ | 4,611,186 | ||||||||||
Cost of sales | 1,510,450 | 387,867 | - | 1,898,317 | ||||||||||||||
Gross profit | 2,197,768 | 515,101 | - | 2,712,869 | ||||||||||||||
Operating expenses | 7,801,261 | 2,564,053 | 824,000 | (g) | 11,189,314 | |||||||||||||
Loss from operations | (5,603,493 | ) | (2,048,952 | ) | (824,000 | ) | (8,476,445 | ) | ||||||||||
Other income (expense): | ||||||||||||||||||
Interest income | 1,470,008 | 13,856 | (115 | ) | (f) | 1,483,749 | ||||||||||||
Equity in earnings of affiliated companies | 19,917,769 | - | - | 19,917,769 | ||||||||||||||
Gain on sale of subsidiary interest | 150,000 | - | - | 150,000 | ||||||||||||||
Loss on sale of assets | (4,139 | ) | - | - | (4,139 | ) | ||||||||||||
Interest expense | (389 | ) | (1,025,214 | ) | 1,025,214 | (f) | (389 | ) | ||||||||||
21,533,249 | (1,011,358 | ) | 1,025,099 | 21,546,990 | ||||||||||||||
Income (loss) before provision for income taxes | ||||||||||||||||||
and minority interest | 15,929,756 | (3,060,310 | ) | 201,099 | 13,070,545 | |||||||||||||
Provision for income taxes | 6,426,029 | 2,444 | - | 6,428,473 | ||||||||||||||
Income (loss) before minority interest | 9,503,727 | (3,062,754 | ) | 201,099 | 6,642,072 | |||||||||||||
Minority interest | 115,406 | - | - | 115,406 | ||||||||||||||
Net loss | $ | 9,388,321 | $ | (3,062,754 | ) | $ | 201,099 | $ | 6,526,666 | |||||||||
Income per share - basic and diluted | $ | 0.02 | $ | 0.02 | ||||||||||||||
Weighted average shares outstanding - basic and diluted | 390,956,153 | 417,944,619 | (h) | |||||||||||||||
Earnings per share - diluted | $ | 0.02 | $ | 0.02 | ||||||||||||||
Weighted average shares outstanding - diluted | 397,485,699 | 428,159,081 | (h) |
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-4
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(a) | Represents elimination of Crossflo’s equity at acquisition. |
(b) | Represents the value of the cash paid, stock issued and liabilities incurred for the acquisition of Crossflo: |
Price per share | $ | 0.24389 | ||
Number of common shares issued | 26,988,466 | |||
Value of shares issued | 6,582,213 | |||
Cash paid, including acquisition costs | 3,234,937 | |||
Principal and interest on convertible notes | 400,115 | |||
Liabilities incurred for acquisition costs | 19,000 | |||
$ | 10,236,265 |
(c) | Represents the excess of purchase price paid over the fair value of tangible net assets acquired. The excess of purchase price paid over the fair value of net assets acquired was allocated to identifiable intangible assets and goodwill and was computed as follows: |
Consideration | $ | 9,942,582 | ||
Acquisition costs | 293,683 | |||
Total consideration | 10,236,265 | |||
Fair value of tangible assets acquired, including deferred tax asset (see (d)) | 4,511,483 | |||
Fair value of identifiable intangible assets acquired | 6,071,400 | |||
Fair value of liabilities assumed, including deferred tax liability (see (d)) | (2,629,134 | ) | ||
Net assets acquired | 7,953,749 | |||
Excess purchase price paid - Goodwill | $ | 2,282,516 | ||
Identifiable intangible assets acquired include the following: | ||||
Patented technologies and processes | $ | 5,932,400 | ||
Customer contracts | 63,600 | |||
Maintenance agreements | 75,400 | |||
$ | 6,071,400 |
(d) | Represents deferred tax assets and liabilities as a result of purchase accounting. The deferred tax asset results from Crossflo’s net operating loss carryforwards that can be used to offset consolidated taxable income in future periods. The deferred tax asset was calculated as follows: |
Net Operating Loss Carryforward | Tax Rate | Deferred Tax Asset | ||||||||||
Federal | $ | 9,183,750 | 35% | $ | 3,214,313 | |||||||
California | 4,998,750 | 5.746% | 287,228 | |||||||||
$ | 14,182,500 | $ | 3,501,541 |
The deferred tax liability is the result of the increase in the cost of the acquired intangible assets for financial reporting purposes but not for tax purposes. The deferred tax liability was calculated as follows:
Identifiable intangible assets acquired | $ | 6,071,400 | ||
Tax rate | 40.746 | % | ||
$ | 2,473,853 |
(e) | Represents elimination of convertible notes payable, net of discount, and accrued interest payable that were repaid upon the acquisition of Crossflo and elimination of the net debt issuance costs on the convertible notes payable. |
F-5
Notes to Unaudited Pro Forma Condensed Combined Financial Statements (Continued)
(f) | Represents elimination of interest income recognized by Patriot on its notes receivable from Crossflo and the elimination of interest expense on the convertible notes payable which were repaid in connection with the transaction, including amortization of debt issuance costs and the debt discount. The interest expense adjustment was calculated as follows: |
For the Year | ||||
Ended | ||||
May 31, 2008 | ||||
Interest accrued at 5.25% | $ | 44,230 | ||
Amortization of debt issuance costs | 29,041 | |||
Amortization of debt discount | 951,943 | |||
$ | 1,025,214 |
(g) | Represents the change in amortization expense as a result of the acquisition of Crossflo and was calculated as follows: |
Amortization Expense for | ||||||||||||
Allocated | Estimated | the Period Ended | ||||||||||
Value | Life in Years | May 31, 2008 | ||||||||||
Contracts in place – open orders | $ | 63,600 | 0.75 | $ | 63,600 | |||||||
Contracts in place – maintenance contracts | 75,400 | 4.00 | 18,850 | |||||||||
Technologies and processes | 5,932,400 | 8.00 | 741,550 | |||||||||
$ | 6,071,400 | $ | 824,000 |
(h) | Represents the weighted-average number of shares outstanding as a result of the Patriot stock issued in connection with the acquisition of Crossflo, which consisted of the following at May 31, 2008: |
Weighted average shares - basic (historical) | 390,956,153 | |||
Shares issued in connection with the acquisition | 26,988,466 | |||
Pro forma combined weighted average shares - basic | 417,944,619 | |||
Weighted average shares - diluted (historical) | 397,485,699 | |||
Dilutive effect of options and warrants | 6,529,546 | |||
Shares issued in connection with the acquisition | 26,988,466 | |||
Less: shares held in escrow in connection with the acquisition | (2,844,630 | ) | ||
Pro forma combined weighted average shares - diluted | 428,159,081 |
(i) | Represents the adjustment to fair value of the purchased deferred maintenance revenue obligation. |
F-6