As filed with the Securities and Exchange Commission on November 5, 2003
Registration No. __________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)
Delaware 3699 84-1070278
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(State or Jurisdiction of Primary SIC Code (I.R.S. Employer
Incorporation or Organization) Identification Number)
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
(Address and telephone number of principal executive offices)
Lowell W. Giffhorn, Secretary
Patriot Scientific Corporation
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
(Name, address and telephone number of agent for service)
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Copies to:
Otto E. Sorensen, Esq.
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 236-1414 (619) 232-8311 (fax)
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Approximate date of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Securities Amount to be Proposed Maximum Aggregate Offering Amount of
to be Registered Registered Offereing Price Per Unit (5) Price Registration Fee
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Common Stock, $0.00001 par value (1) 44,904,710 $0.053 $2,379,950 $192.54
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Common Stock, $0.00001 par value (2) 18,749,999 $0.053 $993,750 $80.39
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Common Stock, $0.00001 par value (3) 1,334,757 $0.053 $70,742 $5.72
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Common Stock, $0.00001 par value (4) 2,062,500 $0.053 $109,313 $8.84
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TOTAL 67,051,966 $0.053 $3,553,754 $287.50
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(1) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of certain selling security holders.
The common stock being registered is issuable to the selling security
holders on their conversion of the Company's 8% Convertible Debentures
issued on August 1, 2003 through October 21, 2003 (the "Series D
Debentures"). The terms of the Series D Debentures do not fix the number of
common shares that may be issuable upon conversion; however, the Company
hereby registers a good faith estimate of the maximum number of shares it
anticipates to issue upon conversion. The Company will not rely on Rule 416
of Regulation C if the conversion price results in an insufficient number
of shares being registered. In the event that the number of shares actually
issued exceeds the number of shares included in the registration fee table,
the Company will file a new registration statement to cover the resale of
any additional shares.
(2) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of a certain selling security holder.
The common stock being registered is issuable to the selling security
holder on its exercise of warrants issued in conjunction with the Series D
Debentures issued on August 5, 2003 and September 22, 2003.
(3) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of a certain selling security holder.
The common stock being registered was issued to the selling security holder
on July 31, 2003, as a result of its exercise of a warrant issued in
conjunction with the Registrant's Series A Debentures.
(4) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of certain selling security holders.
The common stock being registered is issuable to the selling security
holders on their conversion of the Company's Short-term Convertible
Debentures issued on September 30, 2003.
(5) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Act"), based on the average of the closing bid and asked prices for
the Registrant's Common Stock (the "Common Stock") as reported on the OTC
Electronic Bulletin Board on October 30, 2003.
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission (SEC) is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION; AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON NOVEMBER 5, 2003
P R O S P E C T U S
PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000
THE OFFERING
The resale of up to 67,051,966 shares of common stock in the
over-the-counter market at the prevailing market price or in negotiated
transactions.
o up to 44,904,710 shares are issuable to the selling
shareholders as conversion shares upon the conversion of our
8% Convertible Debentures.
o up to 18,749,999 shares are issuable to a selling shareholder
as warrant shares upon the exercise of warrants issued in
conjunction with our 8% Convertible Debentures.
o up to 1,334,757 shares were issued to a selling shareholder as
warrant shares upon the exercise of a warrant issued in
conjunction with our 8% Convertible Debentures.
o up to 2,062,500 shares are issuable to the selling
shareholders as conversion shares upon the conversion of our
Short-term Convertible Debentures.
We will receive no proceeds from the sale of the shares by the selling
shareholders. We may receive proceeds of up to $322,500 from the exercise of
warrants.
Trading Symbol
PTSC (Over-the-counter Electronic Bulletin Board)
This Investment Involves a High Degree of Risk.
Please refer to Risk Factors Beginning on Page 8
The Securities and Exchange Commission (SEC) and state securities regulators
have not approved these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the material information that you will need to make an investment
decision.
We have not authorized anyone to provide you with information that is different
from that which is contained in this prospectus.
The following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information you might want to return to. We
encourage you to read the entire prospectus.
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY 5
About our company 5
About our convertible debentures 5
About our short-term convertible debentures 6
About our warrants we are registering 7
Additional shares we are registering 7
Key facts 7
RISK FACTORS 8
Related to our business
Our major product line has had limited revenues 8 We have
incurred significant losses and may continue to do so 8 Our
limited sales and marketing experience has effected our
revenue 9 Our products may not be completed on time 9
Related to our industry
The market in which we operate is highly competitive 9
Protection of our intellectual property is limited; there is a risk of
claims for infringement 10
We may be impacted as a result of terrorism 10
Related to our offering and share price
We will require additional financing 11 Large block sales of
our stock may decrease the price of our stock 11 Our stock is
subject to penny-stock rules which limits our ability to
attract competitive funding 12 The price of our stock could
be subject to short sale pressure 12 On a significant drop in
the price of our stock, we could be subject to a change
in control 13
Forward-looking statements 14
PLAN OF DISTRIBUTION 14
SELLING SHAREHOLDERS 15
THE COMPANY 16
General 16
2
Page
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Background 16
Business 17
Available information 17
Organization and corporate development 18
Internet growth and the emergence of the java programming language 19
Microprocessor technology 20
General background 20
Industry background 20
Technology description 21
The Ignite microprocessor as a java processor 22
Stage of development 23
Business strategy 24
Competition 25
JUICEtechnology 26
High speed data communications products 26
Radar and antenna technology 26
General background 26
Gas antenna technology description 26
Research and development 26
Licenses, patents, trade secrets and other proprietary rights 27
Marketing and distribution 28
Dependence upon single customers 29
Facilities 29
Employees 29
Government regulation 29
USE OF PROCEEDS 30
LITIGATION 30
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 30
Critical Accounting Policies 30
Results of operations for the three months ended August 31, 2003 and 2002 32
Results of operations for the years ended May 31, 2003 and 2002 33
Liquidity and capital resources 34
New accounting pronouncements 36
Income taxes 36
CHANGES IN ACCOUNTANTS 37
MANAGEMENT 38
Identification of directors and executive officers 38
Biographical information 38
Indemnification of officers, directors and others 40
Executive compensation 40
Option grants 41
Aggregated option exercises and fiscal year-end values 41
Compensation of directors 42
Employee contracts 42
PRINCIPAL SHAREHOLDERS 44
3
Page
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CERTAIN TRANSACTIONS 46
TRADING MARKET AND RELATED MATTERS 47
DESCRIPTION OF SECURITIES 48
LEGAL MATTERS 49
EXPERTS 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1
4
PROSPECTUS SUMMARY
About Our Company
We develop, market, and sell microprocessors, our technology behind the
microprocessors, and complementary products which enable computers and other
data processing devices to communicate. These products can be used to connect to
the Internet or other telecommunication networks. The microprocessor technology
product line accounted for approximately 25% of our revenue in fiscal 2003. The
balance of our 2003 revenue was generated from a communication product line
that, subsequent to a completed last buy program, is now generating minimal
revenue. We also have a patent for special radar technology which, if fully
developed, may allow a potential licensee to penetrate the ground or structures
to find various objects. We also owned gas plasma antenna technology which we
sold for $250,000 in August 1999. In 2003 we received a final royalty payment of
$75,500 from the sale of the gas plasma technology. Our strategy is to exploit
our microprocessor technologies through product sales, licensing, and strategic
alliances.
Our auditors have stated in their report on our consolidated financial
statements as of and for the year ended May 31, 2003, substantial doubt about
our ability to continue operating as a going concern because of recurring net
losses and negative cash flows from operations. We have an accumulated deficit
of $46,846,587 and negative working capital of $1,463,051 as of August 31, 2003
and a history of substantial operating losses, net losses and negative cash
flow.
We have our principal executive offices at 10989 Via Frontera, San
Diego, California 92127. Our telephone number is (858) 674-5000, and our website
is www.ptsc.com.
About Our Convertible Debentures
Overview. From August 1, 2003 through October 21, 2003, we sold to
and had received cash from the selling shareholders an aggregate of $472,500 of
8% convertible debentures with two year maturity dates. The convertible
debentures entitle the debenture holders to convert the principal and unpaid
accrued interest into our common stock on any date up to and including the
maturity date. In addition, the debenture holders received warrants exercisable
into a number of our common shares.
Initial Number of Shares Debentures May Be Converted Into. The
debentures can be converted into a number of our common shares based on either a
negotiated number of shares or the following calculation: the amount of the
debenture divided by 115% of the volume weighted average price for our common
stock for the ten days previous to the debenture date.
Resets of Conversion Price and Conversion Shares. A reset date
occurs on each three month anniversary of the closing date of each debenture and
on the date the registration statement of which this prospectus is a part
becomes effective. If the volume weighted average price for our common stock for
the ten days previous to the reset date is less than the conversion price in
effect at the time of the reset date, then the number of common shares issuable
to the selling shareholder on conversion will be increased. If the conversion
price is reset, the debenture can be converted into a number of our common
shares based on the following calculation: the amount of the debenture plus any
unpaid accrued interest divided by the reset conversion price which shall equal
the volume weighted average price for our common stock for the ten days previous
to the reset date.
5
Warrants. Concurrent with the issuance of the convertible
debentures, we issued to the selling shareholders warrants to purchase up to
22,455,355 shares of our common stock. These warrants are exercisable for five
years from the date of issuance at initial exercise prices equal to either a
negotiated exercise price or 115% of the volume weighted average price for our
common stock for the ten days previous to the debenture date. The warrant
exercise price is subject to being reset on each six month anniversary of its
issuance for 3,705,356 shares of common stock and is fixed at $0.0172 for the
remaining 18,749,999 shares of common stock.
Options to Purchase Additional Debentures. Subject to the price of
our common stock being equal to or greater than $0.20 per share and a two year
limitation, the debenture holders may purchase additional debentures equal to
the value of their initial debentures. The price at which the optional
additional debentures could be converted would initially equal 115% of the
volume weighted average price for our common stock for the ten days previous to
the date on which the optional additional debentures were sold. The optional
additional debentures would carry the same warrant amounts and reset privileges
as the initial debentures.
Shareholder Approval. We may currently issue more than 20% of our
outstanding shares under the convertible debentures. If we become listed on the
Nasdaq Small Cap Market or Nasdaq National Market, then we must get shareholder
approval to issue more than 20% of our outstanding shares at less than fair
market value. Since we are currently a bulletin board company, we do not need
shareholder approval.
Restrictive Covenants. For a period of 18 months from the date of
the debentures, we are prohibited from engaging in certain transactions without
obtaining the selling shareholders' prior written approval. These types of
transactions 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; the issuance of any debt or equity
securities with a fixed conversion or exercise price subject to adjustment; and
any private equity line type agreements.
Right of First Refusal. The selling shareholders have a right of
first refusal to purchase or participate in any securities offered by us in any
private transaction which closes on or prior to the date that is two years after
the issue date of each debenture.
Selling Shareholders' Right of Indemnification. We are obligated
to indemnify the selling shareholders (including their stockholders, officers,
directors, employees and agents) from all liability and losses resulting from
any misrepresentations or breaches we made in connection with the convertible
debenture, our registration rights agreement, other related agreements, or the
registration statement of which this prospectus is a part.
About Our Short-term Convertible Debentures
On September 30, 2003 we sold to and had received cash from a
group of four individual investors an aggregate of $75,000 of short-term
convertible debentures with two month maturity dates. The short-term debentures
may be redeemed for $82,500 cash at maturity or may be converted into 2,062,500
shares of common stock. If the debentures are not redeemed at maturity, they
will earn interest at a rate of 12% from December 1, 2003, until redeemed for
cash or converted into common stock.
6
Warrants We Are Registering
On August 5, 2003 and September 22, 2003, we issued two warrants
exercisable for up to 6,976,744 and 11,773,255 shares of our common stock,
respectively, at exercise prices of $0.0172 per share in consideration of an 8%
convertible debenture of $322,500 issued to an investor. We entered into an
amended warrant agreement with the investor whereby the exercise price, which
was originally subject to reset provisions, was changed to a fixed price.
Additional Shares We Are Registering
On July 31, 2003, a security holder exercised a warrant issued on
June 10, 2002 for 1,334,757 shares of common stock at an exercise price of
$0.0375 per share. The warrant had reset provisions that precluded it from being
registered previous to exercise. We are registering the resale of the shares
which have been issued.
Key Facts
Shares being offered for resale to the public 67,051,966 (51.6% of our shares currently
outstanding)
Total shares outstanding prior to the offering 129,930,085 as of October 30, 2003
Total shares outstanding assuming completion 195,647,294
of the offering
Total shares that would be outstanding assuming
full conversion of the current offering and exercise
of all outstanding debentures, options and warrants 283,995,228
Price per share to the public Market price at time of resale
Total proceeds raised by offering None, however we may receive proceeds of up to $322,500
on the exercise of warrants
Convertible debentures A form of our convertible debenture with the selling
shareholders was included as an exhibit to the S-3
registration statement filed with the SEC on June 27, 2002
Dividend policy We have never paid a dividend and do not anticipate paying
a dividend in the foreseeable future
7
RISK FACTORS
Before purchasing any of the common shares, you should carefully
consider the following factors relating to our business and prospects.
Related to our Business
Patriot's Microprocessor Technologies Have Resulted In Limited Revenues and
Several Related Products Are Still in the Development Stage
We are in the development stage on several components of our
microprocessor technology product line, and the products which have been
commercialized have resulted in limited revenues. Our other product lines have
not generated enough revenue to support our company. Therefore, we have limited
financial results upon which you may judge our potential. We may not become
profitable. We have experienced in the past and may experience in the future
many of the problems, delays and expenses encountered by any early stage
business, many of which are beyond our control. These include:
o substantial delays and expenses related to testing and
development of our new products,
o production and marketing problems encountered in connection
with our new and existing products and technologies,
o competition from larger and more established companies, and
o lack of market acceptance of our new products and
technologies.
Patriot Has a History of Losses, Expects Future Losses and May Not Achieve or
Sustain Annual Profitability
We expect to incur operating losses in the future. Sales of our
products may never generate sufficient revenues to fund our continuing
operations. We may never generate positive cash flow or attain profitability. To
date, we have incurred significant losses. As of August 31, 2003, our
accumulated deficit was $46,846,587 and we had negative working capital of
$1,463,051. For the three months ended August 31, 2003 and the fiscal years
ended May 31, 2003 and 2002, we incurred net losses of $1,152,547, $3,888,299
and $5,487,051, respectively. Because of this record of losses, there is
substantial doubt about our ability to continue as a going concern. These losses
have resulted primarily from:
o significant costs associated with the development of our
products,
o costs associated with the marketing of those products,
o the interest charges and expenses related to previous equity
and debt financings, and
o compensation costs related to the cashless exercise of options
and to the earnout of escrowed common shares.
Should our losses continue and should we be unable to fund our
operations from external
8
sources, we would need to cease doing business and/or liquidate or sell our
assets.
Patriot's Limited Sales and Marketing Experience Has Affected Our Revenue
Our operating results depend to a large extent on our ability to
successfully market and sell our products. We currently have limited marketing
capabilities and need to hire additional sales and marketing personnel. In part
as a consequence of our limited resources, we may not be able to recruit, train,
or retain qualified personnel to sell and market our products and we may not be
able to develop a successful sales and marketing strategy. We also have very
limited marketing experience. There can be no assurance that any marketing
efforts undertaken by us will be successful or will result in any significant
sales of our products. A continued lack of significant revenues from the sale of
our products would require us to cease doing business and/or liquidate or sell
our assets.
Patriot May Experience Difficulties in the Introduction of New Products That
Could Result in Patriot having to Incur Significant Unexpected Expenses or Delay
the Launch of New Products
Our technologies and products are in various stages of development. Our
development stage products may not be completed in time to allow production or
marketing due to the inherent risks of new product and technology development,
limitations on financing, competition, obsolescence, loss of key personnel and
other factors. Although we may license some of our technology at its current
stage of development, there can be no assurance that we will be able to do so or
that any revenues generated from licensing would be sufficient to support
operations at their current level. Unanticipated technical obstacles can arise
at any time and result in lengthy and costly delays or in a determination that
further development is not feasible. Discovery of microprocessor design errors,
frequent in the industry prior to and after production, could result in lengthy
and costly redesign, fabrication (production) and testing in an industry where
new technology rapidly eclipses prior innovations.
The development of our technologies has taken longer than anticipated
and could be additionally delayed. Therefore, there can be no assurance of
timely completion and introduction of improved products on a cost-effective
basis, or that such products, if introduced, will achieve market acceptance such
that, in combination with existing products, they will sustain us or allow us to
achieve profitable operations.
Related to Our Industry
Intense Competition in the Market for Microprocessors Could Prevent Patriot From
Increasing or Sustaining Revenue and Prevent Patriot From Achieving or
Sustaining Annual Profitability
Our products could be rendered noncompetitive or obsolete.
Technological competition from larger and more established microprocessor
companies is significant and expected to increase. Most of the companies with
which we compete and expect to compete have far greater capital resources and
more significant research and development staffs, marketing and distribution
programs and facilities, and many of them have substantially greater experience
in the production and marketing of products. Our ability to compete effectively
may be adversely affected by the ability of these competitors to devote greater
resources to the sale and marketing of their products than we can. In addition,
one or more of our competitors may succeed or may already have succeeded in
developing technologies and products that are more effective than any of those
we currently offer or are developing.
9
Patriot's Limited Ability to Protect Its Intellectual Property May Inadvertently
Adversely Affect Its Ability to Compete
A successful challenge to our ownership of our technology could
materially damage our business prospects. Our technologies may infringe upon the
proprietary rights of others. Licenses required by us from others may not be
available on commercially reasonable terms, if at all. We rely on a combination
of patents, trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property
rights. We currently have eight U.S. patents issued and three U.S. patents
pending. We have one patent issued in Europe and have filed an application for
another patent in Europe, Japan and elsewhere. Any issued patent may be
challenged and invalidated. Patents may not issue from any of our pending
applications. Any claims allowed from existing or pending patents may not be of
sufficient scope or strength to provide significant protection for our products.
Patents may not be issued in all countries where our products can be sold so as
to provide meaningful protection or any commercial advantage to us. Our
competitors may also be able to design around our patents.
Vigorous protection and pursuit of intellectual property rights or
positions characterize the fiercely competitive semiconductor industry, which
has resulted in significant and often protracted and expensive litigation.
Therefore, our competitors may assert that our technologies or products infringe
on their patents or proprietary rights. Problems with patents or other rights
could increase the cost of our products or delay or preclude new product
development and commercialization by us. If infringement claims against us are
deemed valid, we may not be able to obtain appropriate licenses on acceptable
terms or at all. Litigation could be costly and time-consuming but may be
necessary to protect our future patent and/or technology license positions or to
defend against infringement claims.
We did not develop the technology which is the basis for our
products. This technology, which was originally known as the ShBoom technology,
was acquired through a series of agreements from two co- inventors. We have
been, and may again be, subject to claims from such prior parties related to the
technology. Such parties may also attempt to exploit the technology
independently of our rights to do so. The asset purchase agreement and plan of
reorganization between Patriot, nanoTronics Corporation and Helmut Falk was the
agreement under which we acquired the basic ShBoom technology. The agreement
also contained a number of warranties and indemnities related to the ownership
of the technology and other matters. We believe nanoTronics Corporation has been
liquidated and, due to Mr. Falk's death in July 1995, our ability to obtain
satisfaction for any future claims as a result of a breach of the agreement may
be limited.
Patriot May Face Interruption Of Production And Services Due To Increased
Security Measures In Response To Terrorism
Our business depends on the free flow of products and services through
the channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or at certain times stopped
10
altogether. Further delays or stoppages in transportation, mail, financial or
other services could have a material adverse effect on our business, results of
operations and financial condition. Furthermore, we may experience an increase
in operating costs, such as costs for transportation, insurance and security, as
a result of these activities and potential activities. We may also experience
delays in receiving payments from payers that have been affected by terrorist
activities and potential activities. The U.S. economy in general is being
adversely affected by terrorist activities and potential activities, and any
economic downturn could adversely impact our results of operations, impair our
ability to raise capital or otherwise adversely affect our ability to grow our
business.
Related to Our Offering and Share Price
Patriot May Not Be Able to Obtain Additional Capital to Fund Its Operations When
Needed
A lack of additional funding could force us to substantially curtail or
cease our operations, which would have a material adverse effect on our
business. Our ability to raise additional funds under the debenture agreement is
subject to certain conditions. These conditions include the effectiveness of a
registration statement covering the resale of the shares sold on the conversion
of the debentures or the exercise of the warrants issued concurrently with the
debentures. We estimate our current annual cash requirements to sustain our
operations to be $2.1 million. There can be no assurance that any future funds
required will be generated from operations or from other potential sources.
Further, any such required funds may only be available on unattractive terms and
may significantly dilute the value of our existing shares.
If the Selling Shareholders Sell a Large Number of Patriot Shares All at Once or
In Blocks, The Market Price of Our Shares Would Most Likely Decline
The selling shareholders are offering all of the common stock offered
through this prospectus. The selling shareholders are not restricted in the
price at which they can sell the common stock. Shares sold at a price below the
current market price at which the common stock is trading may cause the market
price to decline. The shares of common stock that are issuable on the conversion
of the debentures or exercise of the warrants issued concurrently with the
debentures represent 52% of our outstanding shares. However, should the price of
our stock drop, the number of common shares issuable on the conversion of these
debentures, plus the conversion of currently outstanding previously issued
debentures, would be subject to reset provisions which would substantially
increase the number of common shares to be issued. To the extent the selling
shareholders, and shareholders of currently outstanding previously issued
debentures, convert and then sell their common stock, the common stock price may
decrease due to the additional shares in the market. This could allow the
selling shareholders, and shareholders of currently outstanding previously
issued debentures, to convert their convertible debentures into even greater
amounts of common stock, the sales of which would further depress the stock
price. Accordingly, we do not know the exact number of shares that will be
issued on the conversions of the debentures. The following table presents the
potential number of shares that could be issued and the total number of shares
outstanding under several alternative scenarios:
11
Market Price as of If October 30, 2003 Market Price Decreases
October 30, 2003 25% 50% 75%
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Market price (conversion price) $ 0.055 $ 0.041 $ 0.028 $ 0.014
Common stock currently outstanding 129,930,085 129,930,085 129,930,085 129,930,085
Number of shares issuable on conversion 33,107,460 34,297,699 40,448,864 64,789,773
Number of warrants issuable on exercise 55,927,308 55,927,308 55,927,308 55,927,308
Potential common stock outstanding 218,964,853 220,155,092 226,306,257 250,647,166
Dilutive effect to current shareholders 69% 69% 74% 93%
In addition, at the option of the debenture holder, interest accruing at the
annual rate of 8% can be converted into shares of our common stock at the same
time and at the same conversion price as the principal portion of the debenture.
Should the debenture holders accumulate interest, a larger number of shares
would be issued on conversion; and if the price of the common stock declines,
the reset provisions which allow greater amounts of shares to be issued would
also be in effect for the interest portion of the debenture. As of September 30,
2003, $35,836 interest was payable to the debenture holders which could be
converted into 856,774 shares of common stock at an average conversion price of
$0.042.
The Market for Patriot's Stock is Subject to Rules Relating to Low-Priced Stock
Which Limits Our Ability to Attract Competitive Funding
Our common stock is currently listed for trading in the NASD
Over-The-Counter Bulletin Board Market and is subject to the "penny stock rules"
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended. In general, the penny stock rules apply to non-NASDAQ or non-national
stock exchange companies whose common stock trades at less than $5.00 per share
or which have tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). Such rules require, among
other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document, quote
information, broker's commission information and rights and remedies available
to investors in penny stocks. Many brokers have decided not to trade "penny
stock" because of the requirements of the penny stock rules, and as a result,
the number of broker-dealers willing to act as market makers in such securities
is limited. The "penny stock rules," therefore, may have an adverse impact on
the market for our common stock and may effect our ability to attract
competitive funding.
Our Share Price Could Be Lowered as a Result of Short Sales
The downward pressure on the price of our common stock as the selling
shareholders convert and sell material amounts of common stock could encourage
short sales by the selling shareholders or others. When an investor sells stock
that he does not own, it is known as a short
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sale. The seller, anticipating that the price of the stock will go down, will
buy the stock at a later date. If the price of the stock goes down, the seller
will profit to the extent of the difference between what he originally sold it
for less what he later had to buy it for. Short sales enable the seller to
profit in a down market. Short sales could place significant downward pressure
on the price of our common stock.
On a Significant Drop in the Price of Our Stock, We Could be Subject to a Change
in Control
There is a possibility that a significant number of shares, the exact
number of which we do not know, of our common stock could be issued on the
conversion of the debentures. This possibly could result in a change in control
of the company. Such a change in control could have a material adverse effect on
our operations and business plans. We are unable to determine the impact such a
change in control could have on our company.
13
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934, and the Private Securities Litigation Reform
Act of 1995, and we desire to take advantage of the "safe harbor" provisions in
those laws. Therefore, we are including this statement for the express purpose
of availing ourselves of the protections of these safe harbor provisions with
respect to all of the forward-looking statements we make. The forward-looking
statements in this prospectus reflect our current views with respect to possible
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including specifically the absence
of significant revenues and financial resources, a history of losses, no
assurance that the development of technology can be completed or that its
completion will not be delayed, significant competition, the uncertainty of
patent and proprietary rights, uncertainty as to royalty payments and
indemnification risks, trading risks of low-priced stocks and those other risks
and uncertainties discussed herein that could cause our actual results to differ
materially from our historical results or those we anticipate. In this
prospectus, the words "anticipates," "believes," "expects," "intends," "future"
and similar expressions identify certain forward-looking statements. You are
cautioned to consider the specific risk factors described in "Risk Factors" and
elsewhere in this prospectus and not to place undue reliance on the
forward-looking statements contained in this prospectus, which speak only as of
the date of this prospectus. We undertake no obligation to publicly revise these
forward-looking statements to reflect the effect of events or circumstances that
may arise after the date of this prospectus. All written and oral
forward-looking statements made subsequent to the date of this prospectus and
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section.
PLAN OF DISTRIBUTION
After the effective date of the registration statement of which
this prospectus is a part, each selling shareholder will be free to offer and
sell his or her common shares at such times, in such manner and at such prices
as he or she may determine. The types of transactions in which the common shares
are sold may include transactions in the over-the-counter market (including
block transactions), negotiated transactions, the settlement of short sales of
common shares, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling shareholders
have advised us that they have not entered into any agreements, understandings
or arrangements with any underwriters or broker-dealers regarding the sale of
their securities. The selling shareholders do not have an underwriter or
coordinating broker acting in connection with the proposed sale of the common
shares.
The selling shareholders may effect such transactions by selling
common stock directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the selling shareholders.
They may also receive compensation from the purchasers of common shares for whom
such broker-dealers may act as agents or to whom they sell as principals, or
both (which compensation as to a particular broker-dealer might be in excess of
customary commissions).
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The selling shareholders and any broker-dealer that acts in
connection with the sale of common shares may be "underwriters" within the
meaning of Section 2(11) of the Securities Act. Any commissions received by such
broker-dealers and any profit on the resale of the common shares sold by them
while acting as principals may be deemed to be underwriting discounts or
commissions.
Because the selling shareholders may be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling shareholders will be
subject to prospectus delivery requirements.
Selling shareholders also may resell all or a portion of their
common shares in open market transactions in reliance upon Rule 144 under the
Securities Exchange Act, provided they meet the criteria and conform to the
requirements of such Rule.
SELLING SHAREHOLDERS
Selling Shareholders
The following table sets forth certain information with respect to
the selling shareholders as of October 30, 2003. Except as set forth below, none
of the selling shareholders currently is an affiliate of ours, and none of them
has had a material relationship with us during the past three years. None of the
selling shareholders are or were affiliated with registered broker-dealers.
Amount and
Beneficial Maximum Number Percentage of
Ownership of of Shares of Common Stock
Common Stock as Common Stock After the Sale
Name of October 30, 2003 Offered for Sale Number %
---- ------------------- ---------------- ------------------------------------
Lincoln Ventures, LLC 86,446,522 (2) 60,529,711 25,916,811 (2) 13.61% (2)
Victor Gabourel 4,847,978 (3) 1,041,666 3,806,312 (3) 2.91%
Gloria Felcyn, Trustee (1) 16,861,091 (4) 1,334,757 15,526,334 (4) 11.83%
James and Josephine Zolin 5,250,056 (5) 1,866,666 3,383,390 (5) 2.57%
Richard Daniels 5,568,333 (6) 1,729,166 3,839,167 (6) 2.92%
Wayne Opperman 550,000 550,000 - *
* less than 1%
(1) As trustee of the Helmut Falk Family Trust and executor of the
Helmut Falk estate, Ms. Felcyn effectively controls the shares
that were subject to an escrow arrangement originally issued
to nanoTronics in connection with the ShBoom technology
acquisition and shares that remain from 5,000,000 non-escrowed
shares originally issued to nanoTronics in connection with the
ShBoom technology acquisition and subsequently transferred to
the Helmut Falk Family Trust. Ms. Felcyn is also an affiliate
and director of the company.
(2) This number includes 44,666,810 shares of common stock
issuable upon exercise of outstanding warrants previously
issued to Lincoln which are currently exercisable, which
shares would not be deemed beneficially owned (due to exercise
restrictions within the warrants) within the meaning of
Sections 13(d) and 13(g) of the Exchange Act to the extent
that their acquisition in a warrant exercise by Lincoln would
cause Lincoln to own in excess of 4.99% of our outstanding
common stock immediately following such exercise. By the terms
of the Debentures, the 4.99% limitation may be increased to a
maximum of 9.99% if the Company accepts a tender offer and a
change in control takes place. Therefore, it is expected that
Lincoln will not beneficially own more than 9.99% of our
outstanding common stock at any time. Roy Adams has ultimate
voting and/or investment control over the securities owned by
Lincoln.
15
(3) Includes 1,555,735 shares of common stock issuable upon the
conversion of previously issued convertible debentures. The
resale of these shares has been previously registered. This
number also includes 1,945,437 shares of common stock issuable
upon exercise of outstanding warrants
(4) Includes 4,814,305 shares of common stock issuable upon the
conversion of previously issued convertible debentures. The
resale of these shares has been previously registered. This
number also includes 2,767,674 shares of common stock issuable
upon exercise of outstanding warrants and 50,000 shares of
common stock issuable upon exercise of stock options issued to
Ms. Felcyn, as an individual, as a director of the company.
(5) Includes 390,168 shares of common stock issuable upon the
conversion of previously issued convertible debentures. The
resale of these shares has been previously registered. This
number also includes 1,509,169 shares of common stock issuable
upon exercise of outstanding warrants
(6) Includes 975,419 shares of common stock issuable upon the
conversion of previously issued convertible debentures. The
resale of these shares has been previously registered. This
number also includes 2,170,862 shares of common stock issuable
upon exercise of outstanding warrants
INFORMATION ABOUT US
The Company
Patriot Scientific Corporation was organized under Delaware law on
March 24, 1992, as the successor by merger to Patriot Financial Corporation, a
Colorado corporation incorporated on June 10, 1987. Our address is 10989 Via
Frontera, San Diego, California 92127, and our telephone number is (858)
674-5000. Our home page can be located on the World Wide Web at
http://www.ptsc.com.
We develop, market, and sell microprocessors, our technology
behind the microprocessors, and complementary products which enable computers
and other data processing devices to communicate. These products can be used to
connect to the Internet or other telecommunication networks. The microprocessor
technology product line accounted for approximately 25% of our revenue in fiscal
2003. The balance of our 2003 revenue was generated from a communication product
line that, subsequent to a completed last buy program, is now generating minimal
revenue. We also have a patent for special radar technology which, if fully
developed, may allow a potential licensee to penetrate the ground or structures
to find various objects. We also owned gas plasma antenna technology which we
sold for $250,000 in August 1999. In 2003 we received a final royalty payment of
$75,500 from the sale of the gas plasma technology. Our strategy is to exploit
our microprocessor technologies through product sales, licensing, and strategic
alliances.
In 1997, we emerged from the development stage primarily as a
result of the acquisition of Metacomp Inc. There can be no assurance that we can
achieve profitable operations, and we may need additional financial resources
during the next twelve months.
Background
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In February 1989, we completed our initial public offering under a
registration statement on Form S-18 under the Securities Act of 1933. This
offering raised gross proceeds of $50,000 and net proceeds of approximately
$28,640 upon the sale of 2,500,000 units at $.02 per unit. Each unit sold in the
public offering consisted of one common share and one Class A common stock
purchase warrant exercisable to acquire one share of common stock and one Class
B common stock purchase warrant. All Class A and Class B warrants have since
been exercised or have lapsed.
On May 12, 1992, we redomiciled ourselves from Colorado to
Delaware by merging into a wholly owned Delaware subsidiary, Patriot Scientific
Corporation, organized for that purpose. The reincorporation resulted in a
reverse stock split. Three shares of the Colorado corporation, par value
$.00001, were converted into one share of the Delaware corporation, par value
$.00001. The reincorporation also effected a change in our charter and bylaws
and a name change to Patriot Scientific Corporation.
In May 1993, we registered under the Securities Act of 1933 a
total of 7,631,606 shares issuable upon the exercise of outstanding Class A and
Class B common stock purchase warrants. Upon the exercise of those warrants, we
received net proceeds of $3,343,915 and issued 7,538,102 common shares. None of
such warrants remain outstanding.
Effective May 31, 1994, we entered into an asset purchase
agreement and plan of reorganization with nanoTronics Corporation located in
Eagle Point, Oregon and Helmut Falk. We issued a total of 8,500,000 restricted
common shares to nanoTronics to acquire certain microprocessor technology of
nanoTronics. The technology acquired was used to develop a sophisticated yet low
cost microprocessor. 5,000,000 of the shares were issued on a non-contingent
basis, and the remaining 3,500,000 shares were issued subject to the terms of an
earnout escrow arrangement, which concluded on May 31, 1999.
Effective December 26, 1996, we acquired 96.9% of the outstanding
shares of Metacomp, Inc., a California corporation, from 56 shareholders in
exchange for the issuance of 1,272,068 shares of our common stock. Based on the
closing price of our common stock of $1.375 on the date of the acquisition, the
price of the acquisition was $1,749,094. This business combination was accounted
for as a pooling-of-interests.
Business
Available Information
We file reports, proxy statements and other information with the SEC,
and these reports may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. You may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. The same information may be obtained
at the following Regional Offices of the SEC: 75 Park Place, New York, New York
10007, and the Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621. Copies of such material may be obtained from the Public
Reference Section of the SEC's Washington, D.C. office at prescribed rates.
We mail a copy of our Annual Report on Form 10-K along with a proxy
statement to our shareholders prior to our annual meeting.
17
We have filed a registration statement on Form SB-2, of which this
prospectus is a part, with the SEC. This registration statement or any part
thereof may also be inspected and copied at the public reference facilities of
the SEC.
Our filings may also be accessed through the SEC's web site
(http://www.sec.gov) or by visiting our web site at (http://www.ptsc.com) and
linking to the SEC's site.
Organization and Corporate Development. Our business involves the
following technologies:
o Ignite microprocessor technology,
o high-speed data communications technology, and
o radar technology.
Due to a lack of funds to develop and commercialize JUICEtechnology, a
technology introduced to us in 2001, we assigned our rights in this technology
back to the inventor in April 2003.
The stage of development of each of our technologies is as follows:
o Ignite microprocessor. This technology is generating minor
amounts of revenue from the sale of development boards,
microprocessors and initial license fees related to the
microprocessor application. We run the technology on a
0.18-micron microprocessor, which is in current production. We
have ported the WindRiver VxWorks operating system and the Sun
Microsystems personalJava virtual machine to the
microprocessor. In addition, the technology is available for
sale as intellectual property, which enables the prospective
customer to incorporate the microprocessor functions with
other parties' applications to arrive at a system on a chip
solution. Although we anticipate the Ignite technology to be
our main product line, it currently accounts for only about
25% of our revenue in fiscal year 2003.
o High-speed data communications. Revenue from this technology
was phased out during fiscal year 2002 as a result of the
products reaching the end of their life cycles. During fiscal
2002 we initiated a last time buy program and except for minor
repeat orders have discontinued this product line. We have
decided to concentrate our efforts on the Ignite
microprocessor technology. Although the communications product
line accounted for approximately 75% of our fiscal year 2003
revenue, we anticipate that the Ignite microprocessor will be
our main product line in the future.
o Radar and antenna. We sold the gas plasma antenna technology
in August 1999. Our radar technology has not generated any
revenue, and we have suspended further development of this
technology in order to concentrate our resources on our Ignite
products.
Due to our small size and staffing overlaps among the technologies,
certain personnel may work on any or all of our technologies from time to time.
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During at least the last three years, we have focused the majority of
our efforts on the Ignite technology. The Ignite technology is targeted for the
embedded controller and Java language processor marketplaces.
Internet Growth and the Emergence of the Java Programming Language. The
Internet is a global web of computer networks. This "network of networks" allows
computers connected to the Internet to "talk" to one another. The Internet
provides organizations and individuals with new means to conduct business.
Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
We believe that organizations will also increasingly use the Internet and
private Intranet networks to improve communications, distribute information,
lower operating costs and change operations. Use of the Internet has grown
rapidly and has had an impact on many industries, including computer hardware,
software and peripheral industries. The rapid growth in popularity of the
Internet is in part due to continuing penetration of computers and modems into
U.S. households, growth of the informational, entertainment and commercial
applications and resources of the Internet, the growing awareness of such
resources among individuals, and the increasing availability of user-friendly
navigational and utility tools which enable easier access to the Internet's
resources.
The growth of the Internet and corporate Intranets is creating a demand
for hardware, software and peripherals. Software, such as Java, has been
developed to serve the requirements of Internet users.
Java is a programming language that was originally developed for
personal digital assistant devices and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. A large number of major computer, software, browser and
on-line service provider companies have licensed the Java language. Accordingly,
Java is a fundamental platform for Internet related applications. A significant
number of Java applications, or applets, are now available on the Internet.
These applications not only enhance web pages but also perform many functions of
traditional computer software programs. Our Ignite technology lends itself to
potential markets in which the use of Java is prevalent.
With Java, data and programs do not have to be stored on the user's
computer, but can reside anywhere on the Internet to be called upon as needed.
Among its various attributes, two key features of Java are (1) its ability to
run on a variety of computer operating systems thus avoiding the problem of
incompatibility across networks, and (2) security, because Java enables the
construction of virus-resistant, tamper-resistant systems by using
resource-access control and public-key encryption. Because of Java's useful
features, it has also become a popular programming language for embedded
applications.
Since Java is designed to run on multiple types of devices and
operating systems, it allows developers to write a program once for many types
of operating systems, instead of having to write new versions for each type.
Java does this by interpreting a program's commands into something that a
particular type of computer can understand. This interpretive design runs
programs slower than if they were tailored for each type of computer and is
resulting in a need for specialized microprocessors and compilers to increase
Java's speed.
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The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional computer operating systems. The
concept is to design inexpensive access devices to communicate via the Internet.
Our Microprocessor Technology.
General Background. In 1991, nanoTronics Corporation was formed and
acquired a base technology for an advanced microprocessor integrated on a single
computer chip. nanoTronics subsequently engaged in substantial technical
development and fabricated a first-generation microprocessor in early 1994.
Since the acquisition of the technology from nanoTronics, effective May
31, 1994, we have been engaged in enhancing the microprocessor design, adding
additional technical features to further modernize the design, and improving and
testing the new design. We initially fabricated a prototype 0.8-micron
microprocessor in May 1996. The next generation was a 0.5-micron microprocessor
that was delivered in September 1997. The 0.5-micron microprocessor was employed
in demonstrations for prospective customers and was shipped in limited numbers
to customers as an embedded microprocessor. In 1998 we introduced a 0.35-micron
microprocessor whose features included a reduction in size and improved
performance. In addition, in September 2000 we completed a VHDL model of this
technology which enables customers to purchase intellectual property
incorporating microprocessor functions with other parties' applications to
arrive at a system on a chip solution. By purchasing this software model,
customers can significantly reduce their time to market by simulating results as
opposed to trial and error commitments to silicon production. In 2003 we further
reduced the size of our silicon production to 0.18-microns.
Industry Background. The semiconductor logic market has three major
sectors:
o standard logic products,
o application specific standard products, and
o application specific integrated circuits.
Standard logic products, such as the Intel's X86 and Pentium and
Motorola's 680X0 microprocessor families, are neither application nor customer
specific. They are intended to be utilized by a large group of systems designers
for a broad range of applications. Because they are designed to be used in a
broad array of applications, they may not be cost effective for specific
applications. Application specific integrated circuits are designed to meet the
specific application of one customer. While cost effective for that application,
application specific integrated circuits require large sales volumes of that
application to recover their development costs. Application specific standard
processors are developed for one or more applications but are not generally
proprietary to one customer. Examples of these applications include modems,
cellular telephones, other wireless communications devices, multimedia
applications, facsimile machines and local area networks. We have designed our
microprocessor to be combined with application specific software to serve as an
embedded control product for the application specific standard processor market
sector.
20
Application specific standard processors are typically used in
embedded control systems by manufacturers to provide an integrated solution for
application specific control requirements. Such systems usually contain a
microprocessor or microcontroller, logic circuitry, memory and input/output
circuitry. Electronic system manufacturers combine one or more of these elements
to fit a specific application. The microprocessor provides the intelligence to
control the system. The logic circuitry provides functions specific to the end
application. The input/output circuitry may also be application specific or an
industry standard component. The memory element, if not on the microprocessor,
is usually a standard product used to store program instructions and data. In
the past, these functions have been executed through multiple integrated
circuits assembled on a printed circuit board. The requirements for reduced cost
and improved system performance have created market opportunities for
semiconductor suppliers to integrate some or all of these elements into a single
application specific standard processor or chip set, such as the Ignite family
of microprocessors. The Ignite family provides close integration of the
microprocessor and input/output function with the logic circuitry, thereby
providing an advanced application specific standard processor.
Embedded control systems enable manufacturers to differentiate
their products, replace less efficient electromechanical control devices, add
product functionality and reduce product costs. In addition, embedded control
systems facilitate the emergence of completely new classes of products. Embedded
control systems have been incorporated into thousands of products and
subassemblies worldwide, including automotive systems, remote controls,
appliances, portable computers and devices, cordless and cellular telephones,
motor controls and many other systems.
Microprocessors are generally available in 4-bit through 64-bit
architectures, which refers to the amount of data they can process. 4-bit
microprocessors are relatively inexpensive, typically less than $1.00 each.
Although they lack certain performance and features, they account for more than
40% of worldwide microcontroller volume. Also in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit, 32-bit and
64-bit architectures, with typical costs of over $10.00 each, have offered very
high performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit, 32-bit and 64-bit
architectures offers fewer internal limitations, making programming easier and
providing higher performance. Although generally more expensive per unit and
requiring more support logic and memory, these devices offer many advantages for
more sophisticated embedded control systems.
Electronic system designers, driven by competitive market forces,
seek semiconductor products with more intelligence, functionality and control
that can be used to reduce system costs and improve performance. For these
needs, the Ignite product family was designed to be a sophisticated 32-bit
microprocessor with advanced features. The Ignite product family uses a smaller
number of transistors compared to other RISC (reduced instruction set computor)
processors, which results in less power consumption and more economical prices
compared to other embedded control applications. This creates the opportunity
for the development of new, cost-effective applications.
Technology Description. Conventional high-performance
microprocessors are register-based with large register sets. These registers are
directly addressable storage locations requiring a
21
complex architecture that consumes costly silicon. This conventional
architecture provides processing power for computer applications but complicates
and slows the execution of individual instructions and increases silicon size,
thereby increasing the microprocessor cost.
Our technology is fundamentally different from most other
microprocessors in that the data is stored in groups and certain information is
known to be at the top of a stack as opposed to being stored in a register. Our
microprocessor employs certain features of both register and stack designs. The
resultant merged stack-register architecture improves program execution for a
wide range of embedded applications. Our design combines two processors in one
highly integrated package, a microprocessing unit for performing conventional
processing tasks, and an input-output processor for performing input-output
functions. This replaces many dedicated peripheral functions supplied with other
processors. The microprocessor's design simplifies the manipulation of data. Our
architecture employs instructions that are shrunk from 32-bits to 8-bits. This
simplified instruction scheme improves execution speed for computer
instructions. Our architecture incorporates many on-chip system functions, thus
eliminating the requirement of support microprocessors and reducing system cost
to users.
The 0.8-micron microprocessor was designed to operate at a speed
of 50Mhz; the 0.5-micron microprocessor at a speed of 100Mhz; the 0.35-micron
microprocessor at 150MHz; and the 0.18-micron to operate at speeds in excess of
300Mhz. They are all compatible with a wide range of memory technology from low
cost dynamic random access memory to high-speed static random access memory. The
microprocessors can be packaged in various surface-mount and die-form packaging.
There can be no assurance that the designed speed will be achieved with the
production model of the 0.18-micron microprocessor or future versions or that
all of the desired functions will perform as anticipated.
Our technology is not designed or targeted to compete with
high-end processors for use in personal computers. It is targeted for embedded
control applications. We believe that the features described above differentiate
the Ignite family from other 8-bit to 64-bit microprocessors targeted for
embedded control applications. Considering the reduced requirement for support
microprocessors, the Ignite family is intended to be available at a high volume
price that should be price competitive with high-end 8-bit microprocessor and
general 16-bit microprocessor systems but with higher performance (speed and
functional capability). The Ignite family has been designed to allow high-speed
and high-yield fabrication using generally available wafer fabrication
technology and facilities.
The Ignite Microprocessor as a Java Processor. We believe the
Ignite microprocessor architecture is capable of being an efficient and cost
effective Java programming language processor, because Java is designed to run
on a stack-oriented architecture and the Ignite architecture executes the
virtual stack machine internal to Java efficiently. Many Java operation codes or
instructions require only a single 8-bit Ignite family instruction to be
executed, providing a performance advantage over other more expensive processors
that require six or more 32-bit instructions to do the same task. This feature
allows the execution of Java programs with increased speed and reduced code size
thereby enabling lower system memory costs. In addition, the incorporation of
many on-chip system functions is expected to allow the Ignite family to perform
most of the other functions required of an Internet computer device or Java
accelerator, thereby eliminating components. Since Internet computers are
designed to be inexpensive appliances for
22
Internet access, cost, speed and performance are expected to be key requirements
for designers. We believe the Ignite technology can compete favorably on the
basis of such requirements, although there can be no assurance we can
successfully exploit Java related applications or that competitors will not
create superior Java processors.
We have ported the Java operating environment to the Ignite
family, which currently uses the C programming language for software support. We
are a licensee of Sun Microsystems Inc. This enables us to develop and
distribute products based on Sun's personalJava, a platform on which to run Java
applications. We have also licensed from Wind River an operating system,
VxWorks, and entered into a relationship with Forth Inc. whereby Forth will
provide software support and operating system development tools for the Forth
Programming language. We believe this solution is competitive in the Java
virtual machine and embedded applications markets. We believe that, if the
implementation is successfully completed, the Ignite family will be competitive
with Java microprocessors announced by competitors. However, there can be no
assurance of successful implementation of this package of software or of a
market for an Ignite family Java microprocessor.
Stage of Development. In early 1994, nanoTronics initiated
production of a first generation of wafers at a contract fabrication facility
using 6 inch wafers employing 0.8-micron double-metal CMOS technology. After the
May 31, 1994 acquisition, we improved the original design, added new features
and performed simulations and tests of the improved designs. In October 1995, a
run of six wafers of second generation 0.8-micron microprocessors was fabricated
by a contract fabrication facility. Subsequently, we tested these
microprocessors, while completing a C computer language compiler and preparing
application development tools. The compiler and application development tools
are necessary to enable system designers to program the Ignite family for
specific applications. We made corrections to the design suggested by the
testing of prototype units and produced an additional run of second generation
microprocessors from remaining wafers in May 1996. In July 1996, we employed
these microprocessors in demonstration boards for use by developers and
prospective customers and licensees.
In December 1997, we completed development of and started shipping
a 0.5-micron microprocessor based on the Ignite technology and found that
0.5-micron double-metal CMOS technology improved operating speed, reduced power
requirements, reduced physical size and reduced fabrication cost. In May 1998,
we began a production run of a 0.35-micron microprocessor that further increased
operating speed and cost performance over the previous generations of the Ignite
family of microprocessors.
At each stage of development, microprocessors require extensive
testing to ascertain performance limitations and the extent and nature of errors
(bugs), if any. When significant limitations or errors are discovered,
additional rounds of design modifications and fabrication are required prior to
having functional and demonstrable microprocessors for prospective customers and
licensees. Although our 0.5 and 0.35-micron microprocessors have been sent to
prospective customers in anticipation of production orders, there can be no
assurance that we, during our continued testing of these products, will not
identify errors requiring additional rounds of design and fabrication prior to
commercial production. Additional delays could have an adverse effect on the
marketability of our technology and financial condition.
23
In September 2000, we completed the VHDL soft-core version of the
Ignite microprocessor family. The hardware design inside a microprocessor, or
silicon device, can be represented as a software program. This, in essence,
replaces the old style of designing microprocessors using schematics. VHDL is
the predominant software language used to design semiconductors. In addition to
the design aspects, VHDL also contains sophisticated simulation tools that allow
the designer to simulate the functionality of the entire design before
committing to silicon. Also VHDL enables a designer to easily modify and enhance
the design. A design represented in VHDL goes through a synthesis process
whereby it is converted to the most basic element of a design, logical gates.
This gate level representation in turn is used with computer aided engineering
tools to translate the design into the most fundamental component of
semiconductors, transistors. The characteristics of the transistors can be given
as a library to a foundry. Therefore, a design represented in VHDL is technology
and foundry independent and can be targeted for any given transistor geometry
(such as 0.18, 0.25, or 0.35- micron) for any foundry of choice.
We have developed marketing materials, product manuals and
application development tools for use by licensees and customers. The manuals
and tools are necessary to enable system designers to quickly and easily program
the Ignite family for specific applications.
We believe that the Ignite family is ready for licensing or sale
and that any additional changes encountered in current testing will be minor and
can be made during subsequent production runs of Ignite family microprocessors
for customers, when and if orders are obtained. We also believe the core
technology is ready for licensing for use by others to develop custom
microprocessors.
Business Strategy. The increasing demand for embedded control has
made the market for microprocessors one of the largest segments of the
semiconductor logic market. This demand will drive the need for embedded
processors. Our strategy does not entail competing directly with suppliers who
have multiple microprocessor types addressing all parts of the embedded systems
market, but on identifying certain market niches that the Ignite would best
address due to its low cost, low power consumption, small number of transistors
and higher performance.
Because of the above factors, we intend to focus the majority of
our efforts on the embedded microprocessor business, a market without an
established base of microprocessor products and for which we believe the Ignite
has desirable technical and market advantages.
We believe that our architecture is suited for controller
applications requiring high performance and low system cost, such as smart
cards, cell phones, printers, video terminals, robotics, motion controllers,
industrial controllers, digital communication devices, video games, kiosks,
cable and satellite modems and TV set top boxes. We expect that early licensing
of the technology and product applications will focus on embedded control.
We have three international representatives for foreign markets
and are addressing the domestic market with an in-house business development
person. We also have a strategic alliance with an outside microprocessor design
house.
We believe the appropriate approach for us initially lies in a
balanced effort of cultivating licensees and developing specific product
enhancement partnerships, producing original equipment manufactured products,
and providing technical support to third parties on a contract
24
basis. The overall balance of these approaches will be monitored and modified as
we attempt to ascertain and capitalize on the highly dynamic and competitive
embedded microprocessor market. There can be no assurance that we can
successfully exploit our microprocessor technology.
Subject to the availability of financial and personnel resources,
while we are commercializing the Ignite family and the core technology, our
strategy is to also design and develop future versions of the microprocessor
with more demanding sub-micron technology and with more features. However, our
resources are limited, and there can be no assurance that we will be able to
continue microprocessor enhancement.
Initial fabrications of the 0.8-micron and 0.5-micron processors
were performed by contract fabrication facilities. The 0.35-micron
microprocessor was fabricated by a contract fabrication facility that had agreed
to provide production quantities for our customers. We have completed work with
a contract fabrication facility and our design house partner to produce a
0.18-micron version of the Ignite family. There can be no assurance fabrication
facilities will be available to produce the Ignite family in the future.
However, since there are a large number of fabrication facilities with the
capability to produce the Ignite family of microprocessors, we believe
microprocessors can be produced on a contract basis. Industry shortages of
fabrication facilities that may exist and are predicted to exist in the future
are generally limited to the more demanding architectures. If a shortage of
fabrication facilities develops, it could have a material adverse effect on our
financial condition.
Competition. The semiconductor industry is intensely competitive
and has been characterized by price erosion, rapid technological change and
foreign competition in many markets. The industry consists of major domestic and
international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than we do.
The market for microprocessors and for embedded control applications is at least
as competitive.
While our strategy is to target high-volume licensees and
microprocessor customers requiring more sophisticated but low-cost, low-power
consumption devices, we can still expect significant competition. We may also
elect to develop embedded control system products utilizing our own architecture
or by contract for other manufacturers.
We expect that the Ignite family, if successfully commercialized
in the embedded controller market, will compete with a variety of 16/64-bit
microprocessors including those based on intellectual property from ARM and MIPS
and microprocessors from Hitachi, Motorola and IBM. As a Java processor, we
expect our Ignite family will compete with a broad range of microprocessors
including those incorporating co-processor accelerator technology. The producers
of these microprocessors have significantly greater resources than we do.
A new entrant, such as ours, is at a competitive disadvantage
compared to these and other established producers. A number of factors
contribute to this, including:
o the lack of product performance experience,
o lack of experience by customers in using application
development systems,
o no record of technical service and support, and
o limited marketing and sales capabilities.
25
JUICEtechnology
During 2001 we introduced a technology, the purpose of which was to
enhance the user's experience of the wireless internet by expanding the
capabilities of his device (either a cell phone, PDA, smart phone or pocket PC).
By varying the speed at which the microprocessor processes information, the
device could have presented information in a richer format than was available
from current technologies and, additionally, doing so with less drain on the
device's battery. Due to a lack of funds to develop and commercialize
JUICEtechnology, we assigned our rights in this technology back to the inventor
in April 2003.
High Speed Data Communications Products.
The communication products that reached the end of their life
cycles are:
VME Product Line - a line of intelligent high-speed communications
engines in a virtual memory European form factor. Some of our
customers for these products included the military as well as
large satellite based data communications companies.
Atcomm2/4 Product Line - an intelligent two or four channel
product that was used for high-speed data communications.
Except for minor repeat orders, we no longer support this product
line. We have disposed of or fully reserved the communication product line
inventory and are concentrating our efforts and resources on Ignite.
Radar and Antenna Technology.
General Background. We commenced active development of our ground
penetrating radar technology in April 1992. By May 1993, we were able to
demonstrate the sensing, processing and crude visualization of images from our
technology, and by May 1994 we had completed our prototype device. Since May
1994, we have focused our efforts and limited financial resources on the
microprocessor technology and communication products, effectively suspending
development and marketing efforts related to ground penetrating radar.
Gas Antenna Technology Description.
We sold our gas plasma technology in August 1999.
Research and Development. Our current development efforts are
focused on improvement of, and additional features for, the Ignite family of
microprocessors. The development of this technology has taken longer than
anticipated and could be subject to additional delays. Therefore, there can be
no assurance of timely or successful marketing of this technology.
26
We incurred research and development expenditures of $723,287 and
$1,372,421 for our fiscal years ended May 31, 2003 and 2002, respectively. The
majority of these expenditures have been devoted to our microprocessor
technology. We believe that technical advances are essential to our success and
expect that we will continue to expend substantial funds on research and
development of our technology. However, there can be no assurance that such
research and development efforts will result in the design and development of a
competitive technology in a timely manner.
Licenses, Patents, Trade Secrets and Other Proprietary Rights. We
rely on a combination of patents, copyright and trademark laws, trade secrets,
software security measures, license agreements and nondisclosure agreements to
protect our proprietary technologies. Our policy is to seek the issuance of
patents that we consider important to our business to protect inventions and
technology that support our microprocessor technology.
We have six U.S. patents issued dating back to 1989 on our
microprocessor technology. We have one microprocessor technology patent pending
in five European countries and one patent issued in Japan and may file
additional applications under international treaties depending on an evaluation
of the costs and anticipated benefits that may be obtained by expanding possible
patent coverage. In addition, we have one U.S. patent issued on the ground
penetrating radar technology and one U.S. patent issued on one of the
communications products.
In addition to such factors as innovation, technological expertise
and experienced personnel, we believe that a strong patent position is becoming
increasingly important to compete effectively in the semiconductor industry. It
may become necessary or desirable in the future for us to obtain patent and
technology licenses from other companies relating to certain technology that may
be employed in future products or processes. To date, we have not received
notices of claimed infringement of patents based on our existing processes or
products; but, due to the nature of the industry, we may receive such claims in
the future.
We believe that we may have claims against other companies that
use semiconductors with capabilities in excess of 125 MHz in their products. In
2003 we initiated contacts with companies we believe are infringing on
methodologies covered by our patents. If discussions with potential infringers
do not result in favorable business relationships, we may resort to legal
actions to enforce our patents. However, there can be no assurance that we will
be successful in enforcing any potential patent claims against larger
competitors.
Based on the asset purchase agreement and plan of reorganization
between Patriot, nanoTronics and Mr. Falk, we were the recipients of a number of
warranties and indemnities. We believe nanoTronics has been liquidated and, due
to Mr. Falk's death in July 1995, we may be limited in our ability to obtain
satisfaction should we have any future claims against nanoTronics or its
successor, the Falk Family Estate.
We have entered into the following licenses related to the
microprocessor technology:
o Sierra Systems. In June 1994, we entered into an
agreement with Sierra Systems whereby we could
provide the C programming language on the Ignite. We
currently provide development boards with the C
programming language.
27
o Sun Microsystems Inc. In June 1997, we entered into
an agreement with Sun Microsystems, Inc. which
enabled us to develop and distribute products based
on Sun's Java's technology. In June 1998, we
exercised an option under that agreement to license
from Sun, personalJava, a smaller platform on which
to run Java applications that did not include an
operating system. We determined that personalJava was
better suited to the markets available to the Ignite
microprocessor. We have ported personalJava to the
Ignite microprocessor.
o Wind River. In July 1997, we entered into an
agreement with Wind River that provided us with a
license for an operating system, VxWorks, to be used
in conjunction with personalJava. We have ported
VxWorks to the Ignite.
o Forth Inc. In July 1997, we entered into a license
agreement with Forth Inc. whereby Forth will provide
software support and operating system development
tools for the Forth programming language.
We had one U.S. patent on our gas plasma antenna technology that
was sold in August 1999.
We have one U.S. patent on our ground penetrating radar
technology. No foreign application has been made. There are a large number of
patents owned by others in the radar field generally and in the field of ground
penetrating radar specifically. Accordingly, although we are not aware of any
possible infringement and have not received any notices of claimed infringement,
we may receive such claims in the future.
There can be no assurance that any patents will be issued from
pending or future applications or that any patents that are issued will provide
meaningful protection or other commercial advantages to us. Although we intend
to protect our rights vigorously, there can be no assurance that these measures
will be successful.
We generally require all of our employees and consultants,
including our management, to sign a non-disclosure and invention assignment
agreement upon employment with us.
Marketing and Distribution. Our products are marketed through a
combination of direct sales and distributors. Approximate sales by principal
geographic area (as a percentage of sales) for fiscal years ended May 31 were as
follows:
2003 2002
---- ----
Domestic sales 91% 99%
Foreign sales
Asia --% --%
Europe 9% 1%
North America --% --%
--- ----
Total sales 100% 100%
=== ====
28
All of our operating assets are located within the United States
While sales to certain geographic areas generally vary from year to year, we do
not expect that changes in the geographic composition of sales will have a
material adverse effect on operations.
Dependence upon Single Customers. Ten percent (10%) or more of our
consolidated net sales were derived from shipments to the following customers
for the fiscal years ended May 31as follows:
2003 2002
-------- --------
Long Wave, Inc. $ 43,000 $ --
General Dynamics 23,000 --
Centratech 15,000 --
Advanced Relay 15,000 151,000
Schindler -- 59,000
All of the above sales were shipped against multiple purchase
orders from each customer.
We had no backlog as of May 31, 2003 or 2002.
Facilities. We have one 10,300 square foot office located at 10989
Via Frontera, San Diego, California. The facility is leased through July 2006.
In July 2002, we sublet approximately 5,000 square feet of our facility to an
independent third party. The term of the sublease coincides with the remaining
term of our lease. The reduced floor space provides adequate and suitable
facilities for all of our corporate functions.
Employees. We currently have eight personnel. Four persons are
employed in research and development, one in marketing and sales and three are
engaged in general and administrative activities. We also engage additional
consultants and part-time persons as needed from time to time.
Our future success depends in significant part upon the continued
services of our key technical and senior management personnel. The competition
for highly qualified personnel is intense, and there can be no assurance that we
will be able to retain our key managerial and technical employees or that we
will be able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good. None
of our employees is covered by key man life insurance policies.
Government Regulation. To our knowledge, our products are not
subject to governmental regulation by any federal, state or local agencies that
would affect the manufacture, sale or use of our products, other than
occupational health and safety laws and labor laws which are generally
applicable to most companies. We cannot, of course, predict what sort of
regulations of this type may be imposed in the future but do not anticipate any
unusual difficulties in complying with governmental regulations which may be
adopted in the future.
29
We have not incurred costs associated with environmental laws and
do not anticipate such laws will have any significant effect on our future
business.
USE OF PROCEEDS
We will not receive any proceeds from the resale of these
securities. We may receive proceeds on the exercise of the warrants of up to
$322,500.
LEGAL PROCEEDINGS
In January 1999, we were sued in the Superior Court of San Diego
County, California by the Fish Family Trust, a co-inventor of the original
ShBoom technology. The suit also named as defendants nanoTronics and Gloria
Felcyn on behalf of the Falk Family Trust. The suit sought a judgment for
damages, a rescission of the Technology Transfer Agreement and a restoration of
the technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish Family
Trust. In November 2000, the judge issued a summary ruling in favor of the
defendants on all counts. The Fish Family Trust filed an appeal in January 2001.
In June 2003, the Appellate Court confirmed the trial court's ruling, thereby
bringing the dispute to a favorable conclusion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our 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:
o the overall state of the semiconductor industry,
o the development status of and demand for our products,
o economic conditions in our markets,
o the timing of orders,
o the timing of expenditures in anticipation of future sales,
o the mix of products sold by us,
o the introduction of new products,
o product enhancements by us or our competitors, and
o pricing and other competitive conditions.
Critical Accounting Policies
We believe that the following represent our critical accounting policies:
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight-line method.
Long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We continuously evaluate the recoverability of our long-lived
assets based on estimated future cash
30
flows from and the estimated fair value of such long-lived assets, and provide
for impairment if such undiscounted cash flows are insufficient to recover the
carrying amount of the long-lived asset.
Patents and Trademarks
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years. The carrying value of
patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from an individual
intangible asset is less than its carrying value.
Revenue Recognition
We recognize revenue on the shipment to our customers of communication products,
microprocessor integrated chips and evaluation boards. We also derive revenue
from fees for the transfer of proven and reusable intellectual property
components or the performance of engineering services. We enter into licensing
agreements that will provide licensees the right to incorporate our intellectual
property components in their products with terms and conditions that will vary
by licensee. Generally, these payments will include a nonrefundable technology
license fee, which will be payable upon the transfer of intellectual property,
or a nonrefundable engineering service fee, which generally will be payable upon
achievement of defined milestones. In addition, we anticipate these agreements
will include royalty payments, which will be payable upon sale of a licensee's
product, and maintenance and limited support fees. We will classify all revenue
that involves the future sale of a licensee's products as royalty revenue.
Royalty revenue will be generally recognized in the quarter in which a report is
received from a licensee detailing the shipments of products incorporating our
intellectual property components (i.e., in the quarter following the sale of
licensed product by the licensee). We will classify all revenue that does not
involve the future sale of a licensee's products, primarily license fees and
engineering service fees and maintenance and support fees, as contract revenue.
License fees will be recognized upon the execution of the license agreement and
transfer of intellectual property, provided no further significant performance
obligations exist and collectibility is deemed probable. Fees related to
engineering services contracts, which will be performed on a best efforts basis
and for which we will receive periodic milestone payments, will be recognized as
revenue over the estimated development period, using a cost-based percentage of
completion method. Annual maintenance and support fees, which will be renewable
by the licensee, will be classified as contract revenue and will be amortized
over the period of support, generally 12 months.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock Options
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires the Company to provide pro forma information regarding
net income as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. To provide the required pro forma information, the Company estimates the
fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model.
31
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. During the year ended May 31, 2002, based upon information than
available, we revised our estimates regarding the recovery of our inventories.
As a result, we increased existing reserves for obsolescence by $111,381.
Results of Operations for the Three months Ended August 31, 2003 and August 31,
2002
Net sales. Total net sales for the first fiscal quarter ended August 31, 2003
decreased 71.8% to $11,240 from $39,889 for the corresponding period of the
previous fiscal year. This decrease was due to minimal buys on our matured
communication products during the current quarter after final buys had been
substantially completed during the previous fiscal year. We are currently
expending our efforts on marketing and sale of our microprocessor technology.
The microprocessor technology generated minimal revenue during the first fiscal
quarter ended August 31, 2003. We anticipate that future revenue will be derived
from up front license fees and royalties as a result of the shift in focus to
the commercialization of our microprocessor and related technologies. We cannot
estimate when, if ever, significant revenue will be generated from the
microprocessor technology.
Cost of sales. Cost of sales as a percentage of net sales increased to 55.3% in
the first fiscal quarter ended August 31, 2003 compared to 12.3% for the
corresponding period of the previous fiscal year. This significant increase was
due to sales during the first quarter of fiscal year 2003 not having associated
costs due to our having written off the communication product inventory during
the previous fiscal year.
Research and development expenses decreased 28.7% from $209,287 for the first
fiscal quarter ended August 31, 2002 compared to $149,122 for the first fiscal
quarter ended August 31, 2003. This decrease was due primarily to a reduction in
consulting services compared to the previous fiscal year related to the
development of a new soft core version of the microprocessor technology in the
amount of $27,000 coupled with a reduction in payroll expense in an amount of
$19,230 and overhead expenses of $11,679.
Selling, general and administrative expenses decreased 27.8% to $351,470 for the
first fiscal quarter ended August 31, 2003 compared to $487,101 for the first
fiscal quarter of the previous fiscal year. This decrease was due to a reduction
in non-cash compensation of $61,118 related to investor relations and a
reduction of $29,969 in professional fees related to financings and litigation.
Other expenses for the first fiscal quarter ended August 31, 2003, were $656,982
compared to other expenses of $282,033 for the corresponding period of the
previous fiscal year. This change resulted primarily from the recognition of
non-cash interest expense of $582,450 related to the amortization
32
of the debt discount associated with the issuance of warrants under a secured
note payable and convertible debentures coupled with interest expense of $38,819
related to the note and debentures and $35,618 from the exercise of a warrant
for the current fiscal period compared to $254,367, $27,841 and none,
respectively for the same fiscal period of the previous fiscal year.
Results of Operations for the Years Ended May 31, 2003 and May 31, 2002
Our net sales in fiscal 2003 and 2002 were as follows:
Fiscal Year Amount % Change from the Previous Fiscal Year
----------- ------ --------------------------------------
2003 $ 123,903 Decrease of 65.5%
2002 $ 358,809
Net sales. Net sales for the year ended May 31, 2003, decreased over
the previous year as a result of minimal sales of our communications products,
all of which reached the end of their life cycles, and only minimal sales of the
microprocessor products. We have stopped production of our communications
products and are now concentrating on the microprocessor product line. We
anticipate only minor, if any, future communication product revenue. We have not
been successful in selling this line and have liquidated substantially all of
the inventory related thereto. Future sales revenues will be derived from sales
of microprocessors and licensing of microprocessor technology.
Our cost of sales in fiscal 2003 and 2002 were as follows:
Fiscal Year Amount % Change from the % of Net Sales
----------- ------ Previous Fiscal Year --------------
--------------------
2003 $ 18,660 Decrease of 95.3% 15.1%
2002 $ 393,980 109.8%
Cost of sales. Cost of sales as a percentage of net sales decreased
significantly in the fiscal year ended May 31, 2003, compared to the previous
fiscal year. This reduction was a result of the end of production of our
communication products and the elimination of manufacturing and overhead costs
necessary to support that product line.
Our research and development expenses in fiscal 2003 and 2002 were as
follows:
Fiscal Year Amount % Change from the Previous Fiscal Year
----------- ------ --------------------------------------
2003 $ 723,287 Decrease of 47.3%
2002 $1,372,421
33
Research and development expenses decreased during the fiscal year
ended May 31, 2003, compared to the previous fiscal year. This decrease was due
primarily to a reduction of approximately $428,000 in personnel costs and a
$143,000 reduction in the costs of outside consultants. The reductions in costs
were as a result of a cost cutting program initiated during the first half of
the 2002 fiscal year.
Our selling, general and administrative expenses in fiscal 2003 and
2002 were as follows:
Fiscal Year Amount % Change from the Previous Fiscal Year
----------- ------ --------------------------------------
2003 $1,821,902 Decrease of 32.7%
2002 $2,708,579
Selling, general and administrative expenses decreased during the
fiscal year ended May 31, 2003, compared to the previous fiscal year. This
decrease was due primarily to a reduction of approximately $519,000 in personnel
costs, $178,000 in consulting expenses and $134,000 in professional expenses.
The reductions in costs were as a result of a cost cutting program initiated
during the first half of the 2002 fiscal year.
Our other income (expenses) in fiscal 2003 and 2002 were as follows:
Fiscal Year Amount % Change from the Previous
----------- ------ Fiscal Year
--------------------------
2003 $(1,448,353) Increase of 5.7%
2002 $(1,370,880)
Other income (expense) increased for the fiscal year ended May 31, 2003
compared to the previous fiscal year. This change resulted primarily from the
recognition of non-cash interest expense of approximately $1,305,000 related to
the amortization of the debt discount associated with the issuance of warrants
under the convertible debentures and interest expense of $144,000 related to our
debt.
Liquidity and Capital Resources
In connection with their report on our consolidated financial statements as of
and for the year ended May 31, 2003, Nation Smith Hermes Diamond, our
independent certified public accountants, expressed substantial doubt about our
ability to continue as a going concern because of recurring net losses and
negative cash flow from operations.
At August 31, 2003, we had a working capital deficit of $1,463,051 and cash and
cash equivalents of $7,288. We have historically funded our operations primarily
through the issuance of securities and debt financings. Cash and cash
equivalents decreased $25,375 during the three months ended August 31, 2003 due
to net cash used in operations of $539,238 offset by funds generated primarily
from the issuance of convertible debentures of $422,500 and the sale of common
stock and exercise
34
of common stock warrants of $81,100. The net cash used in operations was
$539,238 for the three months ended August 31, 2003 compared to $665,011 for the
corresponding period of the previous fiscal year. The decrease in cash required
in operations was due primarily to a $134,762 reduction in net loss as adjusted
to reconcile to cash used in operating activities between the two periods. Cash
used in investing activities was $2,269 for the three months ended August 31,
2003 compared to $11,376 for the corresponding period of the previous fiscal
year. Cash provided by financing activities was $516,132 for the three months
ended August 31, 2003 compared to $602,703 for the corresponding period of the
previous fiscal year. This decrease was primarily the result of a reduced
issuance of convertible debentures of $169,500 during the current fiscal period
compared to the corresponding period of the previous fiscal year coupled with an
increase in the sale of common stock and exercise of common stock warrants of
$81,100.
We estimate our current cash requirements to sustain our operations for the next
twelve months through August 2004 to be $2.1 million. Since we are no longer
supporting the communications product line, we are assuming that there will be
no communications product revenue. We have a note payable to Swartz Private
Equity, LLC ("Swartz") of $635,276 at August 31, 2003 which is due March 1,
2004. We also have convertible debentures with a group of investors as of August
31, 2003 aggregating $853,388 and advances of $127,500 on a convertible
debenture that closed subsequent to August 31, 2003. At the option of the
debenture holders, they may purchase additional debentures up to $1 million at
any time during the next two years as long as the price of our common stock is
in excess of $0.20 per share. During the first three months ended August 31,
2003, we obtained $31,000 from the sale of equity to several private investors,
$50,100 from the exercise of a warrant and $10,000 from short term notes entered
into with a related party. Subsequent to August 31, 2003, we obtained an
additional $9,440 from the sale of equity to several private investors and
$187,500 from the issuance of additional convertible debentures net of advances
discussed above.
If the optional amounts under the convertible debentures are not raised in
sufficient amounts, then we may not have funds sufficient to meet our cash
requirements. In such circumstances, we may need to secure additional short-term
debt, private placement debt and/or equity financings with individual or
institutional investors. In addition, we may need to make additional cost
reductions if our cash requirements cannot be met from external sources. We
expect that the $2.1 million requirement will be provided by:
o additional debt and/or equity financings; and
o proceeds from the exercise of outstanding stock options and
warrants.
In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have remaining a
$400,000 accounts receivable factoring agreement with our bank; however, we have
no eligible accounts receivable to factor as of August 31, 2003.
We anticipate our future revenue to be derived primarily from the sale of
licenses and royalties. To receive this revenue, we may require additional
equipment, fabrication, components and supplies during the next twelve months to
support potential customer requirements and further develop our
35
technologies. Product introductions such as those currently underway for the
Ignite may require significant product launch, marketing personnel and other
expenditures that cannot be currently estimated. Further, if expanded
development is commenced or new generations of microprocessor technology are
accelerated beyond current plans, additional expenditures we cannot currently
estimate, may be required. It is possible therefore, that higher levels of
expenditures may be required than we currently contemplate resulting from
changes in development plans or as required to support new developments or
commercialization activities or otherwise.
If we are unable to obtain the necessary funds, we could be forced to
substantially curtail or cease operations, which would have a material adverse
effect on our business. Further, there can be no assurance that we will be able
to timely receive shareholder approval to increase the number of authorized
shares or that required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on our existing
shareholders. As such, there is substantial doubt about our ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our possible inability to continue as a going concern.
New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not impact our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this statement did not impact our financial
position or results of operations
Income Taxes
Deferred income taxes are provided for temporary differences in
recognizing certain income and expense items for financial and tax reporting
purposes. Deferred tax assets consist primarily of income tax benefits from net
operating loss carry-forwards. A valuation allowance has been recorded to fully
offset the deferred tax asset as it is more likely than not that the assets will
36
not be utilized. The valuation allowance decreased approximately $16,000 in the
first three months of 2004, from $14,291,000 at May 31, 2003 to $14,275,000 at
August 31, 2003.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective May 20, 2002, the client-auditor relationship between Patriot
Scientific Corporation (the "Company") and BDO Seidman, LLP ("BDO") ceased. The
Company dismissed BDO on May 20, 2002 as part of its cost reduction program
which was initiated earlier in that fiscal year.
The change in certifying accountants was approved by the Company's
board of directors.
BDO's reports on the consolidated financial statements of the Company
for each of the past two years did not contain an adverse opinion or a
disclaimer of opinion, nor were they qualified as to any uncertainty in audit
scope or accounting principle; however the audit opinion of BDO on the Company's
most recent consolidated financial statements as of and for the period ending
May 31, 2001 was modified to include an explanatory paragraph which contained a
statement that the Company's recurring losses from operations and negative cash
flows raised substantial doubt about the Company's ability to continue as a
going concern.
During the two years ended May 31, 2001 and the subsequent interim
periods preceding the date of the dismissal of BDO on May 20, 2002, there were
no disagreements with BDO on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of BDO, would have caused
the former accountant to make a reference to the subject matter of the
disagreement(s) in connection with its reports covering such periods.
During the two years ended May 31, 2001 and the subsequent interim
periods preceding the date of the dismissal of BDO on May 20, 2002, there were
no "reportable events" (hereinafter defined) requiring disclosure pursuant to
Item 304 (a) (1) (v) of Regulation S-K. As used herein, the term "reportable
events" means any of the items listed in paragraphs (a) (1) (v) (A) - (D) of
Item 304 of Regulation S-K.
Effective May 20, 2002, the Company engaged Nation Smith Hermes
Diamond, a professional corporation, which is a member of the BDO Seidman
Alliance ("Nation") , as its independent accountants. During the two years ended
May 31, 2001 and the subsequent interim periods preceding the effective date of
the engagement of May 20, 2002, neither the Company nor anyone on its behalf
consulted Nation regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, nor has Nation provided to the Company a written report or oral
advice regarding such principles or audit opinion.
The Company requested that BDO furnish it with a letter addressed to
the Securities and Exchange Commission stating whether or not it agrees with the
above statements. A copy of the letter from BDO dated June 4, 2002 was filed as
Exhibit 16.1 to the Form 8-K/A filed June 5, 2002.
37
MANAGEMENT
The following table and biographical summaries set forth information, including
principal occupation and business experience, about our directors and the
executive officers at October 1, 2003:
Name Age Position and Offices Director Since
- ---- --- -------------------- --------------
Donald R. Bernier 61 Chairman and Director January 1995
David H. Pohl 66 Director April 2001
Jeffrey Wallin 55 President and CEO n/a
Lowell W. Giffhorn 56 Executive Vice President, CFO, Secretary and August 1999
Director
Carlton M. Johnson, Jr. 43 Director August 2001
Helmut Falk, Jr. 47 Director December 1997
Gloria Felcyn 56 Director October 2002
Joey Maitra 53 Vice President Engineering n/a
Patrick Nunally 40 Vice President and CTO n/a
Biographical Information
Donald R. Bernier. Mr. Bernier was appointed Chairman of the Board on
August 5, 2001. Since 1971, Mr. Bernier has been the owner and President of
Compunetics Incorporated, a Troy, Michigan-based electronics firm of which he is
the founder. Compunetics engages in contract research and development,
specializing in microelectronics primarily for the automotive industry.
David H. Pohl. Mr. Pohl has served on our board of directors since
April 2001, and served as an officer of the Company from January 2001 to March
2002. Except for his service with PTSC, Mr. Pohl has been in the private
practice of law, counseling business clients since 1997, and from 1995 to 1996
was Special Counsel to the Ohio Attorney General. Previously, he was a senior
attorney with a large U.S. law firm, and held positions as a senior officer and
general counsel in large financial services corporations. Mr. Pohl earned a J.D.
degree in 1962 from the Ohio State University College of Law, and also holds a
BS in Administrative Sciences from Ohio State.
Jeffrey E. Wallin. Mr. Wallin has served as our Chief Executive Officer
and President since March 2002. Since 1999, Mr. Wallin has been president of
SDMC Inc., a consulting company serving the multimedia system integration and
communications markets. From 1996 to 1999, Mr. Wallin was President and CEO of
TV/COM International, a division of Hyundai that developed and manufactured
end-to-end digital communications systems. Previously Mr. Wallin held senior
level management positions with Snell & Wilcox, General Instrument, now a major
division of Motorola, and Teledyne Corporation. Mr. Wallin obtained a B.S.
degree from Bemidji State University in 1970.
38
Lowell W. Giffhorn. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining Patriot as Chief
Financial Officer (CFO) in May 1997. Mr. Giffhorn has served on our board of
directors since August 1999. From June 1992 to August 1996 and from September
1987 to June 1990 he was the CFO of Sym-Tek Systems, Inc. and Vice President of
Finance for its successor, Sym-Tek Inc., a major supplier of capital equipment
to the semiconductor industry. Mr. Giffhorn obtained a M.B.A. degree from
National University in 1975 and he obtained a B.S. in Accountancy from the
University of Illinois in 1969. Mr. Giffhorn is also a director and chairman of
the audit committee of DND Technologies, Inc., a publicly held company.
Carlton M. Johnson, Jr. Mr. Johnson was appointed a Director on August
5, 2001. Mr. Johnson is in-house legal counsel for Swartz Investments, LLC, a
position he has held since June 1996. Mr. Johnson has been licensed to practice
law in Alabama since 1986, Florida since 1988, and Georgia since 1997. He has
been a shareholder in the Pensacola, Florida AV rated law firm of Smith, Sauer,
DeMaria & Johnson and as President-Elect of the 500 member Escambia-Santa Rosa
Bar Association. He also served on the Florida Bar Young Lawyers Division Board
of Governors. Mr. Johnson earned a degree in History/Political Science at Auburn
University and a Juris Doctor degree at Samford University - Cumberland School
of Law. Mr. Johnson is also a director and member of the audit committee of
Peregrine Pharmaceuticals, Inc., a publicly held company.
Helmut Falk, Jr. Since 1992, Dr. Falk has been the Director of
Anesthesia for the Johnson Memorial Hospital in Franklin, Indiana. Dr. Falk
received his D.O. from the College of Osteopathic Medicine of the Pacific in
1987 and his B.S. in Biology from the University of California, Irvine in 1983.
Dr. Falk is the son of the late Helmut Falk, who was the sole shareholder of
nanoTronics and the Chairman and CEO of Patriot until his death in July 1995.
Dr. Falk is also an heir to the Helmut Falk Estate, which is the beneficial
owner of the Company's shares held by the Helmut Falk Family Trust.
Gloria Felcyn. Ms. Felcyn was appointed a Director and chairman of our
audit committee on October 10, 2002. Since 1982 Ms. Felcyn has been the
principal in her own public accounting firm. Ms. Felcyn received a B.S. degree
in Business Economics from Trinity University in 1968.
Patrick O. Nunally. Dr. Nunally joined us as Vice President of Business
Development and Chief Technical Officer in June 2001, previous to which he had
been providing consulting services to us since May 2000. Dr. Nunally has more
than 20 years of entrepreneurial experience in semiconductor and embedded
processor design. From December 1998 to May 2000, he was President and CEO of
Intertech, a company he founded specializing in intellectual property
development for embedded processor and communications systems. From June 1998 to
December 1998, he was President and CEO of Gruppe Telekom, Inc., a licensee of
Interactive Video and Data Service Spectrum. From April 1996 to June 1998, he
served as Chief Technical Officer and co-founder of Aristo, now PlayNet Inc., a
Java-based games company. Dr. Nunally also held other senior management
positions with Wave Interactive Network, Sensormatic Video Products Division,
Intellisys Automation Inc., E-Metrics Inc., General Dynamics Corporation and
Interstate Electronics. Dr. Nunally received his PhD in Electrical Engineering
from the Pacific Western University in 1996, a MBA from the University of
LaVerne in 1993 and a BS in Electrical and Electronics Engineering from
California State Polytechnic University in 1987.
Joey Maitra. Mr. Maitra was Vice President of Engineering for Metacomp
from 1990 until its acquisition by Patriot and was appointed Vice President of
Engineering of Patriot in December
39
1996, a position which he held through February 2001. Mr. Maitra was reappointed
to the same position in November 2001. Previously Mr. Maitra held various
engineering positions with several computer related technology companies. Mr.
Maitra obtained a B.S. in Electrical Engineering from the Indian Institute of
Technology in 1972 and a M.S. in Electrical Sciences at State University of New
York in 1973.
There is no family relationship between any of our executive officers
and directors.
Indemnification of Officers, Directors and Others
As permitted by Delaware law, our certificate of incorporation provides
that we will indemnify our officers, directors, employees and agents. This
includes indemnification against attorneys' fees and other expenses and
liabilities they incur to defend, settle or satisfy any civil or criminal action
brought against them arising out of their association with or activities on
behalf of us. However, they will not be indemnified if they are adjudged to have
acted with gross negligence or to have engaged in willful misconduct. We may
also bear the expenses of such litigation for any such persons upon their
promise to repay such sums if it is ultimately determined that they are not
entitled to indemnification. Such expenditures could be substantial and may not
be recouped, even if we are so entitled. We have provided for indemnification
for liabilities arising under the Securities Act of 1933 as they may be
permitted to directors, officers or persons controlling us. The SEC has informed
us that such indemnification is against public policy and may be unenforceable.
Executive Compensation
There is shown below information concerning the compensation of our
chief executive officer and the most highly compensated executive officers whose
salary and bonus exceeded $100,000 (each a "Named Officer") for the fiscal years
ended May 31, 2003, 2002, and 2001.
Summary Compensation Table
Annual Cash Compensation Long-Term Compensation
------------------------ ----------------------
Name and Fiscal Repriced All Other
Principal Position Year Salary Bonus (# of Shares) Options Compensation
------------------ ---- ------ ----- ------------- ------- ------------
Jeff Wallin 2003 $127,650 (1) Nil 250,000 None None
President and CEO 2002 $68,800 (1) Nil 1,000,000 None None
Lowell W. Giffhorn 2003 $150,779 (1) Nil 115,000 None None
Exec. V.P., CFO and Secy. 2002 $139,908 (1) Nil 255,000 None None
2001 $126,650 (1) Nil 125,000 None None
Joey Maitra 2003 $131,040 (1) Nil 100,000 None None
VP Engineering 2002 $125,058 (1) Nil 335,000 None None
2001 $120,000 Nil None None None
Patrick O. Nunally 2003 $189,521 (1) Nil 400,000 None $52,500 (2)
VP and CTO 2002 $173,046 (1) Nil 250,000 None $105,000 (2)
40
(1) Included in Mssr. Wallin, Giffhorn, Maitra and Nunally is cash
compensation of $400 per month for car allowance.
(2) Payments through November 30, 2002 to Dr. Nunally for
assignments to the Company of intellectual property rights.
The rights were returned to Dr. Nunally in April 2003.
The Company maintains employee benefits that are generally available to
all of its employees, including medical, dental and life insurance benefits and
a 401(k) retirement savings plan. The Company did not make any matching
contributions under the 401(k) plan for any of the above named officers during
the fiscal years ended May 31, 2003, 2002 and 2001.
Option Grants
Shown below is information on grants of stock options pursuant to the
Company's 1992, 1996 and 2001 Stock Option Plans to the Named Officers reflected
in the Summary Compensation Table shown above.
Option Grants Table for Fiscal Year Ended May 31, 2003
------------------------------------------------------
Potential Realizable Value
Percent of Total of Assumed Annual Rates
Options Granted of Stock Price Appreciation
Number of to Employees in Exercise Expiration for Option Term (1)
Name Options Granted Fiscal Year Price Date 5% ($) 10% ($)
---- --------------- ----------- ----- ---- ------ -------
Jeffrey E. Wallin 250,000 20.6% $ 0.043 4/15/2008 $ 2,935 $ 6,563
Lowell W. Giffhorn 115,000 9.5% $ 0.070 8/12/2007 $ 2,224 $ 4,915
Joey Maitra 100,000 8.2% $ 0.059 1/2/2008 $ 1,630 $ 3,602
Patrick Nunally 400,000 32.9% $ 0.043 4/15/2008 $ 4,697 $10,379
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of the company's common stock, overall market conditions and the
executive's continued involvement with the company. The amounts represented in
this table will not necessarily be achieved.
Aggregated Option Exercises and Fiscal Year-End Option Values
There were no exercises of stock options for the fiscal year ended May
31, 2003 by any of the officers reflected in the Summary Compensation Table
shown above. Shown below is information on fiscal year-end values under the
Company's 1992, 1996 and 2001 Stock Option Plans to the officers reflected in
the Summary Compensation Table shown above.
41
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
May 31, 2003 May 31, 2003
------------ ------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Jeffrey E. Wallin 1,020,000 250,000 $ 5,625 $ --
Lowell W. Giffhorn 311,667 183,333 $ -- $ --
Joey Maitra 335,000 100,000 $ -- $ 600
Patrick Nunally 787,500 162,500 $ 9,000 $ --
The fair market value of the unexercised in-the-money options at May
31, 2003 was determined by subtracting the option exercise price from the last
sale price as reported on the over the counter bulletin board on May 31, 2003,
$0.065.
The Company has not awarded stock appreciation rights to any of its
employees. The Company has no long-term incentive plans.
Compensation of Directors
No direct or indirect remuneration has been paid or is payable by us to
the directors in their capacity as directors other than the granting of stock
options. We expect that, during the next twelve months, we will not pay any
direct or indirect remuneration to any directors of ours in their capacity as
directors other than in the form of stock option grants or the reimbursement of
expenses of attending directors' or committee meetings.
Employment Contracts
The Company entered into a consulting agreement dated as of March 7,
2002, with SDMC, Inc. whereby SDMC would provide the services of Mr. Wallin to
be the President and Chief Executive Officer. The agreement is for a term
through March 18, 2004 providing for payments of $133,200 per annum. The
agreement provides for a bonus up to 50% of the annual base consideration for
the applicable year. The agreement also provides for potential bonuses to be
paid based on the increase in the price of the Company's common stock. Should
the price of the common stock reach $0.25 for twenty consecutive days, SDMC
would receive a cash payment of $10,000, $0.40- $20,000, $0.50- $20,000, $0.60-
$30,000, $0.80- $30,000, $1.00- $50,000, $1.50- $100,000, and $2.00- $150,000.
The Company may terminate SDMC's agreement with or without cause, but
termination without cause (other than disability or death) would result in
severance payments equal to the lesser of (i) four months of the then current
compensation or (ii) the balance remaining of the current compensation for the
term of his agreement. If a change in control, as defined in the agreement,
occurs during the term of his agreement, and if Mr. Wallin refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then SDMC will receive a lump sum severance
payment equal to twelve months of the then current compensation. Under the
agreement, the Company granted SDMC options to purchase 1,000,000 common shares,
500,000 vesting on March 7, 2002, 250,000 vesting on March 7, 2003 and 250,000
vesting on March 7, 2004. The Company also placed in escrow four months of
payments which shall be released to SDMC on the termination of Mr. Wallin's
services for any reason other than cause or his resignation.
42
The Company entered into an employment agreement dated as of November
17, 2001, with Mr. Giffhorn providing for his employment as Executive Vice
President and Chief Financial Officer. The agreement is for a term through
September 4, 2004, providing for a base salary of $144,000 per annum. The base
salary may be increased at the discretion of the Board of Directors. The
agreement provides for a bonus up to 50% of the annual base salary for the
applicable year. The agreement also provides Mr. Giffhorn a monthly car
allowance of $400. The Company may terminate Mr.Giffhorn's employment with or
without cause, but termination without cause (other than disability or death)
would result in severance payments equal to the lesser of (i) four months of the
then current base salary or (ii) the balance remaining of the current base
salary for the term of his agreement. If a change in control, as defined in the
agreement, occurs during the term of his agreement, and if Mr. Giffhorn refuses
to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary.
The Company entered into an employment agreement dated as of December
23, 2002, with Mr. Maitra providing for his employment as Vice President of
Engineering. The agreement is for a term through January 2, 2004 providing for a
base salary initially of $126,240. The base salary may be increased at the
discretion of the Board of Directors. The agreement provides for a bonus up to
50% of the annual base salary for the applicable year. The agreement also
provides Mr. Maitra a monthly car allowance of $400. The Company may terminate
Mr.Maitra's employment with or without cause, but termination without cause
(other than disability or death) would result in severance payments equal to the
lesser of (i) four months of the then current base salary or (ii) the balance
remaining of the current base salary for the term of his agreement. If a change
in control, as defined in the agreement, occurs during the term of his
agreement, and if Mr. Maitra refuses to accept or voluntarily resigns from a
position other than a qualified position, as that term is defined in the
agreement, then he will receive a lump sum severance payment equal to twelve
months of his then current salary. Under the agreement, the Company granted Mr.
Maitra options to purchase 100,000 common shares, 50,000 vesting on January 2,
2004 and 50,000 vesting on January 2, 2005.
The Company entered into a letter of intent dated May 31, 2001 with Dr.
Nunally providing for his employment as the Chief Technical Officer of the
Company. The terms of the letter provide for a base salary of $180,000 per
annum. The letter provides for a bonus up to 50% of the annual base
consideration for the applicable year. In addition, the letter provided for
monthly payments of $4,500 for the purchase from Dr. Nunally of certain
intellectual property assets and assignment of worldwide patent rights. On March
30, 2001, the Company entered into an agreement with Dr. Nunally providing for
additional monthly payments of $3,000 for additional intellectual property
assets. On April 16, 2003, the agreements were amended to reflect a return of
the intellectual property assets to Dr. Nunally, forgiveness by Dr. Nunally of
payments due him for the intellectual property assets subsequent to January 1,
2003 and termination of the $7,500 per month payments accruing on the
intellectual property assets. In exchange the Company granted a stock option to
Dr. Nunally for the purchase of up to 400,000 shares of common stock at an
exercise price of $0.0425. The option vested upon grant.
Mr. Giffhorn was an executive officer and a member of the compensation
committee during the fiscal year ended May 31, 2001. Through October 10, 2002,
the entire Board of Directors served as the compensation committee. Any actions
effecting Mr. Giffhorn's compensation or stock option grants during the period
of time he served on the compensation committee were approved by the entire
Board of Directors.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 21, 2003, the stock
ownership of each officer and director of the Company, of all officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power over such shares. No person listed below
has any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.
44
Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
-------- ----- --------- --------
Common stock Gloria Felcyn, CPA 15,752,843 (1) 13.9%
par value 10989 Via Frontera
$0.00001 San Diego, CA 92127
SAME Donald R. Bernier 625,000 (2) *
10989 Via Frontera
San Diego, CA 92127
SAME Helmut Falk, Jr. 149,500 (3) *
10989 Via Frontera
San Diego, CA 92127
SAME Lowell W. Giffhorn 689,948 (4) *
10989 Via Frontera
San Diego, CA 92127
SAME SDMC, Inc. 1,020,000 (5) *
10989 Via Frontera
San Diego, CA 92127
SAME David H. Pohl 325,000 (6) *
10989 Via Frontera
San Diego, CA 92127
SAME Patrick O. Nunally 962,000 (7) *
10989 Via Frontera
San Diego, CA 92127
SAME Joey Maitra 512,342 (8) *
10989 Via Frontera
San Diego, CA 92127
SAME Carlton M. Johnson, Jr. 75,000 (9) *
10989 Via Frontera
San Diego, CA 92127
All directors & officers 20,111,633 (10) 14.4%
as a group (9 persons)
* Less than 1%
1) As trustee of the Helmut Falk Family Trust and executor of the Helmut Falk
estate, Ms. Felcyn effectively controls the shares which were subject to an
escrow arrangement (as described in "Certain Transactions" below) originally
issued to nanoTronics in connection with the ShBoom technology acquisition and
shares that remain from 5,000,000 non-escrowed shares that were originally
issued to nanoTronics in connection with the ShBoom technology acquisition and
were subsequently transferred to the Helmut Falk Family Trust. Includes
6,473,731 shares that are issuable on the conversion of 8% Convertible
Debentures and the exercise of warrants into shares of common stock and 50,000
shares issuable upon the exercise of outstanding stock options.
45
2) Includes 400,000 shares issuable upon the exercise of outstanding stock
options.
3) Includes 115,000 shares issuable upon the exercise of outstanding stock
options.
4) Includes 465,000 shares issuable upon the exercise of outstanding stock
options.
5) Includes 1,020,000 shares issuable upon the exercise of outstanding stock
options.
6) Includes 325,000 shares issuable upon the exercise of outstanding stock
options.
7) Includes 950,000 shares issuable upon the exercise of outstanding stock
options.
8) Includes 335,000 shares issuable upon the exercise of outstanding stock
options.
9) Includes 75,000 shares issuable upon the exercise of outstanding stock
options.
10) Includes 9,902,902 shares issued and outstanding and 10,208,731 shares
issuable upon exercise of stock options, conversion of convertible debentures
and exercise of warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions, or series of transactions, during fiscal
2003 and 2002, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to its knowledge any director, executive officer, nominee,
five percent or greater shareholder, or any member of the immediate family of
any of the foregoing persons, has or will have any direct or indirect material
interest other than as described below.
In June 2000, we entered into a three-year, $80,000 secured promissory
note receivable with James T. Lunney, a previous Chairman, President and CEO.
The note bore interest at the rate of 6% with interest payments due
semi-annually and the principal due at the maturity of the note. Mr. Lunney
pledged 100,000 shares of Patriot's common stock that he held on the date of
issuance as security for this note. In April 2003, we negotiated an early
payment discount and Mr. Lunney paid $60,000 to retire this note.
During the fiscal year ended May 31, 2002, we paid $70,292 to Webster
Incorporated for design and maintenance of our web site and for marketing
support and materials. The principal in Webster Incorporated, Christine Blum, is
the daughter of our previous Chairman, President and CEO, Richard Blum.
From June 10, 2002 through August 23, 2002, we issued to Gloria Felcyn,
Trustee of the Helmut Falk Family Trust, two 8% Convertible Debentures with
accumulative principal balances of $275,000 due June 10, 2004 through August 23,
2004. The initial exercise prices ranged from $0.0727 to $0.08616 and are
subject to a downward revisions if the price of our stock is lower on any three
month anniversary of the debentures or on the date that a statement registering
the resale
46
of the common stock issuable upon conversion of the debentures becomes
effective. Also, in conjunction with the debentures, we issued five year
warrants to purchase up to 4,102,431 shares of our common stock at an initial
exercise prices ranging from $0.0727 to $0.08616 subject to reset provisions on
each six month anniversary of the issuance of the warrants. If the price of our
common stock is in excess of $0.20 per share, Ms. Felcyn has a two year option
to purchase up to an additional $275,000 of 8% Convertible Debentures on the
same terms.
During October 2002 through December 2002, we entered into three 8%
short-term notes with Gloria Felcyn, the trustee for the Falk Family Trust,
aggregating $180,000 with initial maturity dates ranging from January 1 to
January 31, 2003. In July 2003 we issued a new 8% short-term note in the amount
of $200,354 with a maturity date of October 7, 2003 in exchange for cancellation
of the three 8% short term notes issued in October through December 2002, the
accrued interest on the cancelled notes and an additional $10,000 in cash.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market and is quoted
on the NASD OTC Bulletin Board system maintained by the National Association of
Securities Dealers, Inc. Prices reported represent prices between dealers, do
not include markups, markdowns or commissions and do not necessarily represent
actual transactions. The market for our shares has been sporadic and at times
very limited.
The following table sets forth the high and low closing bid quotations
for the Common Stock for the first fiscal quarter ended August 31, 2003 and the
fiscal years ended May 31, 2003 and 2002.
Quotations
----------
First Quarter Ended August 31, 2003 $0.07 $0.04
Fiscal Year Ending May 31, 2003
First Quarter $0.08 $0.06
Second Quarter $0.14 $0.03
Third Quarter $0.09 $0.04
Fourth Quarter $0.09 $0.04
Fiscal Year Ended May 31, 2002
First Quarter $0.53 $0.25
Second Quarter $0.25 $0.10
Third Quarter $0.15 $0.07
Fourth Quarter $0.14 $0.07
We have approximately 561 shareholders of record as of September 5,
2003. Because most of our common stock is held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders. We have never paid a cash
dividend on our common stock and do not expect to pay one in the foreseeable
future.
47
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 400,000,000 shares of common
stock, $.00001 par value per share. At October 30, 2003, a total of 129,930,085
common shares were issued and outstanding. The holders of common stock are
entitled to one vote for each share held. The affirmative vote of a majority of
votes cast at a meeting which commences with a lawful quorum is sufficient for
approval of most matters upon which shareholders may or must vote, including the
questions presented for approval or ratification at the Annual Meeting. However,
removal of a director from office or repeal of the certificate of incorporation
in its entirety require the affirmative vote of a majority of the total voting
power for approval, and certain other matters (such as shareholder amendment of
the bylaws, and amendment, repeal or adoption of any provision inconsistent with
provisions in the certificate of incorporation regarding indemnification of
directors, officers and others, exclusion of director liability, and our
election not to be governed by statutory provisions concerning business
combinations with interested shareholders) require the affirmative vote of
two-thirds of the total voting power for approval. Common shares do not carry
cumulative voting rights, and holders of more than 50% of the common stock have
the power to elect all directors and, as a practical matter, to control the
company. Holders of common stock are not entitled to preemptive rights, and the
common stock may only be redeemed at our election.
A special meeting of shareholders may be called by or at the request
of:
o the Chairman of the Board,
o the President or any two directors, and
o persons owning in the aggregate not less than 20% of the
issued and outstanding common shares entitled to vote in
elections for directors.
After the satisfaction of requirements with respect to preferential
dividends, if any, holders of common stock are entitled to receive, pro rata,
dividends when and as declared by the board of directors out of funds legally
available therefor. Upon our liquidation, dissolution or winding-up, after
distribution in full of the preferential amount, if any, to be distributed to
holders of the preferred stock, holders of common stock are entitled to share
ratably in our assets legally available for distribution to our shareholders.
Our board of directors is authorized to issue 5,000,000 shares of
undesignated preferred stock, $.00001 par value, without any further action by
the stockholders. The board of directors may also divide any and all shares of
preferred stock into series and fix and determine the relative rights and
preferences of the preferred stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidation and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuance of preferred stock by the
board of directors will result in such shares having dividend and/or liquidation
preferences senior to the rights of the holders of common stock and could dilute
the voting rights of the holders of common stock. There are currently no shares
of preferred stock issued and outstanding.
48
We have not paid any cash dividends to date, and no cash dividends will
be declared or paid on the common shares in the foreseeable future. Payment of
dividends is solely at the discretion of our board of directors.
Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt
Lake City, Utah 84117, acts as our transfer agent and registrar for our common
stock. Their telephone number is (801) 272-9294.
LEGAL OPINION
Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway Street, Suite
2600, San Diego, California 92101 will pass on the validity of the common stock
offered by us.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by Nation Smith Hermes Diamond,
independent certified public accountants, to the extent and for the periods set
forth in their report (which contain an explanatory paragraph regarding the
Company's ability to continue as a going concern) appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such report
given the authority of said firm as experts in auditing and accounting.
49
Index to Consolidated Financial Statements
Report of Nation Smith Hermes Diamond,
Independent Certified Public Accountants ...................... F-2
Consolidated Balance Sheets as of May 31, 2003 and 2002 ......... F-3
Consolidated Statements of Operations for the Years Ended May 31,
2003 and 2002 ................................................. F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the
Years Ended May 31, 2003 and 2002 ............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
May 31, 2003 and 2002 ......................................... F-6
Summary of Accounting Policies .................................. F-7-F-12
Notes to Consolidated Financial Statements ...................... F-13-F-30
Consolidated Balance Sheets as of August 31, 2003 (unaudited)
and May 31, 2003 .............................................. F-31
Consolidated Statements of Operations for the Three Months
ended August 31, 2003 and 2002 (unaudited) .................... F-32
Consolidated Statements of Cash Flows for the Three Months
ended August 31, 2003 and 2002 (unaudited) .................... F-33
Notes to Unaudited Consolidated Financial Statements ............ F-34-F-46
F-1
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California
We have audited the accompanying consolidated balance sheets of Patriot
Scientific Corporation as of May 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the two year period ended May 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Patriot Scientific
Corporation at May 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the years in the two year period ended
May 31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative cash flows and has negative working capital that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Nation Smith Hermes Diamond
San Diego, California
August 14, 2003, except for note 1,
dated as of August 26, 2003.
F-2
Patriot Scientific Corporation
Consolidated Balance Sheets
May 31, 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
ASSETS (Notes 4 and 5)
Current assets:
Cash and cash equivalents $ 32,663 $ 88,108
Accounts receivable, net of allowance
of $10,000 and $6,000 for uncollectible accounts 3,866 4,797
Prepaid expenses 93,030 35,749
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 129,559 128,654
Property and equipment, net (Note 2) 153,530 285,488
Other assets, net of accumulated amortization of none and $20,333 53,220 330,863
Patents and trademarks, net of accumulated amortization
of $522,948 and $400,158 128,925 189,521
- -------------------------------------------------------------------------------------------------------------------------
$ 465,234 $ 934,526
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Secured note payable, net of debt discount of none and $189,516 (Note 4) 635,276 $ 445,760
Current portion of 8% Convertible Debentures, net of debt discount of
$103,121 and none (Note 5) 121,879 --
Secured notes payable to shareholder 180,000 --
Accounts payable 397,180 385,255
Accrued liabilities 245,822 211,291
Current portion of capital lease obligation 6,405 5,116
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,586,562 1,047,422
8% Convertible Debentures, net of debt discount of $709,890
and $192,802 (Note 5) 280,110 315,198
Long term portion of capital lease obligation 10,326 16,731
Commitments and contingencies (Notes 1, 7 and 11)
Stockholders' deficit (Notes 4, 5, 6 and 7):
Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding -- --
Common stock, $.00001par value; 200,000,000 shares authorized:
106,547,807 and 81,465,757 issued and outstanding at May 31, 2003
and 2002, respectively 1,066 815
Additional paid-in capital 44,281,210 41,440,101
Accumulated deficit (45,694,040) (41,805,741)
Note receivable (Note 3) -- (80,000)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,411,764) (444,825)
- -------------------------------------------------------------------------------------------------------------------------
$ 465,234 $ 934,526
- -------------------------------------------------------------------------------------------------------------------------
See accompanying report of independent certified public accountant, summary of
accounting policies and notes to consolidated financial statements.
F-3
Patriot Scientific Corporation
Consolidated Statements of Operations
Years Ended May 31, 2003 2002
- -----------------------------------------------------------------------------------
Net sales (Note 12):
Product $ 108,403 $ 358,809
Licenses and royalties 15,500 --
- -----------------------------------------------------------------------------------
Net sales 123,903 358,809
- -----------------------------------------------------------------------------------
Cost of sales:
Product costs 18,660 244,547
Inventory obsolescence -- 149,433
- -----------------------------------------------------------------------------------
Cost of sales 18,660 393,980
- -----------------------------------------------------------------------------------
Gross profit (loss) 105,243 (35,171)
Operating expenses:
Research and development 723,287 1,372,421
Selling, general and administrative 1,821,902 2,708,579
- -----------------------------------------------------------------------------------
Operating expenses 2,545,189 4,081,000
- -----------------------------------------------------------------------------------
Operating loss (2,439,946) (4,116,171)
- -----------------------------------------------------------------------------------
Other income (expenses):
Interest income 191 2,662
Interest expense (Notes 4, 5 and 6) (1,448,544) (1,373,542)
- -----------------------------------------------------------------------------------
Other income (expenses) (1,448,353) (1,370,880)
- -----------------------------------------------------------------------------------
Net loss $ (3,888,299) $ (5,487,051)
- -----------------------------------------------------------------------------------
Basic and diluted loss
per common share (Note 8) $ (0.04) $ (0.08)
- -----------------------------------------------------------------------------------
Weighted average number of
common shares outstanding
during the period (Note 8) 93,791,470 66,810,028
- -----------------------------------------------------------------------------------
See accompanying report of independent certified public accountant, summary of
accounting policies and notes to consolidated financial statements.
F-4
Patriot Scientific Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
- --------------------------------------------------------------------------------
Years Ended May 31, 2003 and 2002
Common Stock Additional Accumulated Stockholders'
Shares Amount Paid-in Capital Deficit Equity (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, June 1, 2001 57,535,411 $ 575 $ 37,240,503(1) $(36,318,690) $ 922,388
- ----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $.07 to $.30
per share (Notes 6 and 7) 4,888,680 49 879,556 -- 879,605
Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 7) 241,666 3 73,830 -- 73,833
Issuance of options for services -- -- 106,926 -- 106,926
Issuance of common stock for services
at $.09 per share 2,200,000 22 197,978 -- 198,000
Conversion of notes payable
at $.07 to $.09 per share (Note 4) 16,600,000 166 1,552,885 -- 1,553,051
Value of warrants issued -- -- 1,308,423 -- 1,308,423
Net loss -- -- -- (5,487,051) (5,487,051)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2002 81,465,757 $ 815 $ 41,360,101 $(41,805,741) $ (444,825)
- ----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock at $.03 to $.05
per share (Notes 6 and 7) 3,765,266 38 120,312 -- 120,350
Collection of note receivable (Note 3) -- -- 80,000 -- 80,000
Issuance of common stock for services
at $.04 to $.06 per share 2,780,000 28 148,772 -- 148,800
Conversion of debentures payable plus accrued
interest at $.04 to $.05 per share (Note 4) 18,536,784 185 836,375 -- 836,560
Value of warrants issued -- -- 1,735,650 -- 1,735,650
Net loss -- -- -- (3,888,299) (3,888,299)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 106,547,807 $ 1,066 $ 44,281,210 $(45,694,040) $ (1,411,764)
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying report of independent certified public accountant, summary of
accounting policies and notes to consolidated financial statements.
(1) Additional Paid-In Capital included a note receivable of $80,000 and
additional paid-in capital of $37,320,503 at June 1, 2001 and $41,440,101 at May
31, 2002.
F-5
Patriot Scientific Corporation
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Years Ended May 31, 2003 2002
- ---------------------------------------------------------------------------------------------
Operating activities:
Net loss $(3,888,299) $(5,487,051)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 258,915 285,759
Provision for doubtful accounts 24,000 76,000
Provision for inventory obsolescence -- 149,433
Common stock, options and warrants issued for
services 148,800 99,000
Non -cash interest expense related to convertible
debentures, notes payable and warrants 1,304,957 1,324,431
Changes in:
Accounts receivable (33,346) (45,973)
Inventories -- 73,960
Prepaid and other assets 216,195 (83,334)
Accounts payable and accrued expenses 83,016 (24,759)
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (1,885,762) (3,632,534)
- ---------------------------------------------------------------------------------------------
Investing activities:
Note receivable (Note 3) 60,000 --
Web site development costs -- --
Purchase of property, equipment and patents, net (62,194) (146,156)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (2,194) (146,156)
- ---------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of secured notes payable 180,000 1,790,000
Payments for capital lease obligations (5,116) (3,148)
Proceeds from issuance of convertible debentures 1,507,000 508,000
Proceeds from issuance of common stock 120,350 879,605
Proceeds from exercise of common stock warrants
and options -- 73,833
Proceeds from sale of accounts receivable 30,277 154,158
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,832,511 3,402,448
- ---------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (55,445) (376,242)
Cash and cash equivalents, beginning of year 88,108 464,350
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 32,663 $ 88,108
- ---------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Convertible debentures, notes payable and accrued
interest exchanged for common stock $ 836,560 $ 1,154,725
Cash payments for interest $ 15,083 $ 19,719
Common stock issued for prepaid services $ -- $ 198,000
Warrants and options paid issued for prepaid services $ -- $ 117,500
Write-off of inventory $ -- $ 38,052
Capital lease obligation $ -- $ 24,996
Debt discount $ 1,763,816 $ 1,308,423
Debt discount cancelled $ 527,067 $ --
- ---------------------------------------------------------------------------------------------
See accompanying report of independent certified public accountant, summary of
accounting policies and notes to consolidated financial statements.
F-6
Patriot Scientific Corporation
Summary of Accounting Policies
Organization and Business
Patriot Scientific Corporation (the "Company") is engaged in the development,
marketing, and sale of patented microprocessor technology and the sale of
high-performance high-speed data communication products. The Company also owns
innovative radar technology. The Company sold its antenna technology in August
1999.
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company, its majority owned subsidiaries, Metacomp, Inc. ("Metacomp") and Plasma
Scientific Corporation. All material intercompany transactions and balances have
been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 2002 financial statement in
order for it to conform to the 2003 presentation. Such reclassifications have no
impact on the Company's financial position or results of operations.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade accounts
receivable.
The Company's cash equivalents are placed in high quality money market accounts
with major financial institutions and high grade short-term commercial paper.
The investment policy limits the Company's exposure to concentrations of credit
risk. Money market accounts are federally insured; however, commercial paper is
not insured. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or other
security to support customer receivables.
The carrying value of financial instruments including cash, cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the immediate or short-term maturity of these instruments. With
respect to long-term debt, the carrying amounts approximate fair value due to
the relative consistency in interest rates and the short term nature of the
debt, with all debt maturing within two years of issuance.
F-7
Patriot Scientific Corporation
Summary of Accounting Policies (Continued)
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight-line method. The
Company follows the provisions of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Long-lived Assets." Long-lived assets and
certain identifiable intangibles to be held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continuously
evaluates the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated fair value of such long-lived assets, and
provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset.
Patents and Trademarks
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years. The carrying value of
patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from individual
intangible assets is less than its carrying value determined based on the
provisions of SFAS No. 144 as discussed above.
Revenue Recognition
We recognize revenue on the shipment to our customers of communication products,
microprocessor integrated chips and evaluation boards. We also derive revenue
from fees for the transfer of proven and reusable intellectual property
components or the performance of engineering services. We enter into licensing
agreements that will provide licensees the right to incorporate our intellectual
property components in their products with terms and conditions that will vary
by licensee. Generally, these payments will include a nonrefundable technology
license fee, which will be payable upon the transfer of intellectual property,
or a nonrefundable engineering service fee, which generally will be payable upon
achievement of defined milestones. In addition, we anticipate these agreements
will include royalty payments, which will be payable upon sale of a licensee's
product, and maintenance and limited support fees. We will classify all revenue
that involves the future sale of a licensee's products as royalty revenue.
Royalty revenue will be generally recognized in the quarter in which a report is
received from a licensee detailing the shipments of products incorporating our
intellectual property components (i.e., in the quarter following the sale of
licensed product by the licensee). We will classify all revenue that does not
involve the future sale of a licensee's products, primarily license fees and
engineering service fees and maintenance and support fees, as contract revenue.
License fees will be recognized upon the execution of the license agreement and
transfer of intellectual property, provided no further significant performance
obligations exist and collectibility is deemed probable. Fees related to
engineering services contracts, which will be performed on a best efforts basis
and for which we will receive periodic milestone payments, will be recognized as
revenue over the estimated development period, using a cost-based percentage of
completion method. Annual maintenance and support fees, which will be renewable
by the licensee, will be classified as contract revenue and will be amortized
over the period of support, generally 12 months.
F-8
Patriot Scientific Corporation
Summary of Accounting Policies (Continued)
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses were
approximately $3,400 and $9,000 for the years ended May 31, 2003 and 2002,
respectively.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
Net Loss Per Share
The Company applies SFAS No. 128, "Earnings Per Share" for the calculation of
"Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflect the potential dilution
of securities that could share in the earnings (loss) of an entity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
During the year ended May 31, 2002, based upon information then available, the
Company revised its estimates regarding the recovery of certain inventories. As
a result, the Company increased existing reserves for obsolescence by $111,381.
Inventories
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value. As of May 31, 2003 and
2002 both inventory amounts were fully reserved.
F-9
Patriot Scientific Corporation
Summary of Accounting Policies (Continued)
Sale of Accounts Receivable
The Company has adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A $400,000 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 is not entitled
to or obligated to repurchase or redeem the invoices before their maturity and
it does not have the ability to unilaterally cause the bank to return the
invoices. Under SFAS 140, 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 fiscal 2003 and 2002, the
Company sold approximately $38,000 and $193,000, respectively, of its accounts
receivable to a bank under a factoring agreement for approximately $30,000 and
$177,000, respectively. Pursuant to the provisions of SFAS 140, the Company
reflected the transaction as a sale 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 is 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 is based on the payment history of the
accounts receivable customer. At May 31, 2003, accounts receivable invoices
totaling $3,811 were outstanding and $396,189 was available for future factoring
of accounts receivable invoices.
Stock Options
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and disclosure," require the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model. SFAS No. 148
also provides for alternative methods of transition for a voluntary change to
the fair value based method
F-10
Patriot Scientific Corporation
Summary of Accounting Policies (Continued)
of accounting for stock-based employee compensation. The Company has elected to
continue to account for stock based compensation under APB No. 25. The Company
applies SFAS No. 123 in valuing options granted to consultants and estimates the
fair value of such options using the Black-Scholes option-pricing model. The
fair value is recorded as consulting expense as services are provided. Options
granted to consultants for which vesting is contingent based on future
performance are measured at their then current fair value at each period end,
until vested.
Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:
2003 2002
- -----------------------------------------------------------------------------
Net loss as reported $ (3,888,299) $ (5,487,051)
Compensation expense (289,023) (567,010)
------------------- -------------------
Net loss pro forma $ (4,177,322) $ (6,054,061)
=================== ===================
As reported per share
Basic and diluted loss $ (0.04) $ (0.08)
=================== ===================
Pro forma per share
Basic and diluted loss $ (0.04) $ (0.09)
=================== ===================
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No.
123." SFAS No. 148 amends the disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 is effective
for fiscal years ending after December 15, 2002 and is effective for interim
periods beginning after December 15, 2002. The Company's adoption of SFAS No.
148 did not have a material effect on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the disclosures
required in financial statements concerning obligations under certain
guarantees. It also clarifies the requirements related to the recognition of
liabilities by a guarantor at the inception of certain guarantees. The
disclosure requirements of this interpretation were effective on December 31,
2002. We adopted the recognition provisions of the interpretation in the quarter
ended February 28, 2003. The adoption of this interpretation did not impact our
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation provides guidance on: 1) the
F-11
Patriot Scientific Corporation
Summary of Accounting Policies (Continued)
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" (VIEs); and 2)
which business enterprise is the primary beneficiary and when it should
consolidate the VIE. This new model for consolidation applies to entities: 1)
where the equity investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, this interpretation requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. This interpretation is effective
for all new VIEs created or acquired after January 31, 2003. For VIEs created or
acquired prior to February 1, 2003, the provisions of the interpretation must be
applied no later than the beginning of the first interim or annual reporting
period beginning after June 15, 2003. Certain disclosures are effective
immediately. The adoption of this interpretation did not impact our financial
position or results of operations.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement is not expected to have a material effect
on the consolidated financial statements
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this Statement is not expected to have a
material effect on the consolidated financial statements.
F-12
Patriot Scientific Corporation
Notes to Consolidated Financial Statements
1. Continued Existence and Management's Plan
Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our ability to continue as a going concern is
contingent upon our obtaining sufficient financing to sustain our operations. We
incurred a net loss of $3,888,299 and $5,487,051 and negative cash flow from
operations of $1,885,762 and $3,632,534 in the years ended May 31, 2003 and
2002, respectively. At May 31, 2003, we had deficit working capital of
$1,457,003 and cash and cash equivalents of $32,663. We have historically funded
our operations primarily through the issuance of securities and debt financings.
Cash and cash equivalents decreased $55,445 during the year ended May 31, 2003.
We estimate our current cash requirements to sustain our operations through
August 2004 to be $2.1 million. Since we are no longer supporting the
communications product line, we are assuming that there will be no
communications product revenue. We have a note payable to Swartz Private Equity,
LLC ("Swartz") of $635,276 at May 31, 2003 which is due March 1, 2004. We also
have convertible debentures with a group of investors as of May 31, 2003
aggregating $1,165,000 and advances of $50,000 on a convertible debenture that
closed subsequent to May 31, 2003. At the option of the debenture holders, they
may purchase additional debentures up to $1 million at any time during the next
two years as long as the price of our common stock is in excess of $0.20 per
share. During the year ended May 31, 2003, we obtained $120,350 from the sale of
equity to several private investors and $180,000 from short term notes entered
into with a related party. . Subsequent to May 31, 2003, we obtained an
additional $422,500 from the issuance of convertible debentures net of advances
discussed above, $50,100 from the exercise of a warrant, $10,000 from a loan
issued to a related party, and $31,000 from the sale of common stock.
If the optional amounts under the convertible debentures are not raised in
sufficient amounts, then we may not have funds sufficient to meet our cash
requirements. In such circumstances, we may need to secure additional short-term
debt, private placement debt and/or equity financings with individual or
institutional investors. In addition, we may need to make additional cost
reductions if our cash requirements cannot be met from external sources. We
expect that the $2.1 million requirement will be provided by:
o additional debt and/or equity financings; and
o proceeds from the exercise of outstanding stock options and
warrants.
In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have a $400,000
accounts receivable factoring agreement with our bank. As of May 31, 2003 there
was a balance due under the factoring agreement of $3,811.
F-13
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
We anticipate our future revenue to be derived primarily from the sale of
licenses and royalties. To receive this revenue, we may require additional
equipment, fabrication, components and supplies during the next twelve months to
support potential customer requirements and further develop our technologies.
Product introductions such as those currently underway for the Ignite may
require significant product launch, marketing personnel and other expenditures
that cannot be currently estimated. Further, if expanded development is
commenced or new generations of microprocessor technology are accelerated beyond
current plans, additional expenditures we cannot currently estimate, may be
required. It is possible therefore, that higher levels of expenditures may be
required than we currently contemplate resulting from changes in development
plans or as required to support new developments or commercialization activities
or otherwise.
If we are unable to obtain the necessary funds, we could be forced to
substantially curtail or cease operations which would have a material adverse
effect on our business. Further, there can be no assurance that we will be able
to timely receive shareholder approval to increase the number of authorized
shares or that required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on our existing
shareholders. As such, there is substantial doubt about our ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our possible inability to continue as a going concern.
2. Property and Property and equipment consisted of the following:
Equipment
May 31,
-----------------------------------
2003 2002
-----------------------------------------------------------------------------------------------
Computer equipment and software $ 1,660,707 $ 1,660,707
Furniture and fixtures 499,274 499,274
Laboratory equipment 205,594 205,594
------------------ ------------------
2,365,575 2,365,575
Less accumulated depreciation and amortization 2,212,045 2,080,087
------------------ ------------------
Net property and equipment $ 153,530 $ 285,488
-----------------------------------------------------------------------------------------------
Depreciation expense was $131,958 and $211,850
for the years ended May 31, 2003 and 2002.
F-14
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
3. 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. The note had an interest 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. In
April 2003, the Company negotiated an early payment discount and the individual
paid $60,000 to retire this note. The balance of $20,000 was written off to bad
debt expense during the year ended May 31, 2003.
4. Secured Note Payable
On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001, an Addendum to Amended
Secured Promissory Note dated March 12, 2002 and an Antidilution Agreement and
Addendum to Warrants dated March 19, 2003. The amended note, which originally
was to mature on January 9, 2003, has been extended to March 1, 2004 and amounts
outstanding under the note bear interest at the rate of 5% per annum. Per the
antidilution agreement, principal and interest payments are deferred until March
1, 2004.
As part of the consideration for entering into the above amended note, we agreed
to issue warrants to Swartz related to each advance against the note. In
connection with each advance, we issued to Swartz a warrant to purchase a number
of shares of common stock equal to the amount of the advance multiplied by 8.25
at an initial exercise price equal to the lesser of (a) the factor of the
average of the volume weighted average price per share, as defined by Bloomberg
L.P., for each trading day in the period beginning on the date of the previous
advance and ending on the trading day immediately preceding the date of the
current advance multiplied by .70 or (b) the volume weighted average price per
share minus $0.05. In addition, we were obligated under the addendum to the note
to issue to Swartz warrants equal to 20% of the common stock issued between
March 12, 2002 and April 1, 2003 and we are obligated under the antidilution
agreement to issue to Swartz warrants equal to 30% of the common stock issued
subsequent to April 1, 2003 to any parties other than Swartz. In addition, we
agreed to extend the expiration date to December 31, 2006 on certain warrants
that were to expire previous to December 31, 2006. In exchange for these
concessions, Swartz agreed to extend the due date to March 1, 2004 on a note for
$635,276 net of accrued interest and unreserved 20,007,350 shares that have been
reserved for the exercise of warrants for a period the sooner of 1) March 19,
2004, or 2) 90 days after the date on which our common stock exceeds $0.375 for
10 consecutive trading days.
As of May 31, 2003 we issued warrants to purchase up to 18,243,712 shares of our
common stock in accordance with the amended note agreements and antidilution
agreement. The warrants issued were valued using the Black-Scholes pricing model
based on the expected fair value at issuance and the estimated fair value was
also recorded as debt discount.
F-15
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
The note is secured by our assets.
All debt discounts were amortized as additional interest expense over the
initial term of the note payable. As of May 31, 2003, $1,107,238 had been
reflected as debt discount of which $189,516 and $917,722 was amortized to
interest expense during the years ended May 31, 2003 and 2002, respectively.
Advances against the note $1,790,000
Less amount applied against $30 million equity line of credit (227,800)
Less amount applied against $25 million equity line of credit (926,924)
Less debt discount
Total 1,107,238
Amount amortized to expense (1,107,238) --
----------- ----------
Note payable at May 31, 2003 $ 635,276
==========
On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under a $30 million equity line
of credit.
On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first and only put under the $25 million
equity line of credit discussed above
5. 8% Convertible Debentures
Overview. From April 23, 2002 through August 26, 2003, we sold an aggregate of
$2,437,500 of 8% convertible debentures to a group of eleven investors. The
convertible debentures entitle the debenture holder to convert the principal and
unpaid accrued interest into our common stock for two years from the date of
closing. In addition, the debenture holders received warrants exercisable into a
number of our common shares.
Number of Shares Debentures May Be Converted Into. The debentures can be
converted into a number of our common shares at conversion prices that initially
equaled $0.041 to $0.10289 per share.
Resets of Conversion Price and Conversion Shares. A reset date occurs on each
three month anniversary of the closing date of each debenture and on the date
the registration statement becomes effective, October 29, 2002 for the first
$1,000,000 of principal, March 7, 2003 for the second $605,000 of principal and
June 26, 2003 for the third $510,000 of principal. If the volume weighted
average price for our common stock for the ten days previous to the reset date
is less than the conversion price in effect at the time of the reset date, then
the number of common shares issuable to the selling shareholder on conversion
will be increased. If the conversion price is reset, the debenture can be
converted into a number of our common shares based on the following calculation:
the amount of the debenture plus any unpaid accrued interest divided by the
reset conversion price
F-16
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
which shall equal the volume weighted average price for our common stock for the
ten days previous to the reset date. On October 29, 2002, the date the
registration statement for the first $1,000,000 of principal became effective,
the conversion prices were reset to $0.04457 from initial conversion prices
ranging from $0.08616 to $0.10289. On March 7, 2003, the date the registration
statement for the second $605,000 of principal became effective, the conversion
prices were reset to $0.04722 from initial conversion prices ranging from
$0.05126 to $0.0727. On June 26, 2003, the date the registration statement for
the third $510,000 of principal became effective, the conversion prices for
debentures with initial conversion prices of $0.065 will reset to $0.06346.
Warrants. Concurrent with the issuance of the convertible debentures, we issued
to the debenture holders warrants to purchase up to 33,471,953 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at either initial negotiated exercise prices or prices equal to 115% of
the volume weighted average price for our common stock for the ten days previous
to the debenture date. The warrant exercise price is subject to being reset on
each six month anniversary of its issuance.
Options to Purchase Additional Debentures. Subject to the price of our common
stock being equal to or greater than $0.20 per share and a two year limitation,
the debenture holders may purchase additional debentures equal to the value of
their initial debentures. The price at which the optional additional debentures
could be converted would initially equal 115% of the volume weighted average
price for our common stock for the ten days previous to the date on which the
optional additional debentures were closed. The optional additional debentures
would carry the same warrant amounts and reset privileges as the initial
debentures.
Shareholder Approval. We may currently issue more than 20% of our outstanding
shares under the convertible debentures. If we become listed on the NASDAQ Small
Cap Market or NASDAQ National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares. Since we are currently a bulletin
board company, we do not need shareholder approval.
Restrictive Covenants. For a period of 18 months from the date of the
debentures, we are 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; the issuance of any debt or equity securities with a fixed
conversion or exercise price subject to adjustment; and any private equity line
type agreements without obtaining the debenture holders' prior written approval.
Right of First Refusal. The debenture holders have a right of first refusal to
purchase or participate in any equity securities offered by us in any private
transaction which closes on or prior to the date that is two years after the
issue date of each debenture.
Registration Rights. We are responsible for registering the resale of the shares
of our common stock which will be issued on the conversion of the debentures. On
October 29, 2002, a registration
F-17
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
statement covering the first $1,000,000 of debentures was declared effective by
the Securities and Exchange Commission. On March 7, 2003, a registration
statement covering the second $605,000 of debentures was declared effective by
the Securities and Exchange Commission. On June 26, 2003, a registration
statement covering the third $510,000 of debentures was declared effective by
the Securities and Exchange Commission.
The convertible debentures are secured by our assets.
Convertbile debenture dated April 23, 2002 $ 225,000
Convertbile debentures dated June 10, 2002 775,000
Convertbile debenture dated August 23, 2002 175,000
Convertbile debentures dated October 29, 2002 180,000
Convertbile debenture dated December 16, 2002 100,000
Convertbile debenture dated January 24, 2003 150,000
Convertbile debenture dated March 24, 2003 162,500
Convertbile debenture dated April 15, 2003 10,000
Convertbile debenture dated May 20, 2003 187,500
Advances against debenture issued subsequent to May 31, 2003 50,000
Less amounts converted to common stock (800,000)
Less debt discount
Total discounts recorded $ 1,965,000
Amount amortized to expense (624,922)
Amount cancelled on conversion (527,067) (813,011)
------------- ----------------
Convertible debentures at May 31, 2003 401,989
Less current portion 121,879
----------------
Long term portion $ 280,110
================
6. Investment Agreement
$25 Million Equity Line of Credit Agreement
Overview. On September 17, 2001, we entered into an investment agreement with
Swartz. The investment agreement entitles us to issue and sell our common stock
to Swartz for up to an aggregate of $25 million from time to time during a
three-year period following the effective date of the registration statement.
This is also referred to as a put right. We filed a registration statement on
Form S-1 on October 11, 2001 that was declared effective on November 5, 2001 for
15,000,000 shares of our common stock which we issued to Swartz during the
fiscal year ended May 31, 2002. There remains approximately $24 million
available under this line conditioned on us filing one or more additional
registration statements. As of May 31, 2003, we have not filed a statement
requesting the registration of additional shares to put to Swartz under the $25
million equity line of credit.
Put Rights. In order to invoke a put right, we 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, we must give at least ten but not more than twenty
F-18
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
business days advance notice to Swartz of the date on which we intend to
exercise a particular put right, and we must indicate the number of shares of
common stock we intend to sell to Swartz. At our option, we may also designate a
maximum dollar amount of common stock (not to exceed $3 million) which we 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 each of two consecutive ten business day periods beginning on the
business day immediately following the day we invoked the put right.
The price Swartz will pay for each share of common stock sold in a put is equal
to the lesser of (i) the market price for each of the two consecutive ten
business day periods beginning on the business day immediately following the day
we invoked the put right minus $0.10, or (ii) X percent of the market price for
each of the two ten day periods, where, X is equal to 90% if the market price is
below $2.00 and 93% if market price is equal to or greater than $2.00. Market
price is defined as the lowest closing bid price for the common stock during
each of the two consecutive ten business day periods. However, the purchase
price may not be less than the designated minimum per share price, if any, that
we indicated in our notice.
Limitations and Conditions Precedent to Our Put Rights. We may not initiate a
put if, as of the proposed date of such put:
o we have issued shares of our common stock that have been paid
for by Swartz and the amount of proceeds we have received is
equal to the maximum offering amount;
o the registration statement covering the resale of the shares
becomes ineffective or unavailable for use;
o our common stock is not actively trading on the OTC Bulletin
Board, the Nasdaq Small Cap Market, the Nasdaq National
Market, the American Stock Exchange, or the New York Stock
Exchange, or is suspended or delisted with respect to the
trading on such market or exchange.
If any of the following events occur during the pricing period for a put, the
volume accrual shall cease. For the put, the pricing period shall be adjusted to
end 10 business days after the date that we notify Swartz of the event, and any
minimum price per share we specified shall not apply to the put:
o we have announced or implemented a stock split or combination
of our common stock between the advanced put notice date and
the end of the pricing period;
o we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put
notice date and the end of the pricing period;
F-19
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
o we have made a distribution to the holders of our common stock
or of all or any portion of our assets or evidences of
indebtedness between the put notice date and the end of the
pricing period;
o we have consummated a major transaction (including a
transaction, which constitutes a change of control) between
the advance put notice date and the end of the pricing period,
the registration statement covering the resale of the shares
becomes ineffective or unavailable for use, or our stock
becomes delisted for trading on our then primary exchange; or
o we discover the existence of facts that cause us to believe
that the registration statement contains an untrue statement
or omits to state a material fact.
Short Sales. Swartz and its affiliates are prohibited from engaging in short
sales of our 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.
Shareholder Approval. We may currently issue more than 20% of our outstanding
shares under the investment agreement. If we become listed on the Nasdaq Small
Cap Market or Nasdaq National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares. Since we are currently a bulletin
board company, we do not need shareholder approval.
Termination of Investment Agreement. We may also terminate our 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 we have concerning the investment
agreement or any related agreement.
Restrictive Covenants. During the term of the investment agreement and for a
period of two months thereafter, we are 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 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 us in any private transaction which closes
on or prior to two months after the termination of the investment agreement and
a right of participation for any equity securities offered by us in any private
transaction which closes on or prior to two months after the termination of the
investment agreement.
Swartz's Right of Indemnification. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from
F-20
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
any misrepresentations or breaches we made in connection with the investment
agreement, our registration rights agreement, other related agreements, or the
registration statement.
Waiver and Agreement. On March 12, 2002, we entered into an amended waiver and
agreement with Swartz which replaced and superseded all previous waivers and
agreements. This amended waiver and agreement extended the time of the put
beyond twenty days and redefined the price of the put to be the lesser of the
factor of (a) the volume weighted average price per share, as defined by
Bloomberg L.P., for each day of the put multiplied by .70 or (b) the volume
weighted average price per share minus $0.05 multiplied by 20% of the acceptable
daily volume as defined in the waiver. At the discretion of Swartz, the 20%
daily volume limitation could be increased up to 30% of the daily volume. In
addition, the amended waiver and agreement increased the intended put share
amount for the first put to 14,100,000 shares, which is the total number of
shares we had registered so far under the $25 million equity line of credit. On
May 30, 2002 we closed the first put under the $25 million equity line of credit
by applying the proceeds of $926,924 to the secured note payable discussed in
Note 4.
Warrants. In connection with closing the $25 million equity line of credit, we
issued to Swartz a commitment warrant to purchase 900,000 shares of our common
stock. This warrant was valued on the issuance date using the Black-Scholes
pricing model and the value was recorded as a debt discount.
7. Stockholders' Equity (Deficit)
Private Offerings and Warrants
During fiscal 2003, 3,765,266 restricted shares of common stock were issued to a
group of individual investors for $120,350; 2,000,000 shares of common stock
were issued to a consultant in exchange for services valued at $110,000; and
400,000 shares valued at $16,000 were issued to a former executive of the
company as partial settlement of a legal action. The fair value (as determined
by the quoted market price) for the consulting services and legal settlement
were recorded as additional general and administrative expense during the year
ended May 31, 2003. Also, during fiscal 2003, the Company issued 380,000 shares
of common stock to a vendor in satisfaction of $22,800 of trade accounts
payable.
At May 31, 2003, the Company had warrants outstanding to purchase 58,992,468
common shares at exercise prices ranging from $0.033 to $1.12 per share expiring
beginning in 2004 through 2008.
During fiscal 2003, the Company issued warrants to purchase 35,005,013 common
shares of stock at exercise prices ranging from $0.04 to $0.065 per share. Of
this amount, warrants to purchase 5,355,562 common shares of stock were issued
to Swartz related to the Addendum to Amended Secured Promissory Note dated March
12, 2002 and an Antidilution Agreement and Addendum to Warrants dated March 19,
2003 discussed in Note 4, warrants to purchase 28,649,451 common
F-21
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
shares of stock were issued to a group of eleven individual and institutions
investors related to the 8% Convertible Debentures discussed in Note 5, and
warrants to purchase 1,000,000 common shares of stock were issued to two
consultants.
During fiscal 2002, the Company issued warrants to purchase 23,197,201 common
shares of stock at exercise prices ranging from $0.048 to $0.54 per share. Of
this amount, warrants to purchase 3,113,302 common shares of stock were issued
to Swartz related to a $30 million investment agreement, a warrant to purchase
900,000 common shares of stock was issued to Swartz related to the $25 million
investment agreement, warrants to purchase 16,519,090 common shares of stock
were issued to Swartz related to the 5% Secured Note Payable of which 3,630,940
were cancelled, a warrant to purchase 2,514,809 common shares of stock was
issued to Lincoln Ventures LLC related to the first funding under the 8%
Convertible Debenture and a warrant to purchase 150,000 common shares of stock
was issued to a consultant. See Notes 4, 5 and 6 for further discussion.
Also, during fiscal 2002, the Company's shareholders approved an increase in the
authorized number of common shares from 100,000,000 to 200,000,000.
1992 Incentive Stock Option Plan ("ISO")
The Company has an ISO Plan which expired March 20, 2002. The ISO Plan provided
for grants to either full or part time employees, at the discretion of the board
of directors, to purchase common stock of the Company at a price not less than
the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share could not be less than
110 percent of the fair market value of the share on the date of grant. Any
options granted under the ISO Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). At
May 31, 2003, options to purchase up to 17,500 shares of common stock remained
outstanding and will expire in 2005.
1992 Non-Statutory Stock Option Plan("NSO")
The Company has an NSO Plan which expired March 20, 2002. The NSO Plan provided,
at the discretion of the board of directors, for grants to either full or part
time employees, directors and consultants of the Company to purchase common
stock of the Company at a price not less than the fair market value of the
shares on the date of grant. Any options granted under the NSO Plan must be
exercised within ten years of the date they were granted. At May 31, 2003,
options to purchase up to 50,000 shares of common stock remained outstanding and
will expire in 2005.
1996 Stock Option Plan
Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was
amended by the Stockholders in December 1997, expiring March 24, 2006, reserving
for issuance 4,000,000 shares of the Company's common stock. The 1996 Stock
Option Plan provides, at the discretion of the board of directors, for grants to
either full or part time employees, directors and consultants of
F-22
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
the Company to purchase common stock of the Company at a price not less than the
fair market value on the date of grant for incentive stock options or not less
than 85% of the fair market value on the date of grant for non-qualified stock
options. In the case of a significant stockholder, the option price of the share
is not less than 110 percent of the fair market value of the shares on the date
of grant. Any option granted under the 1996 Stock Option Plan must be exercised
within ten years of the date they are granted (five years in the case of a
significant stockholder). During the fiscal years ended May 31, 2003 and 2002,
the Company granted options to purchase 340,500 and 1,000,000 shares of stock at
market value.
2001 Stock Option Plan
Effective February 2001, the Company adopted the 2001 Stock Option Plan,
expiring February 21, 2011, reserving for issuance 3,000,000 shares of the
Company's common stock. The 2001 Stock Option Plan provides, at the discretion
of the board of directors, for grants to either full or part time employees,
directors and consultants of the Company to purchase common stock of the Company
at a price not less than the fair market value on the date of grant for
incentive stock options or not less than 85% of the fair market value on the
date of grant for non-qualified stock options. In the case of a significant
stockholder, the option price of the share is not less than 110 percent of the
fair market value of the shares on the date of grant. Any option granted under
the 2001 Stock Option Plan must be exercised within ten years of the date they
are granted (five years in the case of a significant stockholder). During the
fiscal years ended May 31, 2003 and 2002, the Company granted options to
purchase 875,000 and 3,145,000 shares of stock at market value.
During fiscal 2000, the Company repriced a stock option to purchase 36,000
shares of common stock at an exercise prices originally of $0.40 using fixed
accounting rules in effect at the time. The stock option was repriced to an
exercise price of $.32 and no additional compensation expense was recorded.
Subsequent to the repricing, the Company adopted accounting principles generally
accepted in the United States of America that require stock options that have
been modified to reduce the exercise price to be accounted for using variable
accounting. 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 May 31, 2003, 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 option is exercised,
forfeited or expires unexercised.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net loss and net loss per share as if
compensation costs for the Company's stock option plans and other stock awards
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock award at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the three years ended May 31, 2003, 2002,
and 2001 respectively: dividend yield of zero percent for all years; expected
volatility of 100 to 120, 90 and
F-23
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
90 percent; risk-free interest rates of 2.3 to 4.3, 3.5 to 4.8, and 4.8 to 6.4
percent; and expected lives of 3 to 5 years for all years.
A summary of the status of the Company's stock option plans and warrants as of
May 31, 2003, and 2002 and changes during the years ending on those dates is
presented below:
Options Warrants
--------------------------------- -------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, June 1, 2001 2,577,824 0.92 4,961,463 0.42
- ---------------------------------------------------------------------------------------------------------------------------
Granted 4,145,000 0.21 23,197,201 0.09
Cancelled (2,281,419) 0.67 (3,630,940) 0.10
Exercised (191,666) 0.32 (50,000) 0.25
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2002 4,249,739 $ 0.39 24,477,724 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------
Granted 1,215,500 0.05 35,005,013 0.05
Cancelled (411,239) 0.81 (490,269) 0.30
Exercised - 0 - -
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2003 5,054,000 $ 0.28 58,992,468 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2002 2,418,072 $ 0.48 24,477,724 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2003 4,138,633 $ 0.29 57,992,468 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options and warrants
granted during the year ended May 31, 2002 $ 0.07 $ 0.11
Weighted average fair value of options and warrants
granted during the year ended May 31, 2003 $ 0.04 $ 0.05
- ---------------------------------------------------------------------------------------------------------------------------
Included in the above table are certain options for which vesting is contingent
based on various future performance measures.
The following table summarizes information about stock options and warrants
outstanding at May 31, 2003:
F-24
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Outstanding Exercisable
---------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
Options
$ 0.0425-0.059 850,000 4.74 $ 0.05 525,000 $ 0.04
0.07-0.09 1,365,500 3.89 0.08 1,213,467 0.08
0.11-0.1325 1,885,000 3.36 0.11 1,530,000 0.11
0.32-0.69 291,000 1.53 0.64 291,000 0.64
1.16-1.325 662,500 2.04 1.26 579,166 1.25
- -----------------------------------------------------------------------------------------------------
$ 0.0425-1.325 5,054,000 3.46 $ 0.28 4,138,633 $ 0.29
Warrants
$ 0.033-0.495 38,464,610 4.07 $ 0.04 38,464,610 $ 0.04
0.05-0.0592 8,013,741 3.84 0.06 7,013,741 0.06
0.0616-0.0715 9,806,840 3.76 0.07 9,806,840 0.07
0.25-0.40 2,607,277 1.36 0.28 2,607,277 0.28
0.59-1.12 100,000 1.64 0.68 100,000 0.68
- -----------------------------------------------------------------------------------------------------
$ 0.033-1.12 58,992,468 3.86 $ 0.06 57,992,468 $ 0.06
8. Net Loss Per Share
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The Company's net losses for the periods presented cause the
inclusion of potential common stock instruments outstanding to be antidilutive
and, therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. During the years ended May 31, 2003 and 2002, common
stock options and warrants convertible or exercisable into approximately
64,046,468 and 28,727,463 shares of common stock were not included in diluted
loss per share as the effect was antidilutive due to the Company recording
losses in each of those years.
F-25
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
9. Income Taxes The net deferred tax asset recorded
and its approximate tax effect consisted of the
following:
May 31,
----------------------------------------
2003 2002
------------------------------------------------------------------------------------
Net operating loss carryforwards $ 12,073,000 $ 11,030,000
Purchased technology 420,000 470,000
Depreciation and amortization 1,607,000 1,754,000
Other, net 191,000 192,000
-------------------------------------------------------------- --------------------
14,291,000 13,446,000
Valuation allowance 14,291,000 13,446,000
-------------------------------------------------------------- --------------------
Net deferred tax asset $ - $ -
------------------------------------------------------------------------------------
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
May 31, 2003 2002
- ---------------------------------------------------------------------------------------------------------
Federal income tax benefit computed at the Federal statutory rate $ (1,322,000) $ (1,866,000)
State income tax benefit net of Federal benefit (139,000) (211,000)
Other- permanent differences 521,000 502,000
Expiration of state net operating loss carryforwards 95,000 118,000
Change in valuation allowance 845,000 1,457,000
- ---------------------------------------------------------------------------------------------------------
Income tax benefit $ - $ -
- ---------------------------------------------------------------------------------------------------------
As of May 31, 2003 and 2002, valuation allowances equal to the net deferred tax
asset recognized have been recorded, as Management has not determined that it is
more likely than not that the deferred tax asset will be realized. No current
tax provision was recorded for fiscal 2003 and 2002 due to reported losses. The
valuation allowance increased $845,000 for the year ended May 31, 2003 and
$1,457,00 for the year ended May 31, 2002.
At May 31, 2003, the Company has federal net operating loss carryforwards of
approximately $31,814,000 that expire through 2022 and are subject to certain
limitations under the Internal
F-26
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Revenue Code of 1986, as amended. As such, certain federal net operating loss
carryforwards may expire unused.
At May 31, 2003, the Company has state net operating loss carryforwards of
approximately $20,927,000 that expire through 2010. The state of California has
suspended the utilization of net operating losses for 2002 and 2003.
10. Profit-Sharing Plan
Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the Company's discretion, the
Company may match contributions at 20% of the employee's contribution up to 6%
of the employee's salary. The Company contributions are vested 20% per year
beginning with the first year of service. The Company made no matching
contribution in fiscal 2003 or 2002.
11. Commitments and Contingencies
In January 1999, we were sued in the Superior Court of San Diego County,
California by the Fish Family Trust, a co-inventor of the original ShBoom
technology. The suit also named as defendants nanoTronics and Gloria Felcyn on
behalf of the Falk Family Trust. The suit sought a judgment for damages, a
rescission of the Technology Transfer Agreement and a restoration of the
technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish Family
Trust. In November 2000, the judge issued a summary ruling in favor of the
defendants on all counts. The Fish Family Trust filed an appeal in January 2001.
In June 2003, the Appellate Court confirmed the trial court's ruling, thereby,
bringing the dispute to a favorable conclusion.
The Company is obligated under employment contracts with certain key employees
to pay severance upon termination under certain defined conditions. Generally,
unless relieved of their duties for cause, the executive officers are entitled
to severance pay equal to four months of their then current monthly salary. In
the case of a change in control, generally, the executive officers are entitled
to severance pay equal to twelve months of their then current monthly salary
unless they continue to work for the new controlling interest in the same
function as previous to the change.
The Company granted a lien and security interest in substantially all of its
assets to the bank under the accounts receivable factoring line and to investors
under its notes payable and convertible debentures.
F-27
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
The Company has a non-cancellabe operating lease for its office and
manufacturing facilities located in San Diego, California.
Future minimum lease payments required under the operating lease are as follows:
Years ending May 31,
- -----------------------------------------------------------------------------------------------
Gross Sublease Net
Payments Income Payments
2004 $ 129,250 $ 68,850 $ 60,400
2005 135,454 70,470 64,984
2006 141,658 72,540 69,118
2007 23,782 12,150 11,632
- -----------------------------------------------------------------------------------------------
Total minimum lease payments $ 430,144 $ 224,010 $ 206,134
- -----------------------------------------------------------------------------------------------
Rent expense for fiscal 2003 and 2002 was $189,423 and $147,373, respectively.
The Company has one capital lease at May 31, 2003.
Future minimum lease payments are as follows:
Year ending May 31,
2004 $ 9,562
2005 9,562
2006 2,391
- ------------------------------------------------------------------
Total minimum lease payments 21,515
Amount representing interest 4,784
- ------------------------------------------------------------------
Present value of minimum lease payments 16,731
Total obligation 16,731
Less current portion (6,405)
- ------------------------------------------------------------------
Long-term portion $ 10,326
- ------------------------------------------------------------------
Capital leases included in fixed assets at May 31, 2003 and 2002, were $11,803
and $20,135, net of an allowance for depreciation of $13,192 and $4,860.
Depreciation expense related to the capitalized lease was $8,332 and $4,860 for
the years ended May 31, 2003 and 2002.
12. Segment Information
Export Sales
The Company is engaged in one business segment, the development and marketing of
microprocessor technology related products and licenses. Telecommunication
products have
F-28
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
reached the end of their life cycles and no longer provide any significant
sales. During the fiscal years ended May 31, 2003 and 2002, the Company's
product sales of high technology computer products and licenses were $31,340 and
$9,625 and telecommunication products and licenses were $92,563 and $349,184.
For the purpose of allocating revenues by geographic location, the Company uses
the physical location of its customers as its basis. During the fiscal years
ended May 31, 2003 and 2002, the Company's sales by geographic location
consisted of the following:
2003 2002
------------- -------------
Domestic sales $ 113,000 $ 355,000
Foreign sales:
Europe 11,000 4,000
North America - -
Asia - -
--------------------------------
Total foreign sales 11,000 4,000
--------------------------------
Total net product sales $ 124,000 $ 359,000
================================
The Company has no foreign assets.
Sales to Major Customers
During the fiscal years ended May 31, 2003 and 2002, revenues from significant
customers consisted of the following:
2003 2002
------------------------------- ---------------------------------
Customer Sales Percent Sales Percent
--------------- ------------- ------------------ ------------
A $ 43,000 34.3% $ - -
B 23,000 18.6% - -
C 15,000 11.9% - -
D 15,000 11.9% 151,000 42.0%
E - - 59,000 16.4%
F-29
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
13. Related Party Transactions
During fiscal year 2002, the Company contracted with a company, which was owned
by the daughter of our previous President, Chairman and CEO, for web site
development, marketing support and other various services. The Company paid
$70,292 in fiscal year 2002 to the related party for these services. No such
related party transactions occurred during fiscal year 2003.
14. Subsequent Events
Subsequent to year end, we concluded additional fundings of our 8% Convertible
Debentures. We received advances against these closings of $50,000 as of May 31,
2003 and the balance of $295,000 subsequent to year end from a group of four
investors. In conjunction with the debentures we also issued warrants to
purchase up to 7,870,191 shares of our common stock at initial exercise prices
of $0.03 to $0.065 per share, subject to being reset at each six month
anniversary to the closings.
F-30
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2003 2003
------------------ ------------------
(Unaudited)
ASSETS (Notes 4 and 5)
Current assets:
Cash and cash equivalents $ 7,288 $ 32,663
Accounts receivable, net of allowance
of $10,000 for uncollectible accounts 5,763 3,866
Prepaid expenses 119,900 93,030
------------------ ------------------
Total current assets 132,951 129,559
Property and equipment, net 132,245 153,530
Other assets, net 41,121 53,220
Patents and trademarks, net of accumulated amortization of $535,525
and $522,948 118,616 128,925
------------------ ------------------
$ 424,933 $ 465,234
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Secured note payable (Note 4) $ 635,276 $ 635,276
Current portion of 8% convertible debentures, net of debt
discount of $120,956 and $103,121 (Note 5) 159,932 121,879
Secured notes payable to a related party 200,354 180,000
Accounts payable 364,055 397,180
Accrued liabilities 229,610 245,822
Current portion of capital lease obligation 6,775 6,405
------------------ ------------------
Total current liabilities 1,596,002 1,586,562
8% Convertible debentures, net of debt discount of $464,272
and $709,890 (Note 5) 235,728 280,110
Long term portion of capital lease obligation 8,487 10,326
Commitments and contingencies (Note 7)
Stockholders' deficit: (Notes 4,5,6 and 7)
Preferred stock, $.00001 par value; 5,000,000 shares
authorized none outstanding - -
Common stock, $.00001 par value; 200,000,000 shares
authorized; issued and outstanding 123,518,272 and 106,547,807 1,235 1,066
Additional paid-in capital 45,430,068 44,281,210
Accumulated deficit (46,846,587) (45,694,040)
------------------ ------------------
Total stockholders' deficit (1,415,284) (1,411,764)
------------------ ------------------
$ 424,933 $ 465,234
================== ==================
See accompanying summary of accounting policies and notes to unaudited
consolidated financial statements.
F-31
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------------
August 31, August 31,
2003 2002
----------------- -----------------
Net sales $ 11,240 $ 39,889
Cost of sales 6,213 4,909
----------------- -----------------
Gross profit (loss) 5,027 34,980
Operating expenses:
Research and development 149,122 209,287
Selling, general and
administrative 351,470 487,101
----------------- -----------------
500,592 696,388
----------------- -----------------
Operating loss (495,565) (661,408)
----------------- -----------------
Other income (expenses):
Interest income - 175
Interest expense (656,982) (282,208)
----------------- -----------------
(656,982) (282,033)
----------------- -----------------
Net loss $ (1,152,547) $ (943,441)
================= =================
Basic and diluted loss
per common share $ (0.01) $ (0.01)
================= =================
Weighted average number of
common shares outstanding
during the period (Note 1) 113,846,895 81,465,757
================= =================
See accompanying summary of accounting policies and notes to unaudited
consolidated financial statements.
F-32
PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
--------------------------------------------------
August 31, 2003 August 31, 2002
------------------------ -----------------------
Decrease in Cash and Cash Equivalents
Operating activities:
Net loss $ (1,152,547) $ (943,441)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 33,863 53,695
Non-cash interest expense related to convertible
debentures, notes payable and warrants 618,067 254,367
Changes in:
Accounts receivable (5,897) (13,688)
Prepaid expenses and other assets (14,771) 77,230
Accounts payable and accrued liabilities (17,953) (93,174)
--------------------------------------------------
Net cash used in operating activities (539,238) (665,011)
--------------------------------------------------
Investing activities:
--------------------------------------------------
Purchase of property, equipment and patents (2,269) (11,376)
--------------------------------------------------
Financing activities:
Proceeds from the issuance of short term notes payable 10,000 -
Proceeds from the issuance of convertible debentures 422,500 592,000
Proceeds from the issuance of common stock 31,000 -
Principal payments for capital lease obligations (1,468) (1,174)
Proceeds from sales of accounts receivable 4,000 11,877
Proceeds from exercise of common stock warrants 50,100 -
------------------------ -----------------------
Net cash provided by financing activities 516,132 602,703
--------------------------------------------------
Net decrease in cash and cash equivalents (25,375) (73,684)
Cash and cash equivalents, beginning of period 32,663 88,108
--------------------------------------------------
Cash and cash equivalents, end of period $ 7,288 $ 14,424
--------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 5,005 $ 3,172
Common stock issued on conversion of debentures,
notes payable and accrued interest $ 677,642 $ -
Interest expense recorded on exercise of warrant $ 35,618 $ -
Debt discount $ 354,667 $ 1,005,581
Debt discount cancelled $ 400,279 $ -
-----------------------------------------------
See accompanying summary of accounting policies and notes to unaudited
consolidated financial statements.
F-33
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Patriot Scientific Corporation
("Patriot") 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 accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with our audited consolidated financial statements
and notes thereto included in Form 10-K for the year ended May 31, 2003.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
month period are not necessarily indicative of the results that may be expected
for the year.
Loss Per Share
We follow Statement 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 73,951,979 and
42,515,180 for the three months ended August 31, 2003 and 2002, respectively,
were not included in diluted loss per share for the periods as the effect was
antidilutive due to our recording losses in each of those periods. See Notes 5
and 7 for discussion of commitments to issue additional shares of common stock
and warrants.
Stock Options
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and disclosure," require the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock
F-34
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
option at the grant date by using the Black-Scholes option-pricing model. SFAS
No. 148 also provides for alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The Company has elected to continue to account for stock based
compensation under APB No. 25.
The Company applies SFAS No. 123 in valuing options granted to consultants and
estimates the fair value of such options using the Black-Scholes option-pricing
model. The fair value is recorded as consulting expense as services are
provided. Options granted to consultants for which vesting is contingent based
on future performance are measured at their then current fair value at each
period end, until vested.
Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:
Three Months Ended
-----------------------------------------
August 31, August 31,
2003 2002
- -----------------------------------------------------------------------------
Net loss as reported $ (1,152,547) $ (943,441)
Compensation expense (85,674) (144,423)
------------------- -------------------
Net loss pro forma $ (1,238,221) $ (1,087,864)
=================== ===================
As reported per share
Basic and diluted loss $ (0.01) $ (0.01)
=================== ===================
Pro forma per share
Basic and diluted loss $ (0.01) $ (0.01)
=================== ===================
Sale of Accounts Receivable
We follow SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125. SFAS
No. 140 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. A $400,000
factoring line we established with a bank enables us to sell selected accounts
receivable invoices to the bank with full recourse against us. These
transactions qualify for a sale of assets since (1) we have transferred all of
our rights, 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) we have no effective control over the selected
accounts receivable invoices since we are not entitled to or obligated to
repurchase or redeem the invoices before their maturity and we do not have the
ability to unilaterally cause the bank to return the invoices. Under SFAS
No.140, 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 three months of
fiscal 2004, we sold $4,000 of our accounts receivable to a bank under the
F-35
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
factoring agreement for $3,200. Pursuant to the provisions of SFAS No. 140, we
reflected the transactions as sales of assets and established a receivable from
the bank for the retained amount less the costs of the transactions 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 invoices sold to the bank less
1% of the total invoices 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 August 31, 2003, there were no qualifying accounts receivable
invoices available to factor resulting in no balance outstanding under the
factoring line and $400,000 remaining available for future factoring of accounts
receivable invoices.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not impact our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this statement did not impact our financial
position or results of operations.
3. CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our ability to continue as a going concern is
contingent upon our obtaining sufficient financing to sustain our operations. We
incurred a net loss of $1,152,547, $3,888,299 and $5,487,051 and negative cash
flow from operations of $539,238, $1,885,762 and $3,632,534 in the three months
ended August 31, 2003 and the years ended May 31, 2003 and 2002, respectively.
At August 31, 2003, we had deficit working capital of $1,463,051 and cash and
cash equivalents of $7,288. We have historically funded our operations primarily
through the issuance of securities and debt
F-36
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
financings. Cash and cash equivalents decreased $25,375 during the three months
ended August 31, 2003.
We estimate our current cash requirements to sustain our operations for the next
twelve months through August 2004 to be $2.1 million. Since we are no longer
supporting the communications product line, we are assuming that there will be
no communications product revenue. We have a note payable to Swartz Private
Equity, LLC ("Swartz") of $635,276 at August 31, 2003 which is due March 1,
2004. We also have convertible debentures with a group of investors as of August
31, 2003 aggregating $853,388 and advances of $127,500 on a convertible
debenture that closed subsequent to August 31, 2003. At the option of the
debenture holders, they may purchase additional debentures up to $1 million at
any time during the next two years as long as the price of our common stock is
in excess of $0.20 per share. During the first three months ended August 31,
2003, we obtained $31,000 from the sale of equity to several private investors,
$50,100 from the exercise of a warrant and $10,000 from short term notes entered
into with a related party. Subsequent to August 31, 2003, we obtained an
additional $9,440 from the sale of equity to several private investors and
$187,500 from the issuance of additional convertible debentures net of advances
discussed above.
If the optional amounts under the convertible debentures are not raised in
sufficient amounts, then we may not have funds sufficient to meet our cash
requirements. In such circumstances, we may need to secure additional short-term
debt, private placement debt and/or equity financings with individual or
institutional investors. In addition, we may need to make additional cost
reductions if our cash requirements cannot be met from external sources. We
expect that the $2.1 million requirement will be provided by:
o additional debt and/or equity financings; and
o proceeds from the exercise of outstanding stock options and
warrants.
In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have remaining a
$400,000 accounts receivable factoring agreement with our bank; however, we have
no eligible accounts receivable to factor as of August 31, 2003.
We anticipate our future revenue to be derived primarily from the sale of
licenses and royalties. To receive this revenue, we may require additional
equipment, fabrication, components and supplies during the next twelve months to
support potential customer requirements and further develop our technologies.
Product introductions such as those currently underway for the Ignite may
require significant product launch, marketing personnel and other expenditures
that cannot be currently estimated. Further, if expanded development is
commenced or new generations of microprocessor technology are accelerated beyond
current plans, additional expenditures we cannot currently estimate, may be
required. It is possible therefore, that higher levels of expenditures may be
required than we currently contemplate resulting from changes in
F-37
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
development plans or as required to support new developments or
commercialization activities or otherwise.
If we are unable to obtain the necessary funds, we could be forced to
substantially curtail or cease operations which would have a material adverse
effect on our business. Further, there can be no assurance that we will be able
to timely receive shareholder approval to increase the number of authorized
shares or that required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on our existing
shareholders. As such, there is substantial doubt about our ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our possible inability to continue as a going concern.
4. SECURED NOTE PAYABLE
On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001 and an Addendum to Amended
Secured Promissory Note dated March 12, 2002. The amended note, which originally
was to mature on April 9, 2003, has been extended to March 1, 2004 and amounts
outstanding under the note bear interest at the rate of 5% per annum. Per the
addendum to the amended note, principal and interest payments are deferred until
March 1, 2004.
As part of the consideration for entering into the above amended note, we agreed
to issue warrants to Swartz related to each advance against the note. In
connection with each advance, we issued to Swartz a warrant to purchase a number
of shares of common stock equal to the amount of the advance multiplied by 8.25
at an initial exercise price equal to the lesser of (a) the factor of the
average of the volume weighted average price per share, as defined by Bloomberg
L.P., for each trading day in the period beginning on the date of the previous
advance and ending on the trading day immediately preceding the date of the
current advance multiplied by .70 or (b) the volume weighted average price per
share minus $0.05. In addition, we were obligated under the addendum to the note
to issue to Swartz warrants equal to 20% of the common stock issued between
March 12, 2002 and April 1, 2003 and we are obligated under the antidilution
agreement to issue to Swartz warrants equal to 30% of the common stock issued
subsequent to April 1, 2003 to any parties other than Swartz. In addition, we
agreed to extend the expiration date to December 31, 2006 on certain warrants
that were to expire previous to December 31, 2006. In exchange for these
concessions, Swartz agreed to extend the due date to March 1, 2004 on a note for
$635,276 net of accrued interest and unreserved 20,007,350 shares that have been
reserved for the exercise of warrants for a period the sooner of 1) March 19,
2004, or 2) 90 days after the date on which our common stock exceeds $0.375 for
10 consecutive trading days.
As of August 31, 2003 we issued warrants to purchase up to 18,437,045 shares of
our common stock in accordance with the amended note agreements and antidilution
agreement. The warrants
F-38
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount.
The note is secured by our assets.
All debt discounts were amortized as additional interest expense over the term
of the note payable. As of August 31, 2003, $1,107,238 had been reflected as
debt discount which was amortized to interest expense during the previous fiscal
years.
Advances against the note $1,790,000
Less amount applied against $30 million equity line of credit (227,800)
Less amount applied against $25 million equity line of credit (926,924)
-
Less debt discount
Total 1,107,238
Amount amortized to expense (1,107,238) -
----------- -
Note payable at August 31, 2003 $ 635,276
==========
On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under the $30 million equity line
of credit discussed below.
On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first and only put under the $25 million
equity line of credit discussed below.
5. 8% CONVERTIBLE DEBENTURES
Overview. From April 23, 2002 through August 31, 2003, we sold an aggregate of
$2,310,000 of 8% convertible debentures to a group of eleven investors. In
addition, at August 31, 2003, we have received advances totaling $127,500
against a convertible debenture that closed subsequent to the quarter. The
convertible debentures entitle the debenture holder to convert the principal and
unpaid accrued interest into our common stock for two years from the date of
closing. In addition, the debenture holders received warrants exercisable into a
number of our common shares.
Number of Shares Debentures May Be Converted Into. The debentures can be
converted into a number of our common shares at conversion prices that initially
equaled $0.0172 to $0.10289 per share.
Resets of Conversion Price and Conversion Shares. A reset date occurs on each
three month anniversary of the closing date of each debenture and on the date
the registration statement becomes effective, October 29, 2002 for the first
$1,000,000 of principal, March 7, 2003 for the second $605,000 of principal and
June 26, 2003 for the third $510,000 of principal. If the volume weighted
average price for our common stock for the ten days previous to the reset date
is less than the conversion price in effect at the time of the reset date, then
the number of common shares issuable
F-39
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
to the selling shareholder on conversion will be increased. If the conversion
price is reset, the debenture can be converted into a number of our common
shares based on the following calculation: the amount of the debenture plus any
unpaid accrued interest divided by the reset conversion price which shall equal
the volume weighted average price for our common stock for the ten days previous
to the reset date. On October 29, 2002, the date the registration statement for
the first $1,000,000 of principal became effective, the conversion prices were
reset to $0.04457 from initial conversion prices ranging from $0.08616 to
$0.10289. On March 7, 2003, the date the registration statement for the second
$605,000 of principal became effective, the conversion prices were reset to
$0.04722 from initial conversion prices ranging from $0.05126 to $0.0727. On
June 26, 2003, the date the registration statement for the third $510,000 of
principal became effective, the conversion prices for debentures with initial
conversion prices of $0.065 will reset to $0.06346.
Warrants. Concurrent with the issuance of the convertible debentures, we issued
to the debenture holders warrants to purchase up to 42,011,196 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at initial exercise prices equal to 115% of the volume weighted average
price for our common stock for the ten days previous to the debenture date. The
warrant exercise price is subject to being reset on each six month anniversary
of its issuance.
Options to Purchase Additional Debentures. Subject to the price of our common
stock being equal to or greater than $0.20 per share and a two year limitation,
the debenture holders may purchase additional debentures equal to the value of
their initial debentures. The price at which the optional additional debentures
could be converted would initially equal 115% of the volume weighted average
price for our common stock for the ten days previous to the date on which the
optional additional debentures were closed. The optional additional debentures
would carry the same warrant amounts and reset privileges as the initial
debentures.
Shareholder Approval. We may currently issue more than 20% of our outstanding
shares under the convertible debentures. If we become listed on the NASDAQ Small
Cap Market or NASDAQ National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares. Since we are currently a bulletin
board company, we do not need shareholder approval.
Restrictive Covenants. For a period of 18 months from the date of the
debentures, we are 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; the issuance of any debt or equity securities with a fixed
conversion or exercise price subject to adjustment; and any private equity line
type agreements without obtaining the debenture holders' prior written approval.
Right of First Refusal. The debenture holders have a right of first refusal to
purchase or participate in any equity securities offered by us in any private
transaction which closes on or prior to the date that is two years after the
issue date of each debenture.
F-40
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Registration Rights. We are responsible for registering the resale of the shares
of our common stock which will be issued on the conversion of the debentures. On
October 29, 2002, a registration statement covering the first $1,000,000 of
debentures was declared effective by the Securities and Exchange Commission. On
March 7, 2003, a registration statement covering the second $605,000 of
debentures was declared effective by the Securities and Exchange Commission. On
June 26, 2003, a registration statement covering the third $510,000 of
debentures was declared effective by the Securities and Exchange Commission.
The convertible debentures are secured by our assets.
Convertbile debenture dated April 23, 2002 $ 225,000
Convertbile debentures dated June 10, 2002 775,000
Convertbile debenture dated August 23, 2002 175,000
Convertbile debentures dated October 29, 2002 180,000
Convertbile debenture dated December 16, 2002 100,000
Convertbile debenture dated January 24, 2003 150,000
Convertbile debenture dated March 24, 2003 162,500
Convertbile debenture dated April 15, 2003 10,000
Convertbile debenture dated May 20, 2003 187,500
Convertbile debenture dated June 9, 2003 150,000
Convertbile debentures dated August 1, 2003 75,000
Convertbile debenture dated August 5, 2003 120,000
Advances against debenture issued subsequent to August 31, 2003 127,500
Less amounts converted to common stock (1,456,611)
Less debt discount
Total discounts recorded $ 2,310,000
Amount amortized to expense (797,425)
Amount cancelled on conversion (927,346) (585,229)
------------- -------------------
Convertible debentures at August 31, 2003 395,660
Less current portion 159,932
-------------------
Long term portion $ 235,728
===================
6. INVESTMENT AGREEMENT
$25 Million Equity Line of Credit Agreement
Overview. On September 17, 2001, we entered into an investment agreement with
Swartz. The investment agreement entitles us to issue and sell our common stock
to Swartz for up to an aggregate of $25 million from time to time during a
three-year period following the effective date of the registration statement.
This is also referred to as a put right. We filed a registration statement on
Form S-1 on October 11, 2001 that was declared effective on November 5, 2001 for
15,000,000 shares of our common stock which we issued to Swartz during the
fiscal year ended May 31, 2002. There remains approximately $24 million
available under this line conditioned on us filing one or more additional
registration statements. As of August 31, 2003, we have not filed a statement
requesting the registration of additional shares to put to Swartz under the $25
million equity line of credit.
F-41
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Put Rights. In order to invoke a put right, we 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, we must give at least ten but not more than twenty business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right, and we must indicate the number of shares of common stock we intend
to sell to Swartz. At our option, we may also designate a maximum dollar amount
of common stock (not to exceed $3 million) which we 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 each of two
consecutive ten business day periods beginning on the business day immediately
following the day we invoked the put right.
The price Swartz will pay for each share of common stock sold in a put is equal
to the lesser of (i) the market price for each of the two consecutive ten
business day periods beginning on the business day immediately following the day
we invoked the put right minus $0.10, or (ii) X percent of the market price for
each of the two ten day periods, where, X is equal to 90% if the market price is
below $2.00 and 93% if market price is equal to or greater than $2.00. Market
price is defined as the lowest closing bid price for the common stock during
each of the two consecutive ten business day periods. However, the purchase
price may not be less than the designated minimum per share price, if any, that
we indicated in our notice.
Limitations and Conditions Precedent to Our Put Rights. We may not initiate a
put if, as of the proposed date of such put:
o we have issued shares of our common stock that have been paid for by
Swartz and the amount of proceeds we have received is equal to the
maximum offering amount;
o the registration statement covering the resale of the shares becomes
ineffective or unavailable for use;
o our common stock is not actively trading on the OTC Bulletin Board, the
Nasdaq Small Cap Market, the Nasdaq National Market, the American Stock
Exchange, or the New York Stock Exchange, or is suspended or delisted
with respect to the trading on such market or exchange.
If any of the following events occur during the pricing period for a put, the
volume accrual shall cease. For the put, the pricing period shall be adjusted to
end 10 business days after the date that we notify Swartz of the event, and any
minimum price per share we specified shall not apply to the put:
o we have announced or implemented a stock split or combination
of our common stock between the advanced put notice date and
the end of the pricing period;
F-42
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
o we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put
notice date and the end of the pricing period;
o we have made a distribution to the holders of our common stock
or of all or any portion of our assets or evidences of
indebtedness between the put notice date and the end of the
pricing period;
o we have consummated a major transaction (including a
transaction, which constitutes a change of control) between
the advance put notice date and the end of the pricing period,
the registration statement covering the resale of the shares
becomes ineffective or unavailable for use, or our stock
becomes delisted for trading on our then primary exchange; or
o we discover the existence of facts that cause us to believe
that the registration statement contains an untrue statement
or omits to state a material fact.
Short Sales. Swartz and its affiliates are prohibited from engaging in short
sales of our 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.
Shareholder Approval. We may currently issue more than 20% of our outstanding
shares under the investment agreement. If we become listed on the Nasdaq Small
Cap Market or Nasdaq National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares. Since we are currently a bulletin
board company, we do not need shareholder approval.
Termination of Investment Agreement. We may also terminate our 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 we have concerning the investment
agreement or any related agreement.
Restrictive Covenants. During the term of the investment agreement and for a
period of two months thereafter, we are 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 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 us in any private transaction which closes
on or prior to two months after the termination of the investment agreement and
a right of participation for any equity securities offered by us in any private
transaction which closes on or prior to two months after the termination of the
investment agreement.
F-43
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Swartz's Right of Indemnification. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.
Waiver and Agreement. On March 12, 2002, we entered into an amended waiver and
agreement with Swartz which replaced and superseded all previous waivers and
agreements. This amended waiver and agreement extended the time of the put
beyond twenty days and redefined the price of the put to be the lesser of the
factor of (a) the volume weighted average price per share, as defined by
Bloomberg L.P., for each day of the put multiplied by .70 or (b) the volume
weighted average price per share minus $0.05 multiplied by 20% of the acceptable
daily volume as defined in the waiver. At the discretion of Swartz, the 20%
daily volume limitation could be increased up to 30% of the daily volume. In
addition, the amended waiver and agreement increased the intended put share
amount for the first put to 14,100,000 shares, which is the total number of
shares we had registered so far under the $25 million equity line of credit. On
May 30, 2002 we closed the first put under the $25 million equity line of credit
by applying the proceeds of $926,924 to the secured note payable discussed in
Note 4.
Warrants. In connection with closing the $25 million equity line of credit, we
issued to Swartz a commitment warrant to purchase 900,000 shares of our common
stock. This warrant was valued on the issuance date using the Black-Scholes
pricing model and the value was recorded as a debt discount.
7. STOCKHOLDERS' DEFICIT
The following table summarizes equity transactions during the three months ended
August 31, 2003:
F-44
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
Common
Shares Dollars
---------------- -----------------
Balance June 1, 2003 106,547,807 $ 44,282,276
Sale of common stock 1,188,236 31,000
Exercise of common stock warrants 1,334,757 50,100
Stock issued on conversion of
debentures and accrued interest 14,447,472 677,642
Non-cash interest and debt discount
related to warrants and debentures - 390,285
---------------- -----------------
Balance August 31, 2003 123,518,272 $ 45,431,303
================ =================
Stock Options
At August 31, 2003, we had 17,500 options outstanding pursuant to our 1992 ISO
Stock Option Plan exercisable at $1.325 per share expiring in 2005; 50,000
options outstanding pursuant to our 1992 NSO Stock Option Plan exercisable at
$1.325 per share expiring in 2005; 2,026,500 options outstanding pursuant to our
1996 Stock Option Plan exercisable at a range of $0.0425 to $1.325 per share
expiring beginning in 2004 through 2008; and 2,960,000 options outstanding
pursuant to our 2001 Stock Option Plan exercisable at a range of $0.0425 to
$0.69 per share expiring beginning in 2004 through 2008 Also, in August 2003 the
Board of Directors authorized a 2003 Stock Option Plan subject to shareholders
approval.
Some of the options outstanding under these plans are not presently exercisable
and are subject to meeting vesting criteria.
Warrants
At August 31, 2003, we had warrants outstanding exercisable into 68,897,979
common shares at exercise prices ranging from $0.0172 to $0.65 per share
expiring beginning in 2004 through 2008. During the three months ended August
31, 2003, we issued warrants to purchase 11,240,268 shares of common stock of
which 11,040,268 are subject to repricings at the six month anniversary of the
issuance of the warrant. At each anniversary date the warrants will be repriced
to the lesser of the initial exercise price or 110% of the lowest closing bid
price of our common stock for the five trading days ending on such six month
anniversary date. During the three months ended August 31, 2003, warrants to
purchase 27,483,933 shares of common stock with initial or reset exercise prices
ranging from $0.0451 to $0.07303 have been repriced to exercise prices ranging
from $0.04 to $0.0649.
During the three months ended August 31, 2003, we issued to Swartz a snap shot
warrant exercisable for five years into 193,333 common shares at an initial
exercise price of $0.0572 per share. This snap shot warrant was issued under an
agreement with Swartz whereby we will issue to Swartz warrants to purchase
common shares equal to 30% of any common stock or warrants we
F-45
Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)
issue to parties other than Swartz or their affiliates after April 1, 2003.
During the three months ended August 31, 2003, a warrant to purchase 1,334,757
shares of common stock was exercised at a price which was lower than the reset
price at the time of exercise. The difference between the exercise price and the
reset price, $35, 618, was recorded during the quarter as additional interest
expense.
Common Stock
During the three months ended August 31, 2003, we sold to a group of individual
private investors a total of 1,188,236 shares of common stock at prices ranging
from $0.025 to $0.034 for an accumulated total of $31,000. The investors have
agreed to hold these shares for a minimum of one year.
F-46
- ------------------------------------------------------------ ---------------------------------------------------------
=========================================================== ========================================================
Until the completion of the resale of the common
stock included in this prospectus, all dealers that
effect transactions in these securities, whether or
not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their
unsold allotments or subscriptions. The Resale of
67,051,966 Shares
of
Table of Contents Common Stock
Offered by
Prospectus Summary.................... 5 Selling Shareholders
Risk Factors.......................... 8
Plan of Distribution ................. 14
Selling Shareholders.................. 15
The Company........................... 16
Use of Proceeds....................... 30
Litigation............................ 30
Management's Discussion and PATRIOT SCIENTIFIC
Analysis of Financial Condition....... 30 CORPORATION
Changes in Accountants................ 37
Management............................ 38
Principal Shareholders................ 44
Certain Transactions.................. 46
Trading Market and Related Matters.... 47
Description of Securities............. 48 PROSPECTUS
Legal Matters......................... 49
Experts .............................. 49
Index to Financial Statements......... F-1
Subject to Completion, November 5, 2003
- ------------------------------------------------------------ ---------------------------------------------------------
=========================================================== ========================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Company's Certificate of Incorporation, and as
permitted by Section 145 of the General Corporation Law of Delaware, the Company
may indemnify its directors and officers under certain circumstances against
reasonable expenses (including court costs and attorney's fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his being a director, officer, employee, or agent of the Company if it
is determined that he acted in accordance with the applicable standard of
conduct set forth in such statutory provisions. Thus, the indemnification
provisions will protect officers and directors from liability only if the
officer or director meets the applicable standard of conduct and the Company has
the financial ability to honor the indemnity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the registration and distribution
of the securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
Registration Fee - Securities and Exchange Commission.......... $ 287
Printing and Engraving.......................................... 1,000*
Legal Fees and Expenses......................................... 15,000*
Accounting Fees................................................. 15,000*
Blue Sky Fees and Expenses...................................... 1,000*
------
Total.................................................. $32,287*
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
We offered and sold the following common stock, either for cash or in
consideration of services rendered as indicated below, and common stock warrants
without registration under the Securities Act of 1933, as amended, and exemption
for such sales from registration under the Act is claimed in reliance upon the
exemption provided by Section 4(2) thereof on the basis that such offers and
sales were transactions not involving any public offering. Appropriate
precautions against transfer have been taken, including the placing of a
restrictive legend on all certificates evidencing such securities. All such
sales were effected without the aid of underwriters, and no sales commissions
were paid.
i
Common Stock
Number of Aggregate Purchase Price Per
Name Date of Sale Shares Purchase Price Share
---- ------------ ------ -------------- -----
Robert Crawford January 22, 2002 400,000 $34,000 $0.08 Cash
William Crawford January 22, 2002 400,000 $34,000 $0.08 Cash
iCapital January 25, 2002 1,000,000 $90,000 $0.09 Services
Robert Crawford September 24, 2002 1,000,000 $25,000 $0.03 Cash
REC Music Foundation September 24, 2002 600,000 $15,000 $0.03 Cash
Donald Logo October 28, 2002 166,000 $5,000 $0.03 Cash
Red Oak Inc. October 28, 2002 166,000 $5,000 $0.03 Cash
Donald Logo December 6, 2002 111,111 $5,000 $0.04 Cash
Red Oak Inc. December 6, 2002 111,111 $5,000 $0.04 Cash
Don Riley December 9, 2002 118,889 $5,350 $0.04 Cash
Greg Erickson December 16, 2002 100,000 $5,000 $0.05 Cash
Dean Gullick December 19, 2002 102,459 $5,000 $0.05 Cash
Robert Vincent December 19, 2002 61,475 $3,000 $0.05 Cash
John Laws January 21, 2003 98,039 $5,000 $0.05 Cash
REC Music Foundation February 3, 2003 400,000 $12,000 $0.03 Cash
John Castellano February 3, 2003 138,889 $5,000 $0.04 Cash
Lyle Armstrong February 7, 2003 125,000 $4,500 $0.04 Cash
Lyle Armstrong February 13, 2003 88,889 $3,000 $0.03 Cash
Red Oak Inc. February 13, 2003 59,259 $2,000 $0.03 Cash
Orrin Noling February 24, 2003 162,338 $5,000 $0.03 Cash
Michael Korbiak March 3, 2003 155,807 $5,500 $0.04 Cash
Lyle Armstrong August 1, 2003 44,118 $1,500 $0.034 Cash
Red Oak Inc. August 1, 2003 44,118 $1,500 $0.034 Cash
Red Oak Inc. August 20, 2003 100,000 $3,000 $0.030 Cash
REC Music Foundation August 26, 2003 1,000,000 $25,000 $0.025 Cash
Red Oak Inc. September 16, 2003 64,516 $2,000 $0.031 Cash
Dean Gullick September 23, 2003 181,333 $5,440 $0.030 Cash
Lydon Inc. September 30, 2003 67,667 $2,000 $0.030 Cash
ii
Warrants
Number of Initial Exercise Expiration
Name Date of Issuance Shares Price Per Share Date
---- ---------------- ------ --------------- ----
Silicon Valley Finance May 15, 2001 25,000 $ 0.65000 May 15, 2006
Dian Griesel August 14, 2001 150,000 $ 0.40000 August 14, 2006
Swartz Private Equity October 9, 2001 719,400 $ 0.04510 October 9, 2006
Swartz Private Equity October 23, 2001 1,031,250 $ 0.03850 October 23, 2006
Swartz Private Equity November 2, 2001 412,500 $ 0.04400 November 2, 2006
Swartz Private Equity November 5, 2001 618,750 $ 0.05500 November 5, 2006
Swartz Private Equity November 9, 2001 2,125,000 $ 0.07150 November 9, 2006
Swartz Private Equity November 19, 2001 825,000 $ 0.06600 November 19, 2006
Swartz Private Equity December 3, 2001 1,031,250 $ 0.06380 December 3, 2006
Swartz Private Equity December 17, 2001 1,031,250 $ 0.06490 December 17, 2006
Swartz Private Equity December 28, 2001 825,000 $ 0.05940 December 28, 2006
Swartz Private Equity January 14, 2002 1,237,500 $ 0.05720 January 14, 2007
Swartz Private Equity January 28, 2002 825,000 $ 0.05390 January 28, 2007
Swartz Private Equity February 12, 2002 618,750 $ 0.04760 February 12, 2007
Swartz Private Equity February 15, 2002 206,250 $ 0.04510 February 15, 2007
Swartz Private Equity February 25, 2002 618,750 $ 0.04400 February 25, 2007
Swartz Private Equity March 12, 2002 1,650,000 $ 0.04840 March 12, 2007
Swartz Private Equity March 25, 2002 1,237,500 $ 0.03300 March 25, 2007
Lincoln Ventures April 23, 2002 2,514,809 $ 0.04685 April 23, 2007
Lincoln Ventures June 10, 2002 7,674,853 $ 0.06422 June 10, 2007
Charles Moore June 10, 2002 333,689 $ 0.06422 June 10, 2007
Victor Gabourel June 10, 2002 333,689 $ 0.06422 June 10, 2007
James Zolin June 10, 2002 333,689 $ 0.06422 June 10, 2007
Richard Daniels June 10, 2002 333,689 $ 0.06422 June 10, 2007
Swartz Private Equity July 1, 2002 635,318 $ 0.05400 July 1, 2007
Gloria Felcyn, TEE August 23, 2002 2,767,674 $ 0.04381 August 23, 2007
Swartz Private Equity October 1, 2002 1,294,013 $ 0.04000 October 1, 2007
Cliff Koerner October 29, 2002 448,732 $ 0.05126 October 29, 2007
Frederick Feck, Trustee October 29, 2002 560,915 $ 0.05126 October 29, 2007
Stan Caplan October 29, 2002 560,915 $ 0.05126 October 29, 2007
Dan Nunes October 29, 2002 280,458 $ 0.05126 October 29, 2007
Leo Correia October 29, 2002 280,458 $ 0.05126 October 29, 2007
Victor Gabourel October 29, 2002 560,915 $ 0.05126 October 29, 2007
Richard Daniels October 29, 2002 560,915 $ 0.05126 October 29, 2007
Cliff Koerner October 29, 2002 560,915 $ 0.05126 October 29, 2007
James Zolin October 29, 2002 224,366 $ 0.05126 October 29, 2007
Lincoln Ventures December 16, 2002 1,428,571 $ 0.06233 December 16, 2007
Swartz Private Equity January 1, 2003 2,804,719 $ 0.05400 January 1, 2008
Lincoln Ventures January 24, 2003 3,000,000 $ 0.05444 January 24, 2008
Lincoln Ventures March 24, 2003 3,963,414 $ 0.04100 March 24, 2008
Swartz Private Equity April 1, 2003 621,512 $ 0.04080 April 1, 2008
Lincoln Ventures April 15, 2003 222,222 $ 0.04500 April 15, 2008
Lincoln Ventures May 20, 2003 2,884,615 $ 0.06500 May 20, 2008
Lincoln Ventures June 9, 2003 2,307,692 $ 0.06500 June 9, 2008
Hawk Associates June 16, 2003 200,000 $ 0.06000 June 16, 2008
Swartz Private Equity July 1, 2003 193,333 $ 0.05720 July 1, 2008
James Zolin August 1, 2003 520,833 $ 0.04800 August 1, 2008
Victor Gabourel August 1, 2003 520,833 $ 0.04800 August 1, 2008
Richard Daniels August 1, 2003 520,833 $ 0.04800 August 1, 2008
Lincoln Ventures October 21, 2003 2,142,857 $ 0.03500 October 21, 2008
iii
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The Exhibits and Financial Statement Schedules to this Registration
Statement are listed in the Exhibit Index commencing at page EX-1 hereof.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in this Registration
Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration, or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
to this Registration Statement any of the securities being registered which
remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the General Corporation Law of Delaware, the Certificate
of Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
iv
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of San
Diego, State of California, on November 5, 2003
PATRIOT SCIENTIFIC CORPORATION
By: /s/ LOWELL W. GIFFHORN
----------------------
Lowell W. Giffhorn
Executive Vice President, Chief Financial Officer,
Secretary and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
/s/JEFFREY E. WALLIN President and Chief Executive November 5, 2003
--------------------
Jeffrey E. Wallin Officer
/s/LOWELL W. GIFFHORN Chief Financial Officer, Principal November 5, 2003
---------------------
Lowell W. Giffhorn Financial Officer, Principal
Accounting Officer, Secretary
and Director
/s/DAVID POHL Director November 5, 2003
-------------
David Pohl
/s/CARLTON JOHNSON Director November 5, 2003
--------------------------
Carlton Johnson
/s/DONALD BERNIER Chairman of the Board and November 5, 2003
-----------------
Donald Bernier Director
/s/HELMUT FALK JR. Director November 5, 2003
------------------
Helmut Falk Jr.
/s/GLORIA H. FELCYN Director November 5, 2003
-------------------
Gloria H. Felcyn
v
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under The Securities Act of 1933
EXHIBITS
PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
1
PATRIOT SCIENTIFIC CORPORATION
(a) Exhibits
The following exhibits are included as part of this registration
statement, except those exhibits marked (1), which have previously been filed
with the Securities and Exchange Commission and are incorporated by reference to
another registration statement, report or document. References to the "Company"
in this Exhibit Index mean PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation.
Exhibit No. Document No.
- ----------- -------- ---
2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.
2.1 Agreement to Exchange Technology for Stock in Patriot Scientific Corporation, (1)
incorporated by reference to Exhibit 2.1 to Form 8-K dated August 10, 1989
2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22, 1994, (1)
among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4 to Form 8-K dated
July 6, 1994
2.2.1 Amendment to Development Agreement dated April 23, 1996 between the Company and (1)
Sierra Systems, incorporated by reference to Exhibit 2.2.1 to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996
2.3 Form of Exchange Offer dated December 4, 1996 between the Company and certain (1)
shareholders of Metacomp, Inc. incorporated by reference to Exhibit 2.3 to Form
8-K dated January 9, 1997
2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc. (1)
Tendered Pursuant to the Exchange Offer Dated December 4, 1996 incorporated by
reference to Exhibit 2.4 to Form 8-K dated January 9, 1997
3.0 ARTICLES AND BYLAWS.
3.1 Original Articles of Incorporation of the Company's predecessor, Patriot (1)
Financial Corporation, incorporated by reference to Exhibit
3.1 to registration statement on Form S-18, file no.
33-23143-FW
3.2 Articles of Amendment of Patriot Financial Corporation, as filed with the (1)
Colorado Secretary of State on July 21, 1988, incorporated by reference to
Exhibit 3.2 to registration statement on Form S-18, File No. 33-23143-FW
3.3 Certificate of Incorporation of the Company, as filed with the Delaware (1)
Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.3 to Form 8-K dated May 12, 1992
3.3.1 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on April 18, 1995, incorporated by
reference to Exhibit 3.3.1 to Form 10-KSB for the fiscal year ended May 31,
1995
2
Exhibit No. Document No.
- ----------- -------- ---
3.3.2 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on June 19,1997, incorporated by
reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year ended May 31, 1997
3.3.3 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on April 28, 2000, incorporated by
reference to Exhibit 3.3.3 to Registration Statement on Form S-3 dated
May 5, 2000
3.3.4 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on May 6, 2002, incorporated by
reference to Exhibit 3.3.4 to Registration Statement on Form S-3 dated June 27,
2002
3.4 Articles and Certificate of Merger of Patriot Financial Corporation into the (1)
Company dated May 1, 1992, with Agreement and Plan of Merger attached thereto
as Exhibit A, incorporated by reference to Exhibit 3.4 to Form 8-K dated May
12, 1992
3.5 Certificate of Merger issued by the Delaware Secretary of State on May 8, (1)
1992, incorporated by reference to Exhibit 3.5 to Form 8-K dated May 12, 1992
3.6 Certificate of Merger issued by the Colorado Secretary of State on May 12, (1)
1992, incorporated by reference to Exhibit 3.6 to Form 8-K dated May 12, 1992
3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K (1)
dated May 12, 1992
4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.
4.1 Specimen common stock certificate, incorporated by reference to Exhibit 4.1 (1)
Form 8-K dated May 12, 1992
4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29, 1996, (1)
exercisable to purchase 253,166 common shares at $1.58 per
share until August 31, 1996, granted to investors in
connection with an offering of securities made in reliance
upon Regulation S, incorporated by reference to Exhibit 4.2 to
Form 10-QSB for fiscal quarter ended February 29, 1996
4.3 Form of 6% Convertible Subordinated Promissory Note due September 30, 1998 (1)
aggregating $1,500,000 to six investors incorporated by reference to Exhibit
4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996
4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 (1)
aggregating $2,000,000 to two investors incorporated by reference to Exhibit
4.4 to Form 8-K dated June 16, 1997
Exhibit No. Document No.
- ----------- -------- ---
4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997 (1)
exercisable to purchase an aggregate of 400,000 common shares at $1.69125 per
share until June 2, 2002, granted to two investors in connection with the
offering of securities in Exhibit 4.4 incorporated by
reference to Exhibit 4.5 to Form 8-K dated June 16, 1997
4.6 Registration Rights Agreement dated June 2, 1997 by and among the Company and (1)
CC Investments, LDC and the Matthew Fund, N.V. related to the registration of
the common stock related to Exhibits 4.4 and 4.5 incorporated
by reference to Exhibit 4.6 to Form 8-K dated June 16, 1997
4.7 Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) (1)
dated June 2, 1997 exercisable to purchase an aggregate of 211,733 common
shares at $1.69125 per share until June 2, 2002, granted to a group of
investors in connection with the offering of securities in Exhibit 4.4
incorporated by reference to Exhibit 4.7 to Form 8-K dated June 16, 1997
4.8 Registration Rights Agreement dated June 2, 1997 by and among the Company and
Swartz Investments, LLC related to the registration of the common stock related (1)
to Exhibit 4.7 incorporated by reference to Exhibit 4.8 to Form 8-K dated June
16, 1997
4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 (1)
aggregating $1,000,000 to two investors incorporated by
reference to Exhibit 4.9 to Form 10-KSB for the fiscal year
ended May 31, 1998
4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24, 1997 (1)
exercisable to purchase an aggregate of 200,000 common shares
at $1.50 per share until June 2, 2002, granted to two
investors in connection with the offering of securities
described in Exhibit 4.9 incorporated by reference to Exhibit
4.10 to Form 10-KSB for the year ended May 31, 1998
4.11 Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) (1)
dated November 24, 1997 exercisable to purchase an aggregate of 105,867 common
shares at $1.50 per share until June 2, 2002, granted to a group of investors
in connection with the offering of securities described in Exhibit 4.9
incorporated by reference to Exhibit 4.11 to Form 10-KSB for the year ended May
31, 1998
4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group, Inc.) (1)
dated June 16, 1997 exercisable to purchase an aggregate of 130,000 common
shares at prices ranging from $2.50 to $7.50 per share until June 15, 1999
incorporated by reference to Exhibit 4.12 to Form 10-KSB for the year ended May
31, 1998
4.13 Warrant to Purchase Common Stock issued to Spellcaster Telecommunications, Inc. (1)
dated April 28, 1998 exercisable to purchase an aggregate of
100,000 common shares at $1.25 per share until April 28, 2000
incorporated by reference to Exhibit 4.13 to Form 10-KSB for
the year ended May 31, 1998
Exhibit No. Document No.
- ----------- -------- ---
4.14 Investment agreement dated February 24, 1999 by and between the Company and (1)
Swartz Private Equity, LLC for a maximum aggregate amount of $5,000,000
incorporated by reference to Exhibit 4.14 to Form 10-QSB/A for the fiscal
quarter ended November 30, 1998
4.15 Registration Rights Agreement dated February 24, 1999 by and between the (1)
Company and Swartz Private Equity, LLC related to the registration of the
common stock related to Exhibit 4.14 incorporated by reference to Exhibit 4.15
to Form 10-QSB/A for the fiscal quarter ended November 30, 1998
4.16 Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated (1)
February 24, 1999 exercisable to purchase common shares in connection with the
offering of securities in Exhibit 4.14 incorporated by reference to Exhibit
4.16 to Form 10-QSB/A for the fiscal quarter ended November 30, 1998
4.17 Amended and Restated Investment Agreement dated July 12, 1999 by and between (1)
the Company and Swartz Private Equity, LLC for a maximum aggregate amount of
$5,000,000 incorporated by reference to Exhibit 4.17 to Pre-Effective Amendment
No. 2 to Registration Statement on Form SB-2 dated July 14, 1999
4.18 Investment Agreement dated April 28, 2000 by and between the Company and Swartz (1)
Private Equity, LLC for a maximum aggregate amount of $30,000,000 incorporated
by reference to Exhibit 4.18 to Registration Statement on Form S-3 dated May 5,
2000
4.18.1 Waiver and Agreement dated September 24, 2001 amending the Investment Agreement (1)
dated April 28, 2000 by and between the Company and Swartz Private Equity, LLC
for a maximum aggregate amount of $30,000,000 incorporated by reference to
Exhibit 4.18.1 to Registration Statement on Form
S-1 dated October 11, 2001
4.19 2001 Stock Option Plan of the Company dated February 21, 2001 incorporated by (1)
reference to Exhibit 4.19 to Registration Statement on Form S-8 dated March 26,
2001
4.20 Investment agreement dated September 17, 2001 by and between the Company and (1)
Swartz Private Equity, LLC for a maximum aggregate amount of $25,000,000
incorporated by reference to Exhibit 4.20 to Registration Statement
on Form S-1 dated October 11, 2001
Exhibit No. Document No.
- ----------- -------- ---
4.21 Registration Rights Agreement dated September 17, 2001 by and between the (1)
Company and Swartz Private Equity, LLC related to the registration of the
common stock related to Exhibit 4.20 incorporated by reference to Exhibit 4.21
to Registration Statement on Form S-1 dated October 11, 2001
4.22 Warrant to Purchase Common Stock dated September 17, 2001 exercisable to (1)
purchase common shares in connection with the Offering of securities in Exhibit
4.20 incorporated by reference to Exhibit 4.22 to Registration Statement on
Form S-1 dated October 11, 2001
4.23 Financial Consulting Services Agreement between the Company and M. Blaine (1)
Riley, Randall Letcavage and Rosemary Nguyen incorporated by reference to
Exhibit 4.23 to Registration Statement on Form S-8 dated January 22, 2002
4.24 Form of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004 (1)
aggregating $1,000,000 to six investors incorporated by reference to Exhibit
4.24 to Registration Statement on Form S-3 dated June 27, 2002
4.25 Form of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002
exercisable to purchase an aggregate of 12,859,175 common shares at initial (1)
exercise prices ranging form $0.08616 to $0.10289 per share until June 10,
2007, granted to six investors in connection with the offering of securities
described in Exhibit 4.24 incorporated by reference to Exhibit 4.25 to
Registration Statement on Form S-3 dated June 27, 2002
4.26 Form of Registration Rights Agreement (Lincoln Ventures, LLC) dated June 10, (1)
2002 by and among the Company and six investors related to the registration of
the common stock related to Exhibit 4.26 incorporated by reference to Exhibit
4.26 to Registration Statement on Form S-3 dated June 27, 2002
4.27 2003 Stock Option Plan of the Company dated July 2, 2003 incorporated (1)
by reference to Exhibit 4.27 to Registration Statement on Form S-8 dated
September 4, 2003
5.0 OPINION RE LEGALITY.
5.1 Legal opinion of Luce, Forward, Hamilton & Scripps LLP, attorney (2)
10.0 MATERIAL CONTRACTS.
10.1 1992 Incentive Stock Option Plan of the Company, incorporated by reference to (1)
Exhibit 10.1 to Form 8-K dated May 12, 1992
Exhibit No. Document No.
- ----------- -------- ---
10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995, (1)
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17, 1996
10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by reference (1)
to Exhibit 10.2 to Form 8-K dated May 12, 1992
10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995 (1)
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year
ended May 31, 1996
10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and (1)
Clar-O-Wood Partnership, a California limited partnership dated April 11, 1991
as amended November 11, 1992 and November 2, 1995 incorporated by reference to
Exhibit 10.3 to Form 10-KSB for fiscal year ended May 31, 1997
10.4 Stock Purchase Agreement dated November 29 and 30, 1995, between the Company (1)
and SEA, Ltd., I
ncorporated by reference to Exhibit 10.4 to Form 8-K dated December 11, 1995
10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21, 1996, between (1)
the Company and SEA, Ltd., incorporated by reference to Exhibit 10.4.1 to Form
10-QSB for fiscal quarter ended 2/29/96
10.5 1995 Employee Stock Compensation Plan of the Company, incorporated by reference (1)
to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95
10.6 Letter Stock and Warrant Agreement dated January 10, 1996 between the Company (1)
and Robert E. Crawford, Jr., incorporated by reference to Exhibit 10.6 to Form
10-QSB for fiscal quarter ended February 29, 1996
10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated February 28, (1)
1996, between the Company and Labway Corporation, incorporated by reference to
Exhibit 10.7 to Form 10-QSB for fiscal quarter ended February 29, 1996
10.8 Distribution and Representation Agreement dated February 28, 1996, between the (1)
Company and Innoware, Inc., incorporated by reference to Exhibit 10.8 to Form
10-QSB for fiscal quarter ended February 29, 1996
10.9 Employment Agreement dated November 20, 1995 between the Company and Elwood G. (1)
Norris, incorporated by reference to Exhibit 10.9 to
Registration Statement on Form SB-2 dated March 18, 1996
10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the Company (1)
and Elwood G. Norris, incorporated by reference to Exhibit 10.9.1 to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 dated May
23, 1996
10.10 Employment Agreement dated November 20, 1995 between the Company and Robert (1)
Putnam, incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2 dated March 18, 1996
Exhibit No. Document No.
- ----------- -------- ---
10.11 Sales Contractual Agreement dated March 19, 1996 between the Company and Evolve (1)
Software, Inc., incorporated by reference to Exhibit 10.11 to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996
10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve (1)
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares at
$2.85, incorporated by reference to Exhibit 10.11.1 to Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 dated April 29, 1996
10.12 Employment Agreement dated as of May 8, 1996 between the Company and Michael A. (1)
Carenzo, including Schedule A - Stock Option Agreement, incorporated by
reference to Exhibit 10.12 to Pre-Effective Amendment No. 2 to Registration
Statement on Form SB-2 dated May 23, 1996
10.12.1 First Amendment to Employment Agreement dated as of May 8, 1996 between the (1)
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended May 31,
1997
10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved by the (1)
Shareholders on May 17, 1996, incorporated by reference to Exhibit 10.13 to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 dated May
23, 1996
10.14 Sales Contractual Agreement dated June 20, 1996 between the Company and (1)
Compunetics Incorporated incorporated by reference to Exhibit
10.14 to Form 10-KSB for fiscal year ended May 31, 1996
10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and Premier (1)
Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to Form 10-KSB
for fiscal year ended May 31, 1996
10.16 Employment Agreement dated January 1, 1997 between the Company and Norman J. (1)
Dawson incorporated by reference to Exhibit 10.16 to Form
10-KSB for fiscal year ended May 31, 1997
10.17 Employment Agreement dated January 1, 1997 between the Company and Jayanta K. (1)
Maitra incorporated by reference to Exhibit 10.17 to Form
10-KSB for fiscal year ended May 31, 1997
10.18 Technology License and Distribution Agreement dated June 23, 1997 between the (1)
Company and Sun Microsystems, Inc. incorporated by reference to Exhibit 10.18
to Form 10-KSB for the fiscal year ended May 31, 1997
10.19 Employment Agreement dated March 23, 1998 between the Company and James T. (1)
Lunney incorporated by reference to Exhibit 10.19 to Form
10-KSB for the fiscal year ended May 31, 1998
Exhibit No. Document No.
- ----------- -------- ---
10.20 Employment Agreement dated July 28, 1997 between the Company and Phillip (1)
Morettini incorporated by reference to Exhibit 10.20 to Form
10-KSB for the fiscal year ended May 31, 1998
10.21 Employment Agreement dated July 23, 1998 between the Company and Lowell W. (1)
Giffhorn incorporated by reference to Exhibit 10.21 to Form
10-KSB for the fiscal year ended May 31, 1998
10.22 Secured Promissory Note dated June 12, 2000 between the Company and James T. (1)
Lunney incorporated by reference to Exhibit 10.22 to Form
10-KSB for the fiscal year ended May 31, 2000
10.23 Purchase Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC (1)
incorporated by reference to Exhibit 10.23 to Form 10-KSB for the fiscal year
ended May 31, 2000
10.24 Employment Agreement dated October 2, 2000 between the Company and Miklos B. (1)
Korodi incorporated by reference to Exhibit 10.24 to Form
10-QSB for the fiscal quarter ended November 30, 2000
10.25 Employment Agreement dated December 1, 2000 between the Company and Richard G. (1)
Blum incorporated by reference to Exhibit 10.25 to Form 10-QSB
for the fiscal quarter ended November 30, 2000
10.26 Employment Agreement dated January 29, 2001 between the Company and Serge J. (1)
Miller incorporated by reference to Exhibit 10.26 to Form
10-KSB for the fiscal year ended May 31, 2001
10.27 Lease Agreement dated February 23, 2001 between the Company and Arden Realty (1)
Finance IV, LLC incorporated by reference to Exhibit 10.27 to
Form 10-KSB for the fiscal year ended May 31, 2001
10.28 Employment Agreement dated January 1, 2001 between the Company and David H. (1)
Pohl incorporated by reference to Exhibit 10.28 to Form 10-KSB
for the fiscal year ended May 31, 2001
Exhibit No. Document No.
- ----------- -------- ---
10.29 Employment Agreement dated April 26, 2001 between the Company and David H. Pohl (1)
incorporated by reference to Exhibit 10.29 to Form 10-KSB for the fiscal year
ended May 31, 2001
10.30 Employment Agreement dated November 17, 2001 between the Company and Lowell W. (1)
Giffhorn incorporated by reference to Exhibit 10.30 to Registration Statement
on Form S-3 dated June 27, 2002
10.31 Employment Agreement dated December 20, 2001 between the Company and Jayanta (1)
Maitra incorporated by reference to Exhibit 10.31 to Registration Statement on
Form S-3 dated June 27, 2002
10.32 Consulting Agreement dated March 7, 2002 between the Company and SDMC, Inc. (1)
incorporated by reference to Exhibit 10.32 to Registration Statement on Form
S-3 dated June 27, 2002
23.0 CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP, attorneys at law ( included (2)
in Exhibit 5.1)
23.2 Consent of Nation Smith Hermes Diamond, LLP independent certified public (2)
accountants
99.0 Additional Exhibits.
99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by reference (1)
to Exhibit 28.2 to registration statement on Form SB-2, file no. 33-57858
99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by reference (1)
to Exhibit 28.3 to registration statement on Form SB-2, file no. 33-57858
99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock Option (1)
Plan (individual agreements differ as to number of shares, dates, prices and
vesting), incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996
99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock Option (1)
Plan (individual agreement differ as to number of shares, date, prices and
vesting), incorporated by reference to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated May 23, 1996
99.5 Press Release of the Company dated November 4, 1996 incorporated by (1)
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997
Exhibit No. Document No.
- ----------- -------- ---
99.6 Form of Incentive Stock Option Agreement to the Company's 2001 Stock Option (1)
Plan incorporated by reference to Exhibit 99.6 to Registration Statement on
Form S-8 filed March 26, 2001
99.7 Form of Non-Qualified Stock Option Agreement to the Company's 2001 Stock Option (1)
Plan incorporated by reference to Exhibit 99.6 to Registration Statement on
Form S-8 filed March 26, 2001
99.8 Form of Incentive Stock Option Agreement to the Company's 2003 Stock Option (1)
Plan incorporated by reference to Exhibit 99.8 to Registration Statement on
Form S-8 filed September 4, 2003
99.9 Form of Non-Qualified Stock Option Agreement to the Company's 2003 Stock Option (1)
Plan incorporated by reference to Exhibit 99.9 to Registration Statement on
Form S-8 filed September 4, 2003
- --
(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Registration Statement on Form SB-2.
(b) Reports on Form 8-K - None.
All other schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Consolidated Financial
Statements or the Notes thereto.