Company Quick10K Filing
Patriot Scientific
Price0.00 EPS-0
Shares401 P/E-0
MCap0 P/FCF-0
Net Debt-1 EBIT-1
TEV-1 TEV/EBIT1
TTM 2019-05-31, in MM, except price, ratios
10-K 2020-05-31 Filed 2020-08-24
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8-K 2020-08-19 Enter Agreement, M&A, Sale of Shares, Shareholder Rights, Control, Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2019-10-01
8-K 2019-04-12
8-K 2019-04-01
8-K 2018-06-01

PTSC 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
EX-21 ptsc_ex21.htm
EX-31.1 ptsc_ex3101.htm
EX-31.2 ptsc_ex3102.htm
EX-32.1 ptsc_ex3201.htm

Patriot Scientific Earnings 2020-05-31

Balance SheetIncome StatementCash Flow

10-K 1 ptsc_10k-053120.htm ANNUAL REPORT

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended May 31, 2020
   
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
[_] For the transition period from ___________ to _______________

 

Commission File Number 0-22182

 

PATRIOT SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

84-1070278

(I.R.S. Employer Identification No.)

   

 

2038 Corte Del Nogal, Suite 141, Carlsbad, California

(Address of principal executive offices)

92011

(Zip Code)

 

(Registrant’s telephone number, including area code): (760) 795-8517

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
None   None   None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [  ]  NO [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [  ]  NO [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]  NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ]  Smaller reporting company [X]
Emerging growth company [  ]     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [  ]   

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    [  ]   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ]  NO [X]

 

Approximate aggregate market value of the registrant’s common stock held by non-affiliates on November 30, 2019 was $999,791 based on a closing price of $0.0025 per share as reported on the OTC Pink. For purposes of this calculation, it has been assumed that all shares of the registrant's common stock held by directors, executive officers and shareholders beneficially owning five percent or more of the registrant's common stock are held by affiliates. The treatment of these persons as affiliates for purposes of this calculation is not conclusive as to whether such persons are, in fact, affiliates of the registrant.

 

On August 24, 2020, 401,392,948 shares of common stock, par value $0.00001 per share were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 

 

   

 

 

Table of Contents

 

PART I      
  ITEM 1. Business 2
  ITEM 1A. Risk Factors 4
  ITEM 1B. Unresolved Staff Comments 7
  ITEM 2. Properties 7
  ITEM 3. Legal Proceedings 7
  ITEM 4. Mine Safety Disclosures 8
       
PART II      
       
  ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9
  ITEM 6. Selected Financial Data 10
  ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
  ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 15
  ITEM 8. Financial Statements and Supplementary Data 15
  ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 15
  ITEM 9A. Controls and Procedures 15
  ITEM 9B. Other Information 16
       
PART III      
       
  ITEM 10. Directors, Executive Officers and Corporate Governance 17
  ITEM 11. Executive Compensation 19
  ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 20
  ITEM 13. Certain Relationships and Related Transactions, and Director Independence 21
  ITEM 14. Principal Accountant Fees and Services 21
       
PART IV      
       
  ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES 22
       
SIGNATURES   26

 

 

 

 

 

 

 

 i 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including all documents incorporated by reference herein, includes certain statements constituting “forward-looking” statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, including statements concerning our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results and prospects, and we rely on the “safe harbor” provisions in those laws. We are including this statement for the express purpose of availing ourselves of the protections of such safe harbors with respect to all such forward-looking statements. The forward-looking statements in this report reflect our current views with respect to future events and financial performance. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “estimates,” “may,” “could,” “should,” “would,” “will,” “shall,” “propose,” “continue,” “predict,” “plan” and similar expressions are generally intended to identify certain of the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Any forward-looking statement is not a guarantee of future performance.

 

These forward-looking statements are subject to certain risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to those items shown under “Item 1A. Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part 2. You should read this report completely with the understanding that our actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to publicly disclose the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

 

 

 

 

 

 

 

 

 

 

 

 

 

 1 

 

 

PART I

 

ITEM 1. BUSINESS

 

The Company

 

Patriot Scientific Corporation (the “Company”, “Patriot”, “we”, “us”, or “our”) has been a licensing company of patented microprocessor technologies that offered broad and open licensing and by litigating against those who may have infringed on its patents. These licensing efforts were performed through our joint venture with Phoenix Digital Solutions, LLC (“PDS”). PDS has not generated significant license revenues since September 2013. Furthermore, on November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patented microprocessor technologies. As result of this denial to review the lower court’s decision, our patented microprocessor technologies were no longer enforceable, and we have no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue from PDS and we need to either pursue a new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code.

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent (see Note 10 to Patriot’s consolidated financial statements included elsewhere herein).

 

Our business address is 2038 Corte Del Nogal, Suite 141, Carlsbad, California 92011; our main telephone number is (760) 795-8517. Our internet website page is located at http://www.ptsc.com. All of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on our internet website. The information on, or that can be accessed through, our website is not part of this Annual Report.

 

PTSC is a corporation organized under Delaware law on March 24, 1992, and is the successor by merger to Patriot Financial Corporation, a Colorado corporation, incorporated on June 10, 1987. In June 2005, we entered into a joint venture agreement with Technology Properties Limited, Inc. (“TPL”) to form PDS. In September 2008, we acquired Patriot Data Solutions Group, Inc. formerly known as Crossflo Systems, Inc. (“PDSG”) which engaged in data-sharing services and products primarily in the public safety and government sector. During April 2012, we sold substantially all of our assets in PDSG.

 

Our Technology

 

Prior to our patents becoming unenforceable, we focused on licensing our intellectual property that covered the design of microprocessor chips through PDS.

 

 

 

 

 2 

 

 

Phoenix Digital Solutions, LLC

 

On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore, an individual co-inventor (“Moore”). We, TPL and Moore were parties to certain lawsuits filed by us alleging infringement (the “Infringement Litigation”) of seven U.S. issued patents dating back to 1989 on our microprocessor technology (the “Microprocessor Patents”).

 

Pursuant to the Master Agreement, we caused certain of our respective interests in the Microprocessor Patents to be licensed to PDS, a joint venture limited liability company owned 50% by us and 50% by TPL, and PDS engaged TPL to commercialize the Microprocessor Patents pursuant to a Commercialization Agreement among PDS, TPL and us (the “Commercialization Agreement”). Under the Commercialization Agreement, PDS granted to TPL the exclusive right to grant licenses and sub-licenses of the Microprocessor Patents and to pursue claims against violators of the Microprocessor Patents, in each case, on behalf of PDS, us, TPL and Moore, and TPL agreed to use reasonable best efforts to commercialize the Microprocessor Patents in accordance with a mutually agreed business plan. Pursuant to the Commercialization Agreement, PDS agreed to a reimbursement policy with regard to TPL’s expenses incurred in connection with the commercialization of the Microprocessor Patents. All proceeds generated by TPL in connection with the commercialization of the Microprocessor Patents were paid directly to PDS. From the inception of the Commercialization Agreement to May 31, 2020, gross license revenues to PDS totaled $312,814,535. Since September 2013, PDS has not generated significant license revenues. As mentioned above, on November 4, 2019, the Supreme Court of the United States denied its application to review a lower court’s decision that was adverse to the Company’s patented microprocessor technologies. As result of this denial to review the lower court’s decision, the Company’s patented microprocessor technologies are no longer enforceable, and it has no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue from PDS.

 

Licenses, Patents, Trade Secrets and Other Proprietary Rights

 

We currently have no enforceable licenses, patents, trade secrets, or other proprietary rights.

 

We generally require our employees and consultants, including our management, to sign a non-disclosure and invention assignment agreement upon employment with us.

 

Employees

 

At May 31, 2020, we have one full-time employee. We also engage consultants and part-time assistance, as needed. Our employee is not represented by a labor union, and we consider our relations with our employee to be good. Our employee is not covered by a key man life insurance policy.

 

Available Information

 

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Materials filed with the SEC can be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings are available to the public at the website maintained by the SEC, http://www.sec.gov. We also make available, free of charge, through our web site at www.ptsc.com, our reports on Forms 10-K, 10-Q, and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with or furnished to the SEC. The information on, or that can be accessed through, our website is not part of this Annual Report.

 

 

 

 

 3 

 

 

ITEM 1A. RISK FACTORS

 

We urge you to carefully consider the following discussion of risks as well as other information contained in this Form 10-K. We believe the following to be our most significant risk factors as of the date this report is being filed. The risks and uncertainties described below are not the only ones we face.

 

If We Are Unable To Develop Our New Lines of Business, And/Or We Are Unable To Raise Additional Capital, We Will Be Forced To Liquidate The Company In A Dissolution Under Delaware Law Or Seek Protection Under The Provisions Of The U.S. Bankruptcy Code And, In Either Event, It Is Unlikely That Stockholders Would Receive Any Value For Their Shares.

 

As of May 31, 2020, the Company had cash and cash equivalents of $571,921 and working capital of $602,813. Historically, we have been a licensing company and entered into a number of agreements to facilitate the pursuit of unlicensed users of our intellectual property through PDS. PDS has not generated significant license revenues since September 2013. Furthermore, on November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patents. As result of this denial to review the lower court’s decision, our intellectual property was no longer enforceable, and we have no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue and we need to either pursue a new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code.

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent (see Note 10 to Patriot’s consolidated financial statements included elsewhere herein).

 

If we are unable to raise additional capital to advance the new line of business, we will be forced to liquidate the Company in a dissolution under Delaware law or seek protection under the provisions of the U.S. Bankruptcy Code. In either of these events, we might realize significantly less from our assets than the values at which they are carried on our financial statements. The funds resulting from the liquidation of our assets would be used first to satisfy obligations to creditors before any funds would be available to pay our stockholders, and any shortfall in the proceeds would directly reduce the amounts available for distribution, if any, to our creditors and to our stockholders. In the event we are required to liquidate under Delaware law or the federal bankruptcy laws, it is highly unlikely that stockholders would receive any value for their shares.

 

 

 

 

 4 

 

 

If We Cannot Obtain Additional Funding, Our New Line of Business May be Delayed or Discontinued.

 

At May 31, 2020, we had $571,921 in cash and cash equivalents and we have no current sources of revenue. Our ability to continue to fund our operations and future line of business is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, or adverse business results. If we are unable to raise sufficient capital in the equity markets, we may need to delay our new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.

 

We Have Reported Licensing Income In Prior Fiscal Years Which Will Not Be Indicative Of Our Future Income.

 

We have entered into license agreements through PDS and have reported income from the joint venture for the fiscal years 2006 to 2011, 2013 to 2014 and 2016 to 2017. However, the joint venture has not generated significant licensing revenues since September 2013 and we do not expect to generate any future licensing revenue through PDS and our patents are no longer enforceable.

 

The Recent Coronavirus Pandemic ("COVID-19") May Adversely Affect Our Business, Financial Condition, Liquidity, and Our Ability to Raise Capital.

 

While the impact on our future strategic plans from the recent outbreak of COVID-19 is unknown at this time and difficult to predict, various aspects of our business may be impacted and could be adversely affected by it.

 

As of the date of this Annual Report, COVID-19 has been declared a pandemic by the World Health Organization and has been declared a National Emergency by the United States Government. COVID-19 has caused significant volatility in global markets, including the market price of our securities. As the spread of COVID-19 continues, it is unclear how the general slowdown of the global economy will affect our business, results of operations, financial condition and our future strategic plan.

 

Continuation of this event may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. In addition, travel restrictions and shelter-in-place orders may limit our ability to meet with investors, collaborators, or vendors. If these orders continue and we remain unable to meet in person with these contacts, it could have adverse impacts on our business including our ability to raise additional capital and to fund our operations.

 

If We Fail To Comply With The Reporting Obligations Of The Exchange Act, Our Business, Financial Condition, And Results Of Operations, And Investors’ Confidence In Us, Could Be Materially And Adversely Affected.

 

As a public company, we are required to comply with the periodic reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including preparing annual reports, quarterly reports, and current reports. Our failure to prepare and disclose this information in a timely manner and meet our reporting obligations in their entirety could subject us to penalties under federal securities laws, expose us to lawsuits, and restrict our ability to access financing on favorable terms, or at all.

 

If We Fail To Maintain Effective Internal Controls Over Financial Reporting, The Price Of Our Common Stock May Be Adversely Affected.

 

During the fourth quarter of fiscal year ended May 31, 2018, we reduced the number of the Company’s accounting employees down from two to one. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial fraud. 

 

 

 

 

 5 

 

 

Our Insurance Liability Coverage Is Limited And May Not Be Adequate To Cover Potential Losses.

 

In the ordinary course of business, we purchase insurance coverage (e.g., directors and officers, property and liability coverage) to protect us against claims made by third parties and employees for property damage or personal injuries. However, the protection provided by such insurance is limited in significant respects and, in some instances, we have no coverage and certain of our insurance policies have substantial “deductibles” or limits on the maximum amounts that may be recovered. If a series of losses occurred, such as from a series of lawsuits in the ordinary course of business each of which were subject to the deductible amount, or if the maximum limit of the available insurance were substantially exceeded, we could incur losses in amounts that would have a material adverse effect on our results of operations and financial condition.

 

We May Issue Preferred Stock, And The Terms Of Such Preferred Stock May Reduce The Value Of Our Common Stock.

 

We are authorized to issue up to a total of 5,000,000 shares of preferred stock in one or more series. Our Board of Directors may determine whether to issue shares of preferred stock without further action by holders of our Common Stock. If we issue shares of preferred stock, it could affect the rights or reduce the value of our Common Stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. If we seek capital for our business, such capital may be raised through the issuance of preferred stock.

 

If A Large Number Of Our Shares Are Sold All At Once Or In Blocks, The Market Price Of Our Shares Would Most Likely Decline.

 

Most of our shareholders are not restricted in the price at which they can sell their shares. Shares sold at a price below the current market price at which our Common Stock is trading may cause the market price of our Common Stock to decline.

 

Our Common Stock Is Quoted On The OTC Pink Current Information, Which Could Adversely Affect The Market Price And Liquidity Of Our Common Stock.

 

Our common stock is quoted on OTC Pink Current Information. The quotation of our shares on such marketplace may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

 

There can be no assurance that there will be an active market for our shares of common stock either now or in the future or that stockholders will be able to liquidate their investment or liquidate it at a price that reflects the value of the business. As a result, our stockholders may not find purchasers for our securities should they to desire to sell them.

 

The Market For Our Stock Is Subject To Rules Relating To Low-Priced Stock (“Penny Stock”) Which May Limit Our Ability To Raise Capital.

 

Our Common Stock is currently subject to the “penny stock rules” adopted pursuant to Section 15(g) of the Exchange Act. 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” on behalf of 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 affect our ability to raise additional capital if we decide to do so.

 

 

 

 

 6 

 

 

Our Share Price Could Decline As A Result Of Short Sales.

 

When an investor sells stock that he does not own, it is known as a short sale. The seller, anticipating that the price of the stock will go down, intends to buy stock to cover his sale at a later date. If the price of the stock goes down, the seller will profit to the extent of the difference between the price at which he originally sold it less his later purchase price. 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. Penny stocks which do not trade on an exchange, such as our Common Stock, are particularly susceptible to short sales.

 

Our Future Success Depends In Significant Part Upon The Continued Services Of Our Key Senior Management.

 

Our future success depends in significant part upon the continued services of our senior management. The competition for highly qualified personnel is intense, and we may not be able to retain our key employees or attract and retain additional highly qualified personnel in the future. Our employee is not represented by a labor union, and we consider our relations with our employee to be good. Our employee is not covered by a key man life insurance policy.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We currently lease one office of approximately 151 square feet located at 2038 Corte Del Nogal, Suite 141, Carlsbad, California. The lease is month-to-month and can be terminated upon sixty (60) days advance written notice to our landlord.

 

The current floor space provides adequate and suitable facilities for our corporate functions.

 

ITEM 3. LEGAL PROCEEDINGS

 

Patent Litigation

 

We, TPL, and PDS (collectively referred to as “Plaintiffs”) were in proceedings in the U.S. District Court for the Northern District of California where the Plaintiffs allege infringement of the US 5,809,336 patent (the “‘336 patent”) by: Huawei Technologies Co. Ltd., LG Electronics, Nintendo Co. Ltd., Samsung Electronics Co. Ltd., and ZTE Corporation (collectively referred to as the “Defendants”). This litigation was proceeding in front of District Court Judge Vince Chhabria.

 

These proceedings relate to the proceedings filed by the Plaintiffs in February 2008 in the U.S. District Court for the Northern District of California alleging infringement of the US 5,440,749 patent (the “‘749 patent”), the US 5,530,890 patent (the “‘890 patent”) and the ‘336 patent against Amazon.com Inc., Barnes & Noble Inc., Garmin Ltd., Huawei Technologies Co. Ltd., Kyocera Corporation, LG Electronics, Nintendo Co. Ltd., Novatel Wireless Inc., Samsung Electronics Co. Ltd., Sierra Wireless Inc., and ZTE Corporation. We have settled with all defendants except those named in the first paragraph to this footnote. On September 18, 2015, a Markman hearing was held before U.S. Magistrate Judge Grewal and, on September 22, 2015, he issued a claim construction report and recommendation. On September 25, 2015, as a result of the claim construction report and recommendation, Plaintiffs and defendants, with the exception of Huawei Technologies Co. Ltd., (“Huawei”) agreed to stay all proceedings pending resolution of Plaintiffs’ objections to the claim construction report and recommendation. Plaintiffs further stipulated that, under the claim construction provided by the report and recommendation, defendants’ products do not infringe the ‘336 patent, and, in the event that the Court does not materially modify the claim construction, Plaintiffs and defendants ask that the Court enter a final judgment of non-infringement. After Plaintiffs and Huawei filed opposing letter briefs with the Court, U.S. Magistrate Judge Grewal stayed the action against Huawei pending resolution of Plaintiffs’ objections to the claim construction. On October 6, 2015, Plaintiffs filed objections to the claim construction with District Court Judge Chhabria. Judge Chhabria rejected those objections on November 9, 2015. Based on that order, the parties stipulated to a judgment of non-infringement as to the ‘336 patent and such judgment was entered on November 13, 2015.

  

 

 

 

 7 

 

 

On December 7, 2015, Plaintiffs filed notices of appeal with the U.S. Federal Circuit appealing the district court’s claim construction. Plaintiffs filed their opening appellate brief on March 10, 2016. Defendants filed their response brief on May 23, 2016, with Plaintiffs filing their reply brief on June 23, 2016. On March 3, 2017, the U.S. Court of Appeals for the Federal Circuit rendered its decision modifying the claim construction that was issued in September 2016 by the U.S. District Court for the Northern District of California and has remanded the matter to the District Court for further proceedings.

 

On May 23, 2017, a case management conference was held in front of District Court Judge Chhabria, who ordered that Plaintiffs amend their infringement contentions on or before June 16, 2017. Judge Chhabria further ordered that Defendants submit any motion for summary judgment based on the amended infringement contentions and the modified claim construction by August 1, 2017. On June 5, 2017, the law firm of Banys, P.C., who had served as local counsel for PDS, withdrew as counsel. PDS continued to be represented by the law firm of Nelson Bumgardner, P.C. On June 16, 2017, Plaintiffs timely amended their infringement contentions. On July 13, 2017, all remaining counsel for each of Patriot, TPL, and PDS moved to withdraw as counsel and further moved to extend all currently pending case deadlines by 60 days for Plaintiffs to seek new counsel.

 

On September 13, 2017, the law firm of Bunsow De Mory LLP was entered before the U.S. District Court for the Northern District of California as successor counsel in representation of Patriot, PDS, and TPL.

 

The Defendants moved for summary judgment of non-infringement on September 29, 2017, and the Court held a hearing on Defendants’ motion on November 30, 2017. The Court granted Defendants’ motion and entered judgment of non-infringement on December 13, 2017.

 

Plaintiffs filed notices of appeal in these district court matters on January 5, 2018. The appeals were docketed and consolidated under lead case No. 18-1439, captioned as Technology Properties Limited v. Huawei Technologies Co., Ltd in the United States Court of Appeals for the Federal Circuit. Oral argument proceeded on February 4, 2019. The Court affirmed the lower court’s determination without written opinion pursuant to Federal Circuit Rule 36 on February 6, 2019. Plaintiffs filed a Petition for Rehearing En Banc on March 8, 2019 which was denied by the Court on April 10, 2019.

 

On September 6, 2019 Plaintiffs filed a petition for a writ of certiorari with the Supreme Court of the United States as a result of the United States Court of Appeals outcome.

 

On November 4, 2019, the Supreme Court of the United States denied our petition for a writ of certiorari with respect to patent litigation previously before the United States Court of Appeals for the Federal Circuit that alleged infringement of the ‘336 patent against the Defendants.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 

 

 

 

 

 

 

 

 8 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our Common Stock is currently listed for trading in the OTC Pink operated by OTC Markets, Inc. under the symbol PTSC. 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 our Common Stock for the fiscal years ended May 31, 2020 and 2019.

 

   BID QUOTATIONS 
   HIGH   LOW 
Fiscal Year Ended May 31, 2020          
First Quarter  $0.0062   $0.0020 
Second Quarter  $0.0064   $0.0021 
Third Quarter  $0.0029   $0.0013 
Fourth Quarter  $0.0028   $0.0010 

 

   BID QUOTATIONS 
   HIGH   LOW 
Fiscal Year Ended May 31, 2019          
First Quarter  $0.0105   $0.0037 
Second Quarter  $0.0105   $0.0052 
Third Quarter  $0.0067   $0.0031 
Fourth Quarter  $0.0066   $0.0028 

 

On August 14, 2020, the closing price of our stock was $0.0067 per share and we had 700 stockholders of record. 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 beneficial owners represented by these record holders.

 

Dividend Policy

 

We paid no dividends during the fiscal years ended May 31, 2020 and 2019 and we have not paid any dividends since April 9, 2007.

 

Equity Compensation Plan Information

 

Our stockholders previously approved our 2006 Stock Option Plan (“Plan”). As of May 31, 2020, there are no outstanding stock options or options available for future issuance under our 2006 Stock Option Plan as the Plan expired on March 31, 2016.

 

Recent Sale of Unregistered Securities

 

None.

 

 

 

 

 9 

 

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, selected financial data is not required to be disclosed.

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING FUTURE EVENTS AND PERFORMANCE OF OUR COMPANY. YOU SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, BECAUSE THEY ARE ONLY PREDICTIONS BASED ON OUR CURRENT EXPECTATIONS AND ASSUMPTIONS. MANY FACTORS COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THESE FORWARD-LOOKING STATEMENTS. YOU SHOULD REVIEW CAREFULLY THE RISK FACTORS IDENTIFIED IN THIS REPORT AS SET FORTH BELOW AND UNDER THE CAPTION “RISK FACTORS.” WE DISCLAIM ANY INTENT TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT ACTUAL EVENTS OR DEVELOPMENTS.

 

Overview

 

We have been a licensing company of patented microprocessor technologies that offered broad and open licensing and by litigating against those who may have infringed on its patents. These licensing efforts were performed through our joint venture with Phoenix Digital Solutions, LLC (“PDS”). PDS has not generated significant license revenues since September 2013. Furthermore, on November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patented microprocessor technologies. As result of this denial to review the lower court’s decision, our patented microprocessor technologies were no longer enforceable, and we have no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue and we need to either pursue a new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code.

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent (see Note 10 to Patriot’s consolidated financial statements included elsewhere herein).

 

 

 

 

 10 

 

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. We believe the following critical accounting policies affect our most significant estimates and judgments used in the preparation of our consolidated financial statements.

  

1.        Investments in Marketable Securities

 

We classify our investments in marketable securities in certificates of deposit at the time of purchase as held-to-maturity and reevaluate such classifications at each balance sheet date. Held-to-maturity investments consist of securities that we have the intent and ability to retain until maturity. These securities are recorded at cost and adjusted for the amortization of premiums and discounts, which approximates fair value. Cash inflows and outflows related to the sale and purchase of investments are classified as investing activities in our condensed consolidated statements of cash flows.

 

2.        Investment in Affiliated Companies

 

We have a 50% interest in PDS. We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the condensed consolidated statements of operations in the caption “Equity in loss of affiliated company” and also is adjusted by contributions to and distributions from PDS.

 

PDS, as an unconsolidated equity investee, recognizes revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. PDS may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones are met.

 

We review our investment in PDS to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near-term prospects of PDS. If a decline in value is deemed to be other than temporary, we would recognize an impairment loss.

 

We own 100% of the preferred stock of Holocom. Prior to impairment, this investment was accounted for at cost since we did not have the ability to exercise significant influence over the operating and financial policies of Holocom.

 

 

 

 

 11 

 

 

3.       Income Taxes

 

We follow authoritative guidance in accounting for uncertainties in income taxes. This authoritative guidance prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance we may only recognize tax positions that meet a “more likely than not” threshold.

 

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We are assessing our deferred tax assets under more likely than not scenarios in which they may be realized through future income.

 

We have determined that it was more likely than not that all of our deferred tax assets will not be realized in the future due to our continuing pre-tax and taxable losses. As a result of this determination, we have recorded a full valuation allowance against our deferred tax assets.

 

4.       Assessment of Contingent Liabilities

 

We may be involved in various legal matters, disputes, and patent infringement claims which arise in the ordinary course of our business. We accrue for any estimated losses at the time when we can make a reliable estimate of such loss and it is probable that it has been incurred. By their very nature, contingencies are difficult to estimate. We continually evaluate information related to all contingencies to determine that the basis on which we have recorded our estimated exposure is appropriate.

 

RESULTS OF OPERATIONS

 

Comparison of fiscal year 2020 and 2019

 

   May 31, 2020   May 31, 2019 
Selling, general and administrative  $996,019   $734,062 

 

Selling, general and administrative expenses increased from $734,062 for the fiscal year ended May 31, 2019 to $996,019 for the fiscal year ended May 31, 2020. The current fiscal year increase in expenses was primarily due to higher compensation expense mostly associated with severance expense paid to Mr. Flowers, our former Chief Financial Officer. Mr. Flowers resigned on September 30, 2019 and agreed to severance compensation of $327,750, in lieu of any amounts owed under his amended and restated employment agreement, payable in seven equal monthly installments commencing October 30, 2019. In addition, during the current fiscal year, we had an increase in consulting fees, mostly associated with the evaluation of new business opportunities in collaboration with Artius Bioconsulting LLC. These current fiscal year increases in expenses were offset by lower board fees as our board member volunteered to cease taking board fees.

 

   May 31, 2020   May 31, 2019 
Other income (expense):          
Interest income  $12,068   $28,711 
Equity in loss of affiliated company   (74,977)   (91,512)
Total other expense, net  $(62,909)  $(62,801)

 

Total other expenses, net increased slightly from $62,801 for the fiscal year ended May 31, 2019 to $62,909 for the fiscal year ended May 31, 2020. The increase was primarily due to a decrease in the equity in the loss of PDS resulting from a decrease in PDS legal expenses. The current fiscal year increase was partially offset by a decrease in interest income due to a lower cash balance on hand combined with lower overall interest rates. Our investment in PDS continues to be accounted for in accordance with the equity method of accounting for investments.

 

 

 

 

 12 

 

 

   May 31, 2020   May 31, 2019 
Loss before provision for income taxes  $(1,058,928)  $(796,863)

 

Loss before provision for income taxes increased from approximately $796,863 for the fiscal year ended May 31, 2019 to $1,058,928 for the fiscal year ended May 31, 2020 primarily due to increases in selling, general and administrative expenses as discussed above.

 

Provision for income taxes

 

During each of the fiscal years ended May 31, 2020 and 2019, we recorded a provision for income taxes of $1,600 related to California state taxes.

 

Net loss

 

Net loss increased from $798,463 for the fiscal year ended May 31, 2019 to $1,060,528 for the fiscal year ended May 31, 2020 primarily due to increases in selling, general and administrative expenses as discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES 

 

Our cash and cash equivalents and investments in marketable securities balances decreased from approximately $1,537,086 as of May 31, 2019 to $571,921 as of May 31, 2020. We also have restricted cash of $198,843 and $177,247 as of May 31, 2019 and 2020, respectively. Total current assets decreased from $1,790,010 as of May 31, 2019 to $785,408 as of May 31, 2020. Total current liabilities were $228,212 and $182,595 as of May 31, 2019 and 2020, respectively. The decrease in our net working capital during fiscal year 2020 was primarily due to our reported net loss for the fiscal year ended May 31, 2020 as PDS was unable to generate revenues and provide partnership distributions sufficient to cover our operating expenses.

 

PDS has not generated significant license revenues since September 2013. Furthermore, on November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patented microprocessor technologies. As result of this denial to review the lower court’s decision, our patented microprocessor technologies were no longer enforceable, and we have no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue from PDS and we need to either pursue a new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code.

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent (see Note 10 to Patriot’s consolidated financial statements included elsewhere herein).

 

 

 

 

 13 

 

 

Therefore, our ability to continue our operations and new line of business is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to fund future operations. We anticipate, based on currently proposed plans and assumptions that our cash on hand will not satisfy our operational and capital requirements through twelve months from the date of filing on this Form 10-K.

 

There are a number of uncertainties associated with our ability to raise additional capital and we have no current arrangements with respect to any additional financing. In addition, the continuation of disruptions caused by COVID-19 may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. Consequently, there can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital will delay our ability to continue to conduct our business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. If we are unable to raise additional capital, we may either liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code. The above matters raise substantial doubt regarding our ability to continue as a going concern.

 

Cash Flows From Operating Activities

 

Cash used in operating activities for the fiscal years ended May 31, 2020 and 2019 was $986,761 and $760,766, respectively. The principal components of the current fiscal year included a net loss of $1,060,528 combined with a decrease in accounts payable, accrued expenses and other of $45,617. These current fiscal year amounts were offset by a decrease in prepaid expenses and other current assets of $17,841, a decrease in deferred income taxes of $26,078, and by equity in loss of affiliated company of $74,977. The principal components of the prior fiscal year were the net loss of $798,463 combined with an increase in prepaid expenses and other current assets of $22,716 and a decrease in accounts payable, accrued expenses and other of $33,873. These prior fiscal year amounts were offset by decrease in prepaid income tax of $2,285 and by equity in loss of affiliated company of $91,512.

 

Cash Flows From Investing Activities

 

Cash provided by investing activities for the fiscal year ended May 31, 2020 was $750,000 and attributable to net sales of marketable securities. Cash used in investing activities for the fiscal year ended May 31, 2019 was $572,754 comprised of the purchase of marketable securities of $750,000 offset by the receipt of $177,246 in restricted cash that was previously held by a third party in conjunction with the Company’s acquisition of Crossflo.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which was subsequently amended by ASUs 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20. ASU 2014-09, as amended, supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and creates a new ASC Topic 606 (“ASC 606”). ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Our adoption of this guidance effective June 1, 2018 did not have a significant impact on the financial statements of PDS.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issue addressed in ASU 2016-15 that will affect the Company is classifying distributions received from equity method investments. The guidance provides an accounting policy election for classifying distributions received from equity method investments using either a cumulative earnings approach or a nature of distributions approach. The Company adopted this standard on June 1, 2018. The adoption did not have a material effect on our consolidated financial statements.

 

 

 

 

 14 

 

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on June 1, 2018 by using the retrospective transition method.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Report and begin on page F-1 with the index to consolidated financial statements.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our Interim Chief Executive Officer and our Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

  

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and our Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2020 based on the criteria set forth in Internal Control — Integrated Framework – 2013 update issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, and after considering the controls implemented to mitigate the impact resulting from insufficient accounting personnel discussed below, our management concluded that our internal control over financial reporting was effective as of May 31, 2020.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Annual Report.

 

 

 

 

 15 

 

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended May 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Internal Control

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

In addition, projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

 

 

 

 

 

 

 

 

 

 16 

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Director Qualifications – We believe that individuals who serve on our Board should possess the requisite education and experience to make a significant contribution to the Board and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and should have the highest ethical standards, a strong sense of professionalism and dedication to serving the interests of our stockholders. The following are qualifications, experience and skills for Board members which are important to our business:

 

  · Leadership Experience – We seek directors who demonstrate extraordinary leadership qualities. Strong leaders bring vision, diverse perspectives, and broad business insight to the company. They demonstrate practical management experience, skills for managing change, and knowledge of industries, geographies and risk management strategies relevant to the Company.

 

  · Finance Experience – We believe that all directors should possess an understanding of finance and related reporting processes. We also seek directors who qualify as “audit committee financial experts” as defined in rules of the SEC for service on the Audit Committee.

 

  · Industry Experience – We seek directors who have relevant industry experience including: existing and new technologies, new or expanding businesses and a deep understanding of the Company’s business environments.

 

The following table and biographical summaries set forth information, including principal occupation, business experience, other directorships and director qualifications concerning the members of our Board of Directors and our executive officer as of May 31, 2020. There is no blood or other familial relationship between or among our directors or executive officer.

 

NAME AGE POSITION and TERM
Carlton M. Johnson, Jr. 60

Interim Chief Executive Officer (since April 1, 2019) and Interim Chief Financial Officer (since October 3, 2019)

Director (since August 2001)

Gloria H. Felcyn 73 Director (since October 2002)

 

CARLTON M. JOHNSON, JR.

Carlton Johnson became our Interim Chief Executive Officer on April 1, 2019 and appointed Interim Chief Financial Officer since October 3, 2019, and has served as a director of the Company since 2001, and is Chairman of the Executive Committee of the Board of Directors. From June 1996 through March 2013, Mr. Johnson served as in-house legal counsel for Roswell Capital Partners, LLC and related entities. Mr. Johnson has been admitted to the practice of 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 was 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 at Samford University - Cumberland School of Law. Mr. Johnson served on the board of directors of Peregrine Pharmaceuticals, Inc., a publicly held biotechnology company from 1999 through November 2017. From May 2009 to March 2012, Mr. Johnson served on the board of directors of Cryoport, Inc., a publicly held company providing cost-efficient frozen shipping to biopharmaceutical and biotechnology industries. Mr. Johnson served as chairman of Cryoport’s compensation committee and as a member of its audit committee and nomination and governance committee. From November 2009 to December 2011, Mr. Johnson served on the board of directors of ECOtality, Inc., a leader in clean electric transportation and storage technologies. Mr. Johnson served on the audit committee and nominating committee of ECOtality.

 

The Board of Directors concluded that Mr. Johnson should serve as a director in light of the extensive public company finance and corporate governance experience that he has obtained through serving on the boards and audit committees of Peregrine Pharmaceuticals, Inc., Cryoport, Inc., and ECOtality, Inc.

  

 

 

 

 17 

 

 

GLORIA H. FELCYN

Gloria Felcyn has served as a director of the Company since October 2002 and is the Chairman of the Audit Committee of the Board of Directors. From 1982 through April 2018, Ms. Felcyn was principal in her own certified public accounting firm, during which time she represented Helmut Falk Sr. and nanoTronics, along with other major individual and corporate clients in Silicon Valley. Following Mr. Falk’s death, Ms. Felcyn represented his estate and family trust as Executrix and Trustee of the Falk Estate and The Falk Trust.  Prior to establishing her firm, Ms. Felcyn worked for the national accounting firm of Hurdman and Cranston from 1969 through 1970 and Price Waterhouse & Co. in San Francisco and New York City from 1970 through 1976, during which period she represented major Fortune 500 companies. Subsequent to that, Ms. Felcyn worked in the field of international tax planning with a major real estate syndication company in Los Angeles until 1982 when she decided to start her own practice in Northern California.  Ms. Felcyn retired from public accounting effective April 2018. A major portion of Ms. Felcyn’s past practice was “Forensic Accounting”, which involves valuation of business entities and investigation of assets. Ms. Felcyn has published tax articles for “The Tax Advisor” and co-authored a book published in 1982, “International Tax Planning”. Ms. Felcyn has a degree in Business Economics from Trinity University and is a retired member of the American Institute of CPAs. Ms. Felcyn remains a substantial shareholder in the Company and is currently serving as an unpaid director.  

 

The Board of Directors concluded that Ms. Felcyn should serve as a director and the chairperson of the Audit Committee in light of the extensive financial and accounting experience that she has obtained over her career.

 

Board Leadership Structure

 

Our bylaws provide that the Chairman of the Board shall preside over all meetings of the Board of Directors. Our bylaws also state that the Chairman of the Board shall serve as the Chief Executive Officer unless determined otherwise by our Board. Our Board of Directors has not appointed a Chairman. During meetings of our Board of Directors, Mr. Johnson, who is our Interim Chief Executive Officer and Interim Chief Financial Officer, acts as Chairman of the Board. We have not appointed a lead independent director.

 

The Board has determined that its current structure is in the best interests of the Company and its stockholders. We believe that Ms. Felcyn’s independence and participation on the Audit Committee and the Compensation Committee maintains a level of independent oversight of management that is appropriate for the Company.

 

Board Risk Oversight

 

Our Board oversees and maintains our governance and compliance processes and procedures to promote the conduct of our business in accordance with applicable laws and regulations and with the highest standards of responsibility, ethics and integrity. As part of its oversight responsibility, our Board is responsible for the oversight of risks facing the Company and seeks to provide guidance with respect to the management and mitigation of those risks. Our board also delegates specific areas of risk to the Audit Committee which is responsible for the oversight of risk policies and processes relating to our financial statements and financial reporting processes. The Audit Committee reviews and discusses with management and the independent auditors significant risks and exposures to the Company and steps management has taken or plans to take to minimize or manage such risks.

  

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish us with copies of all reports filed by them in compliance with Section 16(a).

 

 

 

 

 18 

 

 

Based solely on our review of the copies of such forms received by us, or written representations from reporting persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during fiscal year 2020.

 

Code of Ethics

 

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Ethics is available on our website at www.ptsc.com under the link “Investors” and “Management Team”.

 

Audit Committee

 

We have an Audit Committee (the “Audit Committee”) established in accordance with Section 3(a)(58)(A) of the Exchange Act, currently comprised of: Gloria H. Felcyn (Committee Chair) and Carlton M. Johnson, Jr. Ms. Felcyn is independent as defined under the applicable rules of the SEC and NASDAQ Stock Market LLC (“NASDAQ”) listing standards. The Board of Directors has determined that Gloria H. Felcyn, who serves on the Audit Committee, is an “audit committee financial expert” as defined in applicable SEC rules. The Board of Directors has appointed Mr. Johnson to the Audit Committee, even though he is not independent, because it believes it is in the best interests of the Company to have two Directors on the Audit Committee at the current time due to the Company’s limited resources.

 

Director Legal Proceedings

 

During the past ten years, no director, executive officer or nominee for our Board of Directors has been involved in any legal proceedings that are material to an evaluation of their ability or integrity to become our director or executive officer.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table summarizes the compensation of the named executive officers for the fiscal years ended May 31, 2020 and 2019. For fiscal 2020 and 2019, the named executive officers are our Interim Chief Executive Officer and our Interim Chief Financial Officer.

 

Summary Compensation Table

For Fiscal Years Ended May 31, 2020 and 2019

 

 

Name and Principal Position

 

 

 

Year

 

 

Salary ($)

  

 

Bonus ($)

   Option Awards ($)  

All Other Compensation

($)

  

Total Compensation

($)

 
Carlton M. Johnson, Jr., Interim CEO  2020  $122,400(1)  $   $   $9,912(2)  $132,312 
since April 1, 2019, Interim CFO since October 3, 2019  2019  $20,400(3)  $   $   $102,000(4)  $122,400 
                             
Clifford L. Flowers, Former CFO,  2020  $150,229(5)  $   $   $330,640(6)  $480,869 
(resigned effective September 30, 2019), and Former Interim CEO (effective March 31, 2019)  2019  $327,750(7)  $   $   $   $327,750 

 

___________________

(1)Represents Mr. Johnson’s annual compensation for fiscal year 2020.
(2)Represents the reimbursement of medical benefits paid directly to Mr. Johnson.
(3)Represents Mr. Johnson’s compensation for 2019 as Interim CEO from April 1, 2019 to May 31, 2019.
(4)Represents director fees as a Company director in the amount of $72,000 and director fees from Phoenix Digital Solutions as a Managing Member in the amount of $30,000.
(5)Represents annual salary compensation through September 30, 2019, the effective date of Mr. Flower’s resignation.
(6)Includes severance costs of $327,750, in accordance with the terms of Mr. Flower’s Amended and Restated Employment Agreement as noted below under “Employment Contract”.
(7)Represents Mr. Flower’s annual compensation for fiscal year 2019.

 

 

 

 

 19 

 

 

Outstanding Equity Awards

 

As of May 31, 2020, there are no outstanding equity awards.

 

Option Exercises and Stock Vested

 

During fiscal year 2020, no stock options were exercised and there was no vesting of stock awards.

 

Employment Contract

 

In connection with Cliff Flowers’ appointment as the Chief Financial Officer of the Company, and commencing on September 17, 2007, we entered into an employment agreement with Mr. Flowers for an initial 120-day term if not terminated pursuant to the agreement, with an extension period of one year and on a continuing basis thereafter. On December 30, 2016, we entered into an amended and restated employment agreement (“Amended and Restated Employment Agreement”) with Mr. Flowers. Pursuant to the Amended and Restated Employment Agreement dated December 30, 2016, if Mr. Flowers was terminated without cause or resigns with good reason any time after two years of continuous employment, he was entitled to receive an amount equal to 1.25 times his annual base salary. Mr. Flowers was also entitled to certain payments upon a change of control of the Company if the surviving corporation did not retain him. All such payments were conditional upon the execution of a general release. On October 1, 2019, Mr. Flowers and the Company signed a Separation Agreement and General Release of all Claims (“Separation Agreement”). Pursuant to the Separation Agreement, Mr. Flowers resigned on September 30, 2019 and agreed to severance compensation of $327,750, in lieu if any amounts owed under his Amended and Restated Employment Agreement, payable in seven equal monthly installments commencing October 30, 2019. As of May 31, 2020, all amounts have been paid to Mr. Flowers.

 

Director Compensation  

 

No director compensation was paid or accrued during fiscal year 2020. In addition, directors did not receive any equity compensation or equity awards during fiscal year 2020.  

 

Director Outstanding Equity Awards

 

As of May 31, 2020, there are no outstanding equity awards to directors.

 

Other

 

We reimburse all directors for travel and other necessary business expenses incurred in the performance of their services for us. 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of August 24, 2020, the stock ownership of each of our officers and directors, of all our officers and directors as a group, and of each person known to us to be a beneficial owner of 5% or more of our Common Stock. The number of shares of Common Stock outstanding as of August 24, 2020, was 401,392,948. 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. Each individual’s address is 2038 Corte Del Nogal, Suite 141, Carlsbad, California 92011.

 

Name  

Amount & Nature of

Beneficial Ownership

    Percent of Class  
Gloria H. Felcyn     951,690       *  
Carlton M. Johnson, Jr.     525,000       *  
All directors & officers as a group (2 persons)     1,476,690       *  

* Less than 1%

 

 

 

 20 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions With Directors, Executive Officers and Principal Stockholders

 

There were no transactions, or series of transactions during the fiscal years ended May 31, 2020 or 2019, nor are there any currently proposed transactions, or series of transactions, to which we are a party, in which the amount exceeds $120,000, and in which to our knowledge any director, executive officer, nominee, five percent or greater stockholder, 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.

 

Director Independence

 

Our Board of Directors has determined that Gloria H. Felcyn qualifies as “independent,” as defined by the listing standards of NASDAQ. Our other director, Carlton M. Johnson, Jr., is no longer independent because he is currently serving as the Company’s Interim Chief Executive Officer and Interim Chief Financial Officer.  Mr. Johnson, who is not independent, is a member of our Audit Committee and our Compensation Committee of our Board of Directors.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Pursuant to the Policy on Engagement of Independent Auditor, the Audit Committee is directly responsible for the appointment, compensation and oversight of the independent auditor. The Audit Committee pre-approves all audit services and non-audit services to be provided by the independent auditor and has approved 100% of the audit, audit-related and tax fees listed below. The Audit Committee may delegate to one or more of its members the authority to grant the required approvals, provided that any exercise of such authority is presented at the next Audit Committee meeting for ratification.

 

Each audit, non-audit and tax service that is approved by the Audit Committee will be reflected in a written engagement letter or writing specifying the services to be performed and the cost of such services, which will be signed by either a member of the Audit Committee or by one of our officers authorized by the Audit Committee to sign on our behalf.

 

The Audit Committee will not approve any prohibited non-audit service or any non-audit service that individually or in the aggregate may impair, in the Audit Committee’s opinion, the independence of the independent auditor.

 

In addition, our independent auditor may not provide any services to our officers or Audit Committee members, including financial counseling or tax services.

 

Audit Fees

 

During the fiscal years ended May 31, 2020 and 2019, the aggregate fees billed by our principal accountants for professional services rendered for the audit of our annual consolidated financial statements, and reviews of quarterly consolidated financial statements included in our reports on Form 10-Q, and audit services provided in connection with other statutory or regulatory filings were $63,800 and $62,700, respectively.

 

Audit-Related Fees

 

None.

 

Tax Fees

 

During the fiscal years ended May 31, 2020 and 2019, the aggregate fees billed by our principal accountants for tax compliance, tax advice and tax planning rendered on our behalf were $9,537 and $9,295, respectively, which are related to the preparation of federal and state income tax returns.

 

All Other Fees

 

Our principal accountants billed no additional fees for the fiscal years ended May 31, 2020 and 2019, except as disclosed above.

 

 

 

 21 

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)    The following documents are filed as a part of this report:

 

  1. Financial Statements. The following consolidated financial statements and Report of Independent Registered Public Accounting Firm are included starting on page F-1 of this Report:

 

Patriot Scientific Corporation

 

Report of KMJ Corbin & Company LLP, Independent Registered Public Accounting Firm

 

Consolidated Balance Sheets as of May 31, 2020 and 2019

 

Consolidated Statements of Operations for the Years Ended May 31, 2020 and 2019

 

Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, 2020 and 2019

 

Consolidated Statements of Cash Flows for the Years Ended May 31, 2020 and 2019

 

Notes to Consolidated Financial Statements

 

Phoenix Digital Solutions, LLC

 

Report of KMJ Corbin & Company LLP, Independent Registered Public Accounting Firm

 

Balance Sheets as of May 31, 2020 and 2019

 

Statements of Operations for the Years Ended May 31, 2020 and 2019

 

Statements of Members’ Equity for the Years Ended May 31, 2020 and 2019

 

Statements of Cash Flows for the Years Ended May 31, 2020 and 2019

 

Notes to Financial Statements

 

  2. Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or is included in the consolidated financial statements or notes thereof.

 

  3. Exhibits. Those exhibits marked with a (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list. Those exhibits marked with a (†) refer to management contracts or compensatory plans or arrangements.

 

 

 

 

 22 

 

 

Exhibit No.

Document
   
2.1

Agreement and Plan of Merger dated August 4, 2008, among the Company, PTSC Acquisition 1 Corp, Crossflo Systems, Inc. and the Crossflo principal officers, incorporated by reference to Exhibit 99.1 to Form 8-K filed August 11, 2008 (Commission file No. 000-22182)

   

3.1

Original Articles of incorporation of the Company’s predecessor, Patriot Financial Corporation, incorporated by reference to Exhibit 3.1 to registration statement on Form S-18, (Commission file No. 33-23143-FW)

   

3.2

Articles of Amendment of Patriot Financial Corporation, as filed with the Colorado Secretary of State on July 21, 1988, incorporated by reference to Exhibit 3.2 to registration statement on Form S-18, (Commission file No. 33-23143-FW)

   

3.3

Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on March 24, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

   

3.3.1

Certificate of Amendment to the Certificate of Incorporation of the Company, as 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 (Commission file No. 000-22182)

   

3.3.2

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on June 24, 1997, incorporated by reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year ended May 31, 1997, filed July 18, 1997 (Commission file No. 000-22182)

   

3.3.3

Certificate of Amendment to the Certificate of Incorporation of the Company, as 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 filed May 5, 2000 (Commission file No. 333-36418)

   

3.3.4

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on May 6, 2002, incorporated by reference to Exhibit 3.3.4 to Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)

   

3.3.5

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on October 16, 2003, incorporated by reference to Exhibit 3.3.5 to Registration Statement on Form SB-2 filed May 21, 2004 (Commission file No. 333-115752)

   

3.3.6

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on April 29, 2005, incorporated by reference to Exhibit 3.3.6 to Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)

   

3.3.7

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on November 14, 2005, incorporated by reference to Exhibit 3.3.7 to Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)

 

 

 

 

 23 
 

 

3.3.8

Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on March 18, 2009, incorporated by reference to Exhibit 3.3.8 to Form 10-K for the fiscal year ended May 31, 2009, filed August 14, 2009 (Commission file No. 000-22182)

   
3.4

Articles and Certificate of Merger of Patriot Financial Corporation into the 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 (Commission file No. 33-23143-FW)

   
3.5

Certificate of Merger issued by the Delaware Secretary of State on May 8, 1992, incorporated by reference to Exhibit 3.5 to Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

   
3.6

Certificate of Merger issued by the Colorado Secretary of State on May 12, 1992, incorporated by reference to Exhibit 3.6 to Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

   
3.7

Bylaws of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

   
3.7.1

Amendment to bylaws of the Company, incorporated by reference to Exhibit 3.7.1 to our Current Report on Form 8-K dated November 4, 2010 (Commission file No. 000-22182)

   
4.1

Specimen common stock certificate, incorporated by reference to Exhibit 4.1 Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

   
4.2†

2006 Stock Option Plan of the Company as amended and restated, incorporated by reference to Appendix C to the Company Proxy Statement filed September 22, 2008 (Commission file No. 000-22182)

   
10.1

Master Agreement, dated as of June 7, 2005, by and among the Company, Technology Properties Limited Inc., a California corporation and Charles H. Moore, an individual, incorporated by reference to Exhibit 10.40 to Form 8-K filed June 15, 2005 (Commission file No. 000-22182)

   
10.2

Commercialization Agreement dated as of June 7, 2005 by and among the JV LLC, Technology Properties Limited Inc., a California corporation, and the Company, incorporated by reference to Exhibit 10.41 to Form 8-K filed June 15, 2005 (Commission file No. 000-22182)

   
10.3

Limited Liability Company Operating Agreement of JV LLC, a Delaware limited liability company, dated as of June 7, 2005, incorporated by reference to Exhibit 10.42 to Form 8-K filed June 15, 2005 (Commission file No. 000-22182)

   
10.4†

Employment Agreement dated September 17, 2007 by and between the Company and Clifford L. Flowers, incorporated by reference to Exhibit 10.1 to Form 8-K filed September 19, 2007 (Commission file No. 000-22182)

   
10.5

Form of Indemnification Agreement by and between the Company and the Board of Directors, incorporated by reference to Exhibit 10.6 to Form 10-K filed August 29, 2011 (Commission file No. 000-22182)

 

 

 

 24 
 

 

10.6

Licensing Program Services Agreement effective July 11, 2012 among Phoenix Digital Solutions, LLC, Alliacense Limited, LLC, Technology Properties Limited, LLC and the Company, incorporated by reference to Exhibit 10.7 to Form 8-K filed July 17, 2012 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

   
10.7

Agreement effective July 11, 2012 between Technology Properties Limited, LLC and the Company, incorporated by reference to Exhibit 10.8 to Form 8-K filed July 17, 2012 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

10.8

Agreement effective July 17, 2012 among Phoenix Digital Solutions, LLC, Alliacense Limited, LLC, Technology Properties Limited, LLC and the Company, incorporated by reference to Exhibit 10.9 to Form 8-K filed July 17, 2012 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

   
10.9

Agreement effective July 24, 2014 among Phoenix Digital Solutions, LLC and Alliacense Limited, LLC, incorporated by reference to Exhibit 10.10 to Form 8-K filed July 30, 2014 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

   
10.10

Letter agreement dated October 10, 2014 between Phoenix Digital Solutions, LLC and Dominion Harbor Group, LLC, incorporated by reference to Exhibit 10.10 to Form 8-K filed October 16, 2014 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

   
10.11

Agreement effective August 10, 2016 among Phoenix Digital Solutions, LLC, MMP Licensing LLC and Alliacense Limited, LLC, incorporated by reference to Exhibit 10.1 to Form 8-K filed August 16, 2016 (Commission file No. 000-22182) (Confidential treatment has been requested with respect to portions of this agreement.)

   
10.12†

Amended and Restated Employment Agreement dated December 30, 2016 by and between the Company and Clifford L. Flowers, incorporated by reference to Exhibit 10.1 to Form 8-K filed January 6, 2017 (Commission file No. 000-22182)

   

14.1

Code of Ethics for Senior Financial Officers incorporated by reference to Exhibit 14.1 to Form 10-K for the fiscal year ended May 31, 2003, filed August 29, 2003 (Commission file No. 000-22182)

   

21*

List of subsidiaries of the Company

   

31.1*

Certification of Carlton M. Johnson Jr., Interim CEO, pursuant to Rule 13a-15(e) or Rule 15d-15(e)
   

31.2*

Certification of Carlton  M. Johnson Jr., Interim CFO, pursuant to Rule 13a-15(e) or Rule 15d-15(e)
   

32.1*

Certification of Carlton M. Johnson Jr., Interim CEO and Interim CFO, pursuant to 18 U.S.C. Section 1350
   

99.1

Form of Incentive Stock Option Agreement to the Company’s 2006 Stock Option Plan incorporated by reference to Exhibit 99.10 on Form 10-K for the fiscal year ended May 31, 2009, filed August 14, 2009 (Commission file No. 000-22182)

   

99.2

Form of Non-Qualified Stock Option Agreement to the Company’s 2006 Stock Option Plan incorporated by reference to Exhibit 99.11 on Form 10-K for the fiscal year ended May 31, 2009, filed August 14, 2009 (Commission file No. 000-22182)

   
101.INS XBRL Instance Document
   
101.SCH XBRL Schema Document
   
101.CAL XBRL Calculation Linkbase Document
   
101.DEF XBRL Definition Linkbase Document
   
101.LAB XBRL Label Linkbase Document
   
101.PRE XBRL Presentation Linkbase Document

 

 

 

 

 25 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DATED:  August 24, 2020 PATRIOT SCIENTIFIC CORPORATION
   
   
   
  /S/ CARLTON M. JOHNSON JR.
  Carlton M. Johnson Jr.
  Interim Chief Executive Officer and Interim Chief Financial Officer
  (Duly Authorized and Principal Financial Officer)
   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 26 

 

 

Patriot Scientific Corporation

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
   
Report of Independent Registered Public Accounting Firm     F-2
Financial Statements:      
Consolidated Balance Sheets     F-3
Consolidated Statements of Operations     F-4
Consolidated Statements of Stockholders’ Equity     F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements     F-7

 

 

 

 

 

 

 

 

 

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Stockholders and Board of Directors

Patriot Scientific Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Patriot Scientific Corporation and subsidiaries (the "Company") as of May 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has an accumulated deficit of $62.2 million at May 31, 2020, has incurred recurring losses and used significant amounts of cash in its operations, and has no potential source of cash generation. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

KMJ Corbin & Company LLP

 

We have served as the Company's auditor since 2005.

 

Irvine, California

August 24, 2020

 

 

 

 

 

 F-2 

 

 

Patriot Scientific Corporation

Consolidated Balance Sheets

 

 

   May 31, 2020   May 31, 2019 
         
ASSETS          
Current assets:          
Cash and cash equivalents  $571,921   $787,086 
Restricted cash and cash equivalents   177,247    198,843 
Investments in marketable securities       750,000 
Prepaid expenses and other current assets   10,162    28,003 
Refundable income taxes   26,078    26,078 
Total current assets   785,408    1,790,010 
           
Property and equipment, net   326    814 
Deferred income taxes       26,078 
Investment in affiliated company   32,884    107,861 
Total assets  $818,618   $1,924,763 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $2,444   $8,868 
Accrued expenses and other   180,151    219,344 
Total current liabilities   182,595    228,212 
Total liabilities   182,595    228,212 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Preferred stock, $0.00001 par value; 5,000,000 shares authorized: none outstanding        
Common stock, $0.00001 par value: 600,000,000 shares authorized: 438,242,618 shares issued and 401,392,948 shares outstanding at May 31, 2020 and 2019   4,382    4,382 
Additional paid-in capital   77,444,062    77,444,062 
Accumulated deficit   (62,186,553)   (61,126,025)
Common stock held in treasury, at cost – 36,849,670 shares at May 31, 2020 and 2019   (14,625,868)   (14,625,868)
Total stockholders’ equity   636,023    1,696,551 
Total liabilities and stockholders’ equity  $818,618   $1,924,763 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 F-3 

 

 

Patriot Scientific Corporation

Consolidated Statements of Operations

 

 

   Year Ended May 31, 
   2020   2019 
Operating expenses:          
Selling, general and administrative  $996,019   $734,062 
Total operating expenses   996,019    734,062 
           
Other income (expense):          
Interest income   12,068    28,711 
Equity in loss of affiliated company   (74,977)   (91,512)
Total other expense, net   (62,909)   (62,801)
           
Loss before provision for income taxes   (1,058,928)   (796,863)
           
Provision for income taxes   1,600    1,600 
           
Net loss  $(1,060,528)  $(798,463)
           
Basic loss per common share  $   $ 
           
Diluted loss per common share  $   $ 
           
Weighted average number of common shares outstanding – basic   398,548,318    398,548,318 
Weighted average number of common shares outstanding – diluted   398,548,318    398,548,318 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 F-4 

 

 

Patriot Scientific Corporation

Consolidated Statements of Stockholders’ Equity

 

   Common Stock   Additional
Paid-in
   Accumulated   Treasury   Stockholders’ 
   Shares   Amounts   Capital   Deficit   Stock   Equity 
Balance, May 31, 2018   401,392,948   $4,382   $77,444,062   $(60,327,562)  $(14,625,868)  $2,495,014 
Net loss               (798,463)       (798,463)
Balance, May 31, 2019   401,392,948    4,382    77,444,062    (61,126,025)   (14,625,868)   1,696,551 
Net loss               (1,060,528)       (1,060,528)
Balance, May 31, 2020   401,392,948   $4,382   $77,444,062   $(62,186,553)  $(14,625,868)  $636,023 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-5 

 

 

Patriot Scientific Corporation

Consolidated Statements of Cash Flows

 

   Year Ended May 31, 
   2020   2019 
Operating activities:          
Net loss  $(1,060,528)  $(798,463)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   488    489 
Equity in loss of affiliated company   74,977    91,512 
Deferred income taxes   26,078    26,078 
Changes in operating assets and liabilities:          
Prepaid income tax       2,285 
Prepaid expenses and other current assets   17,841    (22,716)
Refundable income taxes       (26,078)
Accounts payable, accrued expenses and other   (45,617)   (33,873)
Net cash used in operating activities   (986,761)   (760,766)
           
Investing activities:          
Proceeds from sales of marketable securities   1,000,000     
Purchases of marketable securities   (250,000)   (750,000)
Crossflo acquisition liability       177,246 
Net cash provided by (used in) investing activities   750,000    (572,754)
           
Net decrease in cash, cash equivalents and restricted cash   (236,761)   (1,333,520)
Cash, cash equivalents, and restricted cash, beginning of year   985,929    2,319,449 
Cash, cash equivalents, and restricted cash, end of year  $749,168   $985,929 
           
Reconciliation of cash, cash equivalents and restricted cash at end of year:          
Cash and cash equivalents  $571,921   $787,086 
Restricted cash   177,247    198,843 
   $749,168   $985,929 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid for income taxes  $1,600   $1,600 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 F-6 

 

 

Patriot Scientific Corporation

Notes to Consolidated Financial Statements

 

1. Organization and Business

 

Patriot Scientific Corporation (the “Company”, “Patriot”, “we”, “us”, or “our”), was organized under Delaware law on March 24, 1992 and is the successor by merger to Patriot Financial Corporation, a Colorado corporation, incorporated on June 10, 1987.

 

In September 2008, we acquired Patriot Data Solutions Group, Inc. formerly known as Crossflo Systems, Inc. (“PDSG”) which engaged in data-sharing services and products primarily in the public safety and government sector. During April 2012, we sold substantially all of the assets of PDSG.

 

In June 2005, we entered into a joint venture agreement with Technology Properties Limited, Inc. (“TPL”) to form Phoenix Digital Solutions, LLC (“PDS”), a Delaware limited liability company organized on June 7, 2005. Through a commercialization agreement dated June 7, 2005, as amended in July 2012, PDS holds the rights to certain patents contributed by its two members, Patriot and TPL. Pursuant to the commercialization agreement, PDS would pursue the commercialization of our patented microprocessor technologies through broad and open licensing and by litigating against those who may be infringing on the members patents. License fees received by PDS would be distributed to its members, as defined in the commercialization agreement. While PDS has not generated significant license revenues since September 2013, on November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patented microprocessor technologies. As result of this denial to review the lower court’s decision, our patented microprocessor technologies are no longer enforceable, and we have no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue from PDS and we need to either pursue a new line of business, liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code.

 

On April 12, 2019, we entered into an agreement with Artius Bioconsulting LLC (“Artius”), to evaluate the potential of establishing a systems integration company that develops a blockchain-based technology platform that could be implemented throughout the drug development process. Pursuant to the agreement, during fiscal year 2019 and 2020, we paid Artius $58,000 and $83,597, respectively, for its consulting services to evaluate the potential new line of business. Based on the Company’s evaluation of multiple strategic alternatives, including blockchain-based technologies, the Company determined that the merger with Mosaic ImmunoEngineering, as discussed below, would provide the best opportunity for its shareholders moving forward.

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent (see Note 10).

 

 

 

 

 F-7 

 

 

Reclassifications

 

Certain reclassifications have been made to the prior period consolidated financial statements to conform to the classifications used in the current year. These reclassifications had no net impact on consolidated net loss and financial position.

 

Liquidity and Management’s Plans

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At May 31, 2020, the Company has an accumulated deficit of $62,186,553, and has incurred recurring losses and used significant amounts of cash in its operations. As of May 31, 2020, the Company had cash and cash equivalents of $571,921 and working capital of $602,813. In addition, PDS has not generated significant license revenues since September 2013 and we do not expect any future license revenue from PDS. Therefore, our ability to continue our operations and new line of business is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to fund future operations. We anticipate, based on currently proposed plans and assumptions that our cash on hand will not satisfy our operational and capital requirements through twelve months from the date of filing on this Form 10-K.

 

There are a number of uncertainties associated with our ability to raise additional capital and we have no current arrangements with respect to any additional financing. In addition, the continuation of disruptions caused by COVID-19 may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. Consequently, there can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital will delay our ability to continue to conduct our business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. If we are unable to raise additional capital, we may either liquidate the Company in a dissolution under Delaware law, or seek protection under the provisions of the U.S. Bankruptcy Code. The above matters raise substantial doubt regarding our ability to continue as a going concern.

  

2. Summary of Significant Accounting Policies

 

Basis of Consolidation

 

The consolidated balance sheets at May 31, 2020 and 2019 and consolidated statements of operations for the fiscal years ended May 31, 2020 and 2019 include our accounts and those of our wholly owned and inactive subsidiary PDSG which includes Crossflo Systems, Inc. (“Crossflo”). All significant intercompany accounts and transactions have been eliminated.

 

Financial Instruments and Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents, and investments in marketable securities.

 

We invest our cash and cash equivalents primarily in money market funds and certificates of deposit. Cash and cash equivalents are maintained with high quality financial institutions, the composition and maturities of which are regularly monitored by management. At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. We perform ongoing evaluations of these financial institutions to limit our concentration of risk exposure.

 

 

 

 

 F-8 

 

 

Fair Value of Financial Instruments

 

Our financial instruments consist principally of cash and cash equivalents, investments in marketable securities, accounts payable and accrued expenses and other. The carrying value of these financial instruments approximates fair value because of the immediate or short-term maturity of the instruments. The fair value of certain of our cash equivalents is determined based on quoted prices in active markets for identical assets or Level 1 inputs. The fair value of our investments in certificates of deposit is determined based on quoted prices in non-active markets for identical assets or Level 2 inputs. We believe that the carrying values of all other financial instruments approximate their current fair values due to their nature and respective durations.

 

Cash Equivalents, Restricted Cash, and Marketable Securities

 

We consider all highly liquid investments acquired with a maturity of three months or less from the purchase date to be cash equivalents.

 

Restricted cash and cash equivalents at May 31, 2020 is comprised of amounts previously held by a third party in conjunction with the Company’s acquisition of Crossflo. Restricted cash and cash equivalents at May 31, 2019 consist of a savings account held as collateral for our corporate credit card account plus amounts previously held by a third party in conjunction with the Company’s acquisition of Crossflo.

  

Investments in Marketable Securities

 

We determine the appropriate classification of our investments at the time of purchase and reevaluate such designation at each balance sheet date. Our investments in marketable securities have been classified and accounted for as held-to-maturity based on management’s investment intentions relating to these securities. Held-to-maturity marketable securities are stated at amortized cost which approximates fair value. We follow the authoritative guidance to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in fair value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations.

 

Property, Equipment and Depreciation

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years.  Repairs and maintenance are charged to expense when incurred.

 

Investment in Affiliated Companies

 

We have a 50% ownership interest in PDS. We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statements of operations in the caption “Equity in earnings (loss) of affiliated company” and also is adjusted by contributions to and distributions from PDS.

  

PDS, as an unconsolidated equity investee, recognizes revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured which is generally upon the receipt of the license proceeds. PDS may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones are met.

 

 

 

 

 F-9 

 

 

We review our investment in PDS to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near term prospects of PDS. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss.

 

We own 100% of the preferred stock of Holocom (see Note 5). Prior to impairment, this investment was accounted for at cost since we do not have the ability to exercise significant influence over the operating and financial policies of Holocom.

 

Treasury Stock

 

We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity.

 

Income Taxes

 

We follow authoritative guidance in accounting for uncertainties in income taxes. This authoritative guidance prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance we may only recognize tax positions that meet a “more likely than not” threshold.

 

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income.

 

We have determined that it was more likely than not that all of our deferred tax assets will not be realized in the future due to our continuing pre-tax and taxable losses. As a result of this determination, we have recorded a full valuation allowance against our deferred tax assets.

 

Assessment of Contingent Liabilities

 

We may be involved in various legal matters, disputes, and patent infringement claims which arise in the ordinary course of our business. We accrue for any estimated losses at the time when we can make a reliable estimate of such loss and it is probable that it has been incurred. By their very nature, contingencies are difficult to estimate. We continually evaluate information related to all contingencies to determine that the basis on which we have recorded our estimated exposure is appropriate.

 

Income (Loss) Per Share

 

Basic income (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 per share reflect the potential dilution of securities that could share in the earnings of an entity.

  

 

 

 

 F-10 

 

 

For the fiscal year ended May 31, 2019, potential common shares of 1,600,000 related to our outstanding options were not included in the calculation of diluted loss per share as we recorded a net loss. Had we reported net income for the year ended May 31, 2019, no shares of common stock would have been included in the calculation of diluted income per share using the treasury stock method. There were no outstanding options as of May 31, 2020.

 

In connection with our acquisition of Crossflo, which became a part of PDSG, we issued 2,844,630 escrow shares that are contingent upon certain representations and warranties made by Crossflo at the time of the merger agreement (see Note 9). We exclude these escrow shares from the basic income (loss) per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance 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, revenues and expenses, and the disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying footnotes. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including, but not limited to, fair values of investments in marketable securities, the use, recoverability, and /or realizability of certain assets, including investments in affiliated companies, and deferred tax assets.

 

Intellectual Property Rights

 

PDS historically relied on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We have seven U.S., nine European, and three Japanese patents all of which expired between August 2009 and October 4, 2016. On November 4, 2019, the Supreme Court of the United States denied our application to review a lower court’s decision that was adverse to our patents. As result of this denial to review the lower court’s decision, our patented microprocessor technologies are no longer enforceable, and we have no other options to appeal the lower court’s adverse decision.

 

Recent Accounting Pronouncements

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issue addressed in ASU 2016-15 that will affect the Company is classifying distributions received from equity method investments. The guidance provides an accounting policy election for classifying distributions received from equity method investments using either a cumulative earnings approach or a nature of distributions approach. The Company adopted this standard on June 1, 2018. The adoption did not have a material effect on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on June 1, 2018 by using the retrospective transition method, which required the following disclosures and changes to the presentation of its consolidated financial statements: cash, cash equivalents and restricted cash reported on the consolidated statements of cash flows now includes restricted cash of $198,843 as of May 31, 2019, as well as previously reported cash and cash equivalents.

 

 

 

 

 F-11 

 

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. The Company adopted ASU 2016-01 during the fiscal year ended May 31, 2019. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, as amended ("ASC 842"), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted ASC 842 effective June 1, 2019 using a modified retrospective method and will not restate comparative periods. As permitted under the transition guidance, the Company will carry forward the assessment of whether its contracts contain or are leases, classification of its leases and remaining lease terms. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

  

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which removes, modifies, and adds various disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The Company does not expect a significant impact from adopting this update on its consolidated financial statements.

 

3. Cash, Cash Equivalents, Restricted Cash and Marketable Securities

 

We follow authoritative guidance to account for our marketable securities as held-to-maturity. Under this authoritative guidance we are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We determine fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment or valuations by third party professionals. The three levels of inputs that we may use to measure fair value are:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

 

 

 

 

 F-12 

 

 

The following tables detail the fair value measurements within the fair value hierarchy of our cash, cash equivalents and investments in marketable securities:

 

       Fair Value Measurements at May 31, 2020 Using 
   Fair Value at
May 31,
2020
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Cash and cash equivalents:                    
Cash  $571,921   $571,921   $   $ 
Restricted cash and cash equivalents   177,247    177,247         
Total  $749,168   $749,168   $   $ 

  

 

       Fair Value Measurements at May 31, 2019 Using 
   Fair Value at
May 31,
2019
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Cash and cash equivalents:                    
Cash  $49,149   $49,149   $   $ 
Money market funds   237,937    237,937         
Certificates of deposit   500,000        500,000     
Restricted cash and cash equivalents   198,843    198,843         
Investments in marketable securities:                    
Certificates of deposit   750,000        750,000     
Total  $1,735,929   $485,929   $1,250,000   $ 

 

We purchase certificates of deposit with varying maturity dates. The following table summarizes the purchase date maturities, gross unrealized gains or losses and fair value of the certificates of deposit as of May 31, 2019:

 

   May 31, 2019 
   Cost   Gross Unrealized
Gains/(Losses)
   Fair
Value
 
Maturity               
Due in three months or less  $500,000   $   $500,000 
Due in greater than three months   750,000        750,000 
Total  $1,250,000   $   $1,250,000 

 

 

 

 

 F-13 

 

 

4. Property and Equipment

 

Property and equipment consisted of the following at May 31, 2020 and 2019:

 

   2020   2019 
Computer equipment and software  $9,082   $9,082 
Furniture and fixtures   3,147    3,147 
    12,229    12,229 
Less: accumulated depreciation   (11,903)   (11,415)
Net property and equipment  $326   $814 

 

Depreciation expense related to property and equipment was $488 and $489 for the fiscal years ended May 31, 2020 and 2019, respectively.

  

5. Investment in Affiliated Companies

 

Phoenix Digital Solutions, LLC

 

On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore, an individual co-inventor of the technology (“Moore”). Pursuant to the Master Agreement, we and TPL entered into the Limited Liability Company Operating Agreement of PDS (the “LLC Agreement”). Pursuant to the Master Agreement, we caused certain of our respective interests in the Microprocessor Patents to be licensed to PDS, a joint venture limited liability company owned 50% by us and 50% by TPL, and PDS engaged TPL to commercialize the Microprocessor Patents pursuant to a Commercialization Agreement among PDS, TPL and us (the “Commercialization Agreement”). Under the Commercialization Agreement, PDS granted to TPL the exclusive right to grant licenses and sub-licenses of the Microprocessor Patents and to pursue claims against violators of the Microprocessor Patents, in each case, on behalf of PDS, us, TPL and Moore, and TPL agreed to use reasonable best efforts to commercialize the Microprocessor Patents in accordance with a mutually agreed business plan. Pursuant to the Commercialization Agreement, PDS agreed to a reimbursement policy with regard to TPL’s expenses incurred in connection with the commercialization of the Microprocessor Patents. All proceeds generated by TPL in connection with the commercialization of the Microprocessor Patents were paid directly to PDS.

   

On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code. On March 5, 2018, TPL’s Motion for Entry of Final Decree Closing Chapter 11 was granted. In the event we are required to provide funding to PDS that is not reciprocated by TPL, our ownership percentage in PDS will increase and we will have a controlling financial interest in PDS, in which case, we will consolidate PDS in our consolidated financial statements. If we determine that it is appropriate to consolidate PDS, we would measure the assets, liabilities and noncontrolling interests of PDS at their fair values at the date that we have the controlling financial interest.

 

Based on our analysis of current authoritative accounting guidance with respect to our investment in PDS, we continue to account for our investment in PDS under the equity method of accounting, and accordingly have recorded our share of PDS’s net loss during the fiscal years ended May 31, 2020 and 2019 of $74,977 and $91,512, respectively, as a decrease in our investment. We have recorded our share of PDS’s net loss as “Equity in loss of affiliated company” in the accompanying consolidated statements of operations for the fiscal years ended May 31, 2020 and 2019.

 

 

 

 

 F-14 

 

 

PDS’s balance sheets at May 31, 2020 and 2019 and statements of operations for the years ended May 31, 2020 and 2019 are as follows:

 

Balance Sheets

 

Assets:

 

   2020   2019 
Cash  $68,531   $237,655 
Total assets  $68,531   $237,655 

 

Liabilities and Members’ Equity:

 

   2020   2019 
Payables  $2,763   $21,933 
Members’ equity   65,768    215,722 
Total liabilities and members’ equity  $68,531   $237,655 

 

Statements of Operations

 

   2020   2019 
Expenses  $149,154   $182,223 
Loss before provision for income taxes and foreign taxes   (149,154)   (182,223)
Provision for income taxes and foreign taxes   800    800 
Net loss  $(149,954)  $(183,023)

 

We review our investment in PDS to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near-term prospects of PDS. If a decline in value is deemed to be other than temporary, we would recognize an impairment loss.

 

Holocom, Inc.

 

We currently own 2,100,000 shares of preferred stock, equivalent to an approximate 46% ownership interest on an after converted basis, in Holocom, Inc. (“Holocom”), a California corporation that manufactures products that protect information transmitted over secure networks. The shares are convertible at our option into shares of Holocom’s common stock on a one-to-one basis. The preferred stock entitles us to receive non-cumulative dividends at the per annum rate of $0.04 per share, when and if declared by the Board of Directors of Holocom, as well as a liquidation preference of $0.40 per share, plus an amount equal to all declared but unpaid dividends.

 

In 2010, we determined that the inability of Holocom to meet its business plan, raise capital, and the general economic environment were indicators of impairment on our investment and we wrote-off our cost basis investment in Holocom. At May 31, 2020 and 2019, our investment in Holocom was valued at $0.

  

 

 

 

 F-15 

 

 

6. Accrued Expenses and Other

 

At May 31, 2020 and 2019, accrued expenses and other consisted of the following:

 

   2020   2019 
Crossflo acquisition liability  $177,244   $177,244 
Compensation and benefits   2,907    42,100 
Total  $180,151   $219,344 

 

7. Stockholders’ Equity

 

Share Repurchases

 

During July 2006, we commenced our Board of Director approved stock buyback program in which we repurchase our outstanding common stock from time to time on the open market. The repurchase plan has no maximum number of shares and is solely at the discretion of the Board of Directors. The repurchase plan has no set expiration date. There were no share repurchases during the fiscal years ended May 31, 2020 and 2019.

 

2006 Stock Option Plan

 

The 2006 Stock Option Plan, as amended, which expired in March 2016, provided for the granting of options to acquire up to 10,000,000 shares, with a limit of 8,000,000 Incentive Stock Option (“ISO”) shares of our common stock to either full or part time employees, directors and our consultants at a price not less than the fair market value on the date of grant. 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 2006 Stock Option Plan must be exercised within ten years of the date they are granted (five years in the case of a significant stockholder). As of May 31, 2020, there were no options outstanding under the 2006 Stock Option Plan and no additional grants can be made under the 2006 Stock Option Plan.

 

Share-based Compensation

 

The fair value of share-based awards to employees and directors is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options.

 

The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any individual grant is based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatilities of our common stock. These factors could change in the future, affecting the determination of share-based compensation expense in future periods.

 

 

 

 

 F-16 

 

 

A summary of option activity for the fiscal year ended May 31, 2020 is presented below:

 

   Shares   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term (Years)
   Aggregate
Intrinsic Value
 
Options outstanding at June 1, 2019   1,600,000   $0.03       $ 
Options granted                
Options exercised                
Options forfeited/expired   (1,600,000)   0.03         
Options outstanding at May 31, 2020      $       $ 
Options vested and expected to vest at May 31, 2020      $       $ 
Options exercisable at May 31, 2020      $       $ 

 

8. Income Taxes

 

The provision (benefit) for income taxes is as follows for the years ended May 31:

 

   2020   2019 
Current:          
Federal  $(26,078)  $(26,078)
State   1,600    1,600 
Total current   (24,478)   (24,478)
           
Deferred:          
Federal   26,078    26,078 
State        
Total deferred   26,078    26,078 
           
Total provision  $1,600   $1,600 

 

The reconciliation of the effective income tax rate to the Federal statutory rate is as follows for the years ended May 31:

 

   2020   2019 
Statutory federal income tax rate   21.00%   21.00%
State income tax rate, net of Federal effect   (0.12)%   (0.16)%
Stock option expense   (0.69)%   (1.77)%
Other       (0.04)%
Change in valuation allowance   (20.34)%   (19.23)%
Effective income tax rate   (0.15)%   (0.20)%

 

 

 

 

 F-17 

 

 

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of our deferred tax assets are as follows as of May 31:

 

   2020   2019 
Deferred tax assets (liabilities):          
State taxes  $336   $336 
Accrued expenses   (397)   9,570 
Investment in affiliated company   442,065    442,065 
Basis difference in property and equipment   (72)   (92)
Stock based compensation expense       10,315 
Impairment of note receivable   231,180    231,180 
Capital loss carryover       104 
Net operating loss carryforwards   7,691,740    7,330,976 
Credit carryover   31,552    83,708 
Valuation allowance   (8,396,404)   (8,082,084)
Net deferred tax asset  $   $26,078 

  

 

We have federal and state net operating loss carryforwards available to offset future taxable income of approximately $27,239,000 and $22,303,000, respectively, at May 31, 2020. These carryforwards begin to expire in the years ending May 31, 2025 and 2028, respectively.

 

We have refundable alternative minimum tax credits of $26,078 and $52,156 at May 31, 2020 and 2019, respectively. During the year ended May 31, 2020, we collected $26,078 of such credits, and we expect to collect the remaining $26,078 during the year ending May 31, 2021.

 

We follow authoritative guidance which defines criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in a company’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. Interest and penalties relating to underpayment of income taxes are recorded in general and administrative expense. As of May 31, 2020, we are subject to U.S. Federal income tax examinations for the tax years May 31, 2007 through May 31, 2019, and we are subject to state and local income tax examinations for the tax years May 31, 2007 through May 31, 2019 due to the carryover of net operating losses related to PDSG from previous years.

 

We have no liability relating to unrecognized tax benefits under the authoritative guidance for the fiscal years ended May 31, 2020 and 2019.

 

Our continuing practice is to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.

 

9. Commitments and Contingencies

 

Patent Litigation

 

We, TPL, and PDS (collectively referred to as “Plaintiffs”) were Plaintiffs in proceedings in the U.S. District Court for the Northern District of California where the Plaintiffs allege infringement of the US 5,809,336 patent (the “‘336 patent”) by: Huawei Technologies Co. Ltd., LG Electronics, Nintendo Co. Ltd., Samsung Electronics Co. Ltd., and ZTE Corporation (collectively referred to as the “Defendants”). This litigation was proceeding in front of District Court Judge Vince Chhabria.

 

 

 

 

 F-18 

 

 

These proceedings relate to the proceedings filed by the Plaintiffs in February 2008 in the U.S. District Court for the Northern District of California alleging infringement of the US 5,440,749 patent (the “‘749 patent”), the US 5,530,890 patent (the “‘890 patent”) and the ‘336 patent against Amazon.com Inc., Barnes & Noble Inc., Garmin Ltd., Huawei Technologies Co. Ltd., Kyocera Corporation, LG Electronics, Nintendo Co. Ltd., Novatel Wireless Inc., Samsung Electronics Co. Ltd., Sierra Wireless Inc., and ZTE Corporation. We have settled with all defendants except those named in the first paragraph to this footnote. On September 18, 2015, a Markman hearing was held before U.S. Magistrate Judge Grewal and, on September 22, 2015, he issued a claim construction report and recommendation. On September 25, 2015, as a result of the claim construction report and recommendation, Plaintiffs and defendants, with the exception of Huawei Technologies Co. Ltd., (“Huawei”) agreed to stay all proceedings pending resolution of Plaintiffs’ objections to the claim construction report and recommendation. Plaintiffs further stipulated that, under the claim construction provided by the report and recommendation, defendants’ products do not infringe the ‘336 patent, and, in the event that the Court does not materially modify the claim construction, Plaintiffs and defendants ask that the Court enter a final judgment of non-infringement. After Plaintiffs and Huawei filed opposing letter briefs with the Court, U.S. Magistrate Judge Grewal stayed the action against Huawei pending resolution of Plaintiffs’ objections to the claim construction. On October 6, 2015, Plaintiffs filed objections to the claim construction with District Court Judge Chhabria. Judge Chhabria rejected those objections on November 9, 2015. Based on that order, the parties stipulated to a judgment of non-infringement as to the ‘336 patent and such judgment was entered on November 13, 2015.

  

On December 7, 2015, Plaintiffs filed notices of appeal with the U.S. Federal Circuit appealing the district court’s claim construction. Plaintiffs filed their opening appellate brief on March 10, 2016. Defendants filed their response brief on May 23, 2016, with Plaintiffs filing their reply brief on June 23, 2016. On March 3, 2017, the U.S. Court of Appeals for the Federal Circuit rendered its decision modifying the claim construction that was issued in September 2016 by the U.S. District Court for the Northern District of California and has remanded the matter to the District Court for further proceedings.

 

On May 23, 2017, a case management conference was held in front of District Court Judge Chhabria, who ordered that Plaintiffs amend their infringement contentions on or before June 16, 2017. Judge Chhabria further ordered that Defendants submit any motion for summary judgment based on the amended infringement contentions and the modified claim construction by August 1, 2017. On June 5, 2017, the law firm of Banys, P.C., who had served as local counsel for PDS, withdrew as counsel. PDS continued to be represented by the law firm of Nelson Bumgardner, P.C. On June 16, 2017, Plaintiffs timely amended their infringement contentions. On July 13, 2017, all remaining counsel for each of Patriot, TPL, and PDS moved to withdraw as counsel and further moved to extend all currently pending case deadlines by 60 days for Plaintiffs to seek new counsel.

 

On September 13, 2017, the law firm of Bunsow De Mory LLP was entered before the U.S. District Court for the Northern District of California as successor counsel in representation of Patriot, PDS, and TPL.

 

The Defendants moved for summary judgment of non-infringement on September 29, 2017, and the Court held a hearing on Defendants’ motion on November 30, 2017. The Court granted Defendants’ motion and entered judgment of non-infringement on December 13, 2017.

 

Defendant Samsung submitted a bill of costs seeking $30,170 in taxable costs in the underlying district court proceedings; Plaintiffs filed an objection to significant portions of that request. On March 1, 2018, the Clerk of the District Court taxed costs in the amount $829.

 

Plaintiffs filed notices of appeal in these district court matters on January 5, 2018. The appeals were docketed and consolidated under lead case No. 18-1439, captioned as Technology Properties Limited v. Huawei Technologies Co., Ltd in the United States Court of Appeals for the Federal Circuit. Oral argument proceeded on February 4, 2019. The Court affirmed the lower court’s determination without written opinion pursuant to Federal Circuit Rule 36 on February 6, 2019. Plaintiffs filed a Petition for Rehearing En Banc on March 8, 2019 which was denied by the Court on April 10, 2019.

 

On September 6, 2019, Plaintiffs filed a petition for a writ of certiorari with the Supreme Court of the United States as a result of the United States Court of Appeals outcome.

 

 

 

 

 F-19 

 

 

On November 4, 2019, the Supreme Court of the United States denied our petition for a writ of certiorari with respect to patent litigation previously before the United States Court of Appeals for the Federal Circuit that alleged infringement of the ‘336 patent against the Defendants (see Note 1).

 

Employment Contract

 

In connection with Cliff Flowers’ appointment as the Chief Financial Officer of the Company, and commencing on September 17, 2007, we entered into an employment agreement with Mr. Flowers for an initial 120-day term if not terminated pursuant to the agreement, with an extension period of one year and on a continuing basis thereafter. On December 30, 2016, we entered into an amended and restated employment agreement with Mr. Flowers. Pursuant to the amended December 30, 2016 agreement, if Mr. Flowers was terminated without cause or resigns with good reason any time after two years of continuous employment, he was entitled to receive an amount equal to 1.25 times his annual base salary. Mr. Flowers was also entitled to certain payments upon a change of control of the Company if the surviving corporation did not retain him. All such payments were conditional upon the execution of a general release. On October 1, 2019, Mr. Flowers and the Company signed a Separation Agreement and General Release of all Claims (“Separation Agreement”). Pursuant to the Separation Agreement, Mr. Flowers resigned on September 30, 2019 and agreed to severance compensation of $327,750 in lieu if any amounts owed under his amended and restated employment agreement, payable in seven equal monthly installments commencing October 30, 2019. As of May 31, 2020, all amounts have been paid to Mr. Flowers. There were no known disagreements with Mr. Flowers regarding our operations, policies or practices. The Board appointed Carlton M. Johnson to assume all management roles on an interim basis.

 

Guarantees and Indemnities

 

We have made certain guarantees and indemnities, under which we may be required to make payments to a guaranteed or indemnified party. We indemnify our directors, officers, employees, consultants and other agents to the maximum extent permitted under the laws of the State of Delaware. The duration of the guarantees and indemnities varies, and in many cases is indefinite. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these guarantees and indemnities in the accompanying consolidated balance sheets.

 

Escrow Shares

 

On August 31, 2009, we gave notice to the former shareholders of Crossflo and Union Bank of California (the “Escrow Agent”) under Section 2.5 of the Agreement and Plan of Merger between us and Crossflo (the “Agreement”), outlining damages incurred by us in conjunction with the acquisition of Crossflo, and seeking the return of 2,844,630 shares of our common stock held by the Escrow Agent.  Subsequently, former shareholders of Crossflo representing a majority of the escrowed shares responded in protest to our claim, delaying the release of the escrowed shares until a formal resolution is reached.  In the event we fail to prevail in our claim against the escrowed shares, we may be obligated to deposit into escrow approximately $256,000 of cash consideration due to the decline in our average stock price over the one-year escrow period, calculated in accordance with the Section 2.5 of the Agreement.  We have evaluated the potential for loss regarding our claim and believe that it is probable that the resolution of this issue will not result in a material obligation to the Company, although there is no assurance of this.  Accordingly, we have not recorded a liability for this matter.

 

Operating Lease

 

Our current facility operating lease is on a month to month basis. Rent expense for fiscal years ended May 31, 2020 and 2019 was $9,300 and $9,320, respectively.

 

 

 

 

 F-20 

 

 

10. Subsequent Events

 

On August 19, 2020, Patriot Scientific Corporation (referred to as “Parent” in the transaction), entered into a stock purchase agreement (the “Stock Purchase Agreement”) among Parent, PTSC Sub One Inc., a Delaware corporation (as “Buyer” and together with the Parent, the “Buyer Parties”), Mosaic ImmunoEngineering Inc., a Delaware corporation (the “Target”), certain stockholders of the Target set for therein (as “Sellers”), and Steven King (as the “Sellers’ Representative” and together with the Target and Sellers, the “Seller Parties”) pursuant to which, Buyer will buy from Sellers 630,000 shares of its Class A common stock (“Class A Stock”), par value $0.0001 per share, and 70,000 shares of its Class B common stock (“Class B Stock”), par value $0.0001 per share, together the Class A Stock and Class B Stock shall collectively be referred to as “Target Common Stock”, representing 100% of the issued and outstanding common stock of the Target as of August 19, 2020. Upon closing, in exchange for the Target Common Stock, the holders of the Class A Stock shall receive 630,000 shares of the Parent’s preferred stock to be designated Series A Convertible Preferred Stock (“Series A Preferred”) and holders of the Class B Stock shall receive 70,000 shares of the Parent’s preferred stock to be designated Series B Convertible Preferred Stock (“Series B Preferred”). Each share of the Series A Preferred; shall (a) convert into 5,097.053 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, and (c) have no dividend rate. Each share of the Series B Preferred; shall (a) convert into 5,734.185 shares of common stock of the Parent, (b) possess full voting rights, on an as-converted basis, as the common stock of the Parent, (c) have no dividend rate, and (d) shall possess certain anti-dilution protections as defined in the Series B Certificate of Designations. On a fully diluted, as converted basis, the Sellers shall own 90% of the issued and outstanding common stock of the Parent. Mr. Steven King, an affiliate of Artius (Note 1), is a founder of Mosaic ImmunoEngineering Inc. and owns 161,000 shares of Class A Stock of Sellers.

 

The Company’s new line of business will focus on biotechnology and the bridging of immunology and engineering to develop novel immunotherapies to treat and prevent cancer and infectious diseases. The technology has broad potential for the treatment of many different types of cancer and the lead product candidates are supported by numerous research publications and university grant funding.

 

We have evaluated subsequent events after the consolidated balance sheet date and through the filing date of this Annual Report, and based on our evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

 

 

 

 

 

 

 

 

 

 F-21 

 

 

Phoenix Digital Solutions, LLC

 

INDEX TO FINANCIAL STATEMENTS

 

    Page  
   
Report of Independent Registered Public Accounting Firm   F-23  
Financial Statements:      
Balance Sheets   F-24  
Statements of Operations   F-25  
Statements of Members’ Equity   F-26  
Statements of Cash Flows   F-27  
Notes to Financial Statements   F-28  

 

 

 

 

 

 

 

 

 

 

 

 

 F-22 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members and Management Committee

Phoenix Digital Solutions, LLC

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Phoenix Digital Solutions, LLC (the "Company") as of May 31, 2020 and 2019, the related statements of operations, members' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, because of the loss of enforceable patents that lead to license revenues, there is no assurance that the Company will receive any future revenues from license agreements, and the Company has no other sources of revenue. These factors raise substantial doubt about the Company’s 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.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

KMJ Corbin & Company LLP

 

We have served as the Company’s auditor since 2005.

 

Irvine, California

August 24, 2020

 

 

 

 

 F-23 

 

 

Phoenix Digital Solutions, LLC

Balance Sheets

 

   Year Ended May 31, 
   2020   2019 
         
ASSETS          
           
Current assets:          
Cash  $68,531   $237,655 
Total assets  $68,531   $237,655 
           
LIABILITIES AND MEMBERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $2,763   $21,933 
           
Commitments and Contingencies          
           
Members’ equity   65,768    215,722 
           
Total liabilities and members’ equity  $68,531   $237,655 

 

See accompanying notes to financial statements.

 

 

 

 

 F-24 

 

 

Phoenix Digital Solutions, LLC

Statements of Operations

 

   Years Ended May 31, 
   2020   2019 
         
Operating expenses:          
General and administrative  $149,154   $182,223 
           
Loss before provision for income taxes and foreign taxes   (149,154)   (182,223)
           
Provision for income taxes and foreign taxes   800    800 
           
Net loss  $(149,954)  $(183,023)

 

See accompanying notes to financial statements.

 

 

 

 

 F-25 

 

 

Phoenix Digital Solutions, LLC

Statements of Members’ Equity

Years Ended May 31, 2020 and 2019

 

Balance June 1, 2018  $398,745 
Net loss   (183,023)
Balance May 31, 2019   215,722 
Net loss   (149,954)
Balance May 31, 2020  $65,768 

 

 

See accompanying notes to financial statements.

 

 

 

 

 F-26 

 

 

Phoenix Digital Solutions, LLC

Statements of Cash Flows

 

   Years Ended May 31, 
   2020   2019 
Operating activities:          
Net loss  $(149,954)  $(183,023)
Adjustments to reconcile net loss to net cash used in operating activities:          
Changes in operating assets and liabilities:          
Prepaid expenses       48,825 
Accounts payable and accrued expenses   (19,170)   20,107 
Net cash used in operating activities   (169,124)   (114,091)
           
Net decrease in cash   (169,124)   (114,091)
Cash, beginning of year   237,655    351,746 
Cash, end of year  $68,531   $237,655 
           
Supplemental Disclosure of Cash Flow Information:          
Cash payments for income taxes  $800   $800 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

 F-27 

 

 

Phoenix Digital Solutions, LLC

Notes to Financial Statements

 

1. Organization and Business

 

Phoenix Digital Solutions, LLC (the “Company” or “PDS”) is a Delaware limited liability company organized on June 7, 2005. Through a commercialization agreement dated June 7, 2005, as amended in July 2012, the Company holds the rights to certain patents contributed by its two members, Patriot Scientific Corporation (“Patriot”) and Technology Properties Limited, Inc. (“TPL”). The Company historically received license fees from license agreements entered into between licensees and the Company and distributes those license fee proceeds to its members. PDS has not generated significant license revenues since September 2013 and on November 4, 2019, the Supreme Court of the United States denied its application to review a lower court’s decision that was adverse to the Company’s patented microprocessor technologies. As result of this denial to review the lower court’s decision, the Company’s patented microprocessor technologies are no longer enforceable, and it has no other options to appeal the lower court’s adverse decision. As a result, there are no future licensing opportunities or sources of revenue. While the Company has not formally approved to liquidate the Company, it is reviewing its options to liquidate its assets over the coming year in a dissolution under Delaware law, which is subject to the courts approval on behalf of TPL, which approval has not been received nor guaranteed. On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code and on March 5, 2018, TPL’s Motion for Entry of Final Decree Closing Chapter 11 was granted.

 

Basis of Presentation

 

The Company’s financial statements have been prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.

 

Going Concern and Management’s Plans

 

At May 31, 2020, the Company had cash and cash equivalents of $68,531. The ability of PDS to continue as a going concern is dependent on its ability to generate or obtain sufficient cash to meet its obligations on a timely basis. As mentioned above, the Company’s patents are no longer enforceable and therefore, the Company does not expect to generate any additional licensing revenue in the future. While the Company has not approved any formal plan to liquidate the Company, management is reviewing its options to liquidate its assets over the coming year in a dissolution under Delaware law, which is subject to the courts approval on behalf of TPL, which approval has not been received nor guaranteed.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed, the above conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

2. Summary of Significant Accounting Policies

 

Limited Liability Company Operating Agreement

 

As a limited liability company, each member’s liability is limited to the capital invested. Allocation of profits, losses and distributions is in accordance with the terms as defined in the operating agreement.

 

 

 

 

 F-28 

 

 

The Company is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable by the Company. The Company’s net income or loss is allocated among the members in accordance with the operating agreement of the Company and members are taxed individually on their share of the Company’s earnings. The State of California assesses a limited liability company fee based on the Company’s income in addition to a flat limited liability company tax. Accordingly, the financial statements reflect a provision for these California taxes.

 

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 and disclosures. Accordingly, actual results could differ from those estimates.

 

Revenue Recognition

 

The Company recognizes revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured which is generally upon the receipt of the license proceeds. The Company may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones are met.

 

Financial Instruments and Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash.

 

Cash is maintained with high quality financial institutions. At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation. The Company performs ongoing evaluations of these financial institutions to limit its concentration of risk exposure.

 

Legal Fees

 

For the fiscal years ended May 31, 2020 and 2019, the Company incurred legal costs associated with the litigation of the Moore Microprocessor Patent (“MMP”) portfolio of $143,825 and $76,463, respectively. These amounts are included in general and administrative expense in the accompanying statements of operations.  

 

Intellectual Property Rights

 

The Company has historically relied on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company licenses seven U.S., nine European, and three Japanese patents on PTSC’s microprocessor technology all of which expired between August 2009 and October 4, 2016. On November 4, 2019, the Supreme Court of the United States denied the Company’s application to review a lower court’s decision that was adverse to the Company’s intellectual property rights. As result of this denial to review the lower court’s decision, the Company’s patented microprocessor technologies are no longer enforceable, and it has no other options to appeal the lower court’s adverse decision.

 

 

 

 

 

 F-29 

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which was subsequently amended by ASUs 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20. ASU 2014-09, as amended, supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and creates a new ASC Topic 606 (“ASC 606”). ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company’s adoption of this guidance, effective June 1, 2018, did not have a significant impact on its financial statements.

 

3. Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and its accounts payable and accrued expenses. The carrying value of these financial instruments approximates fair value because of the immediate or short-term maturity of the instruments.

 

4. Formation of Joint Venture and Commercialization Agreement

 

The Company is a joint venture between two members, Patriot and TPL. Each member owns 50% of the membership interests of the Company. Each member has the right to appoint one member of the three-member management committee. The two appointees are required to select a mutually acceptable third member of the management committee. At May 31, 2020, there was not a third member in place.

 

Contribution Requirements

 

Pursuant to the Company’s Limited Liability Company Operating Agreement (the “LLC Agreement”), the members agreed to establish a working capital fund for the Company of $4,000,000, of which each member contributed $2,000,000. The working capital fund increased to a maximum of $8,000,000 as license revenues are achieved. The members are obligated to fund future working capital requirements at the discretion of the management committee of the Company in order to maintain working capital of not more than $8,000,000. If the management committee determines that additional capital is required, neither member is required to contribute more than $2,000,000 in any fiscal year. No contributions were made during the fiscal years ended May 31, 2020 and 2019. Distributable cash and allocation of profits and losses are allocated to the members in the priority defined in the LLC Agreement.

 

Joint Venture Contractual Agreements

 

On June 7, 2005, the Company entered into a Commercialization Agreement (the “Commercialization Agreement”) with Patriot and TPL. This Commercialization Agreement allows TPL to commercialize the patent portfolio by entering into settlement and/or license agreements, litigating in the name of Patriot, TPL, the Company and Charles Moore (“Moore”), and manage the use of the patent portfolio by third parties.

 

On July 11, 2012, the Company entered into a Licensing Program Services Agreement (the “Program Agreement”) with Patriot, TPL, and Alliacense creating an amendment to the Commercialization Agreement, and an Agreement (the “TPL Agreement”) between TPL and Patriot. Pursuant to the Program Agreement, the Company engaged Alliacense to negotiate MMP portfolio licenses and to pursue claims against violators of the MMP portfolio on behalf of the Company, TPL, and Patriot. The Program Agreement continued through the useful life of the MMP portfolio patents. On July 24, 2014, the Program Agreement was amended with the Company and Alliacense entering into the Amended Alliacense Services and Novation Agreement (the “Novation Agreement”). Pursuant to the Novation Agreement, certain performance goals and incentives were established for Alliacense. The Novation Agreement also provided for the addition of a second licensing company, which was engaged on October 10, 2014, to complement the MMP licensing commercialization. However, Alliacense fulfilled only a portion of its obligations under the Novation Agreement associated with the deployment of the second licensing company and on May 11, 2015, Alliacense was terminated by PDS.

 

 

 

 

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On August 10, 2016, the Company entered into an agreement with Alliacense and MMP Licensing, LLC to settle matters relating to Alliacense’s non-performance under terms of the Novation Agreement. The August 10, 2016 agreement required Alliacense to provide the Company’s second licensing agent, Dominion Harbor Group (“DHG”), with certain materials and to cooperate with reasonable discovery requests relating to infringement litigation in the U.S. District Court for the Northern District of California. MMP Licensing, LLC will provide commercialization services to the Company for the MMP portfolio with respect to certain companies. The Company and Alliacense have agreed to cause the arbitration between the parties to be dismissed with prejudice. The August 10, 2016 agreement, and the agreement retaining DHG as PDS’s second licensing company, will both expire on October 4, 2022. Terms of the settlement agreement required the Company to pay Alliacense $84,000 within 24 hours after delivery of materials to the Company’s second licensing agent and to pay Alliacense $84,000 out of subsequent recoveries. The Company paid Alliacense $84,000 on each of August 11, 2016 and October 3, 2016.

 

During January 2013, TPL and Moore settled their litigation. Terms of the settlement included payment by the Company to Moore of a consulting fee of $250,000 for four years or until the completion of all outstanding MMP litigation whichever came first. Per terms of the agreement, the Company paid Moore $150,000 on the settlement date and paid Moore $16,667 per month from August 2013 through January 2014 and paid Moore $20,833 per month from February 2014 through January 2017. For the fiscal year ended May 31, 2017, the Company expensed $166,674 related to this agreement.

 

6. Commitments and Contingencies

 

Guarantees and Indemnities

 

Under the LLC Operating Agreement, the Company indemnifies its members, managers, officers and employees from any damages and liabilities by reason of their management or involvement in the affairs of the Company as long as the indemnitee acted in good faith and in the best interests of the Company.

 

Under the Commercialization Agreement, the Company and Patriot will hold harmless TPL and its representatives with respect to all claims of any nature by or on behalf of the Company and Patriot related to the preparation, execution and delivery of duties and responsibilities under the Commercialization Agreement.

 

The duration of the guarantees and indemnities varies, and in many cases is indefinite. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make.

 

Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these guarantees and indemnities in the accompanying balance sheets.

 

7. Subsequent Events

 

The Company has evaluated subsequent events after the balance sheet date and through the filing of this report, and based on its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

 

  

 

 

 

 

 

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