Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PTSC > SEC Filings for PTSC > Form 10-Q on 14-Jan-2014All Recent SEC Filings

Show all filings for PATRIOT SCIENTIFIC CORP

Form 10-Q for PATRIOT SCIENTIFIC CORP


14-Jan-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING DISCUSSION AND THE REST OF THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS". SEE ALSO OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 2013.

Overview

In June 2005, we entered into a series of agreements with TPL and others to facilitate the pursuit of unlicensed users of our intellectual property. In October 2011 we settled litigation with TPL that was initiated by us over matters related to the management of the MMP Portfolio. In July 2012 we entered into additional agreements with TPL, PDS and the TPL affiliate, Alliacense, in furtherance of the management and commercialization of the MMP Portfolio. The July 2012 Agreements ("July 2012 Agreements") paved the way for an aggressive litigation strategy subsequently initiated on July 24, 2012 whereby Alliacense filed parallel actions with the ITC and in the U.S. District Court against multiple companies alleged to be infringers of the MMP portfolio. We believe that the significant investment in legal effort and costs incurred to date at PDS, in addition to this expanded litigation strategy, is necessary for the protection of our interests in the MMP portfolio and its future success.

During fiscal 2013 and through the date of this filing, we and TPL each contributed $1,097,809 to fund the working capital of PDS. To the extent MMP portfolio license proceeds are insufficient, we expect working capital contributions to PDS to continue in the future. Cash shortfalls currently experienced by PDS will have an adverse effect on our liquidity. To date, we have determined that it is in the best interests of the MMP licensing program that we contribute our 50% share of additional capital to PDS to provide for PDS litigation support payments to Alliacense, in the event license revenues received by PDS are insufficient to meet these needs.

On January 9, 2014 PDS' cash balance was $1,213,209. Management's plans for the continued operation of PDS rely on the ability of Alliacense to obtain license agreements to cover the operational costs of PDS. Notwithstanding the November 30, 2012 and May 31, 2013 fiscal quarters, PDS has experienced a decline in licensing revenues and has been incurring significant third-party costs for expert testimony, depositions and other related legal costs pursuant to litigation with HTC Corporation, and Acer, Inc., in U.S. District Court, and actions with the ITC Investigation No. 337-TA-853. Although the HTC and Acer U.S. District Court actions have concluded and an Initial Determination rendered by the ITC, as a result of actions against additional defendants in U.S. District Court which are currently stayed, and a petition for review of the Initial Determination which is currently under consideration by the full ITC, we could be required to make capital contributions to PDS for any future litigation related costs in the event that PDS does not receive sufficient licensing revenues to pay these expenses.

On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code. We have been appointed to the creditors' committee and have been closely monitoring the progress in this matter as it relates to our interest in PDS. If we 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.

The results of PDSG, which was previously reported as a separate business segment, is being presented as discontinued operations in the condensed consolidated statements of operations for all periods presented.

Discontinued Operations and Assets Held for Sale

On February 17, 2012, our board of directors authorized management to sell the assets of PDSG due to the inability of PDSG to meet its business plan and continuing projected negative cash flows. In accordance with authoritative guidance we have classified the assets, liabilities, operations and cash flows of PDSG as discontinued operations for all periods presented. During March 2012, we entered into an interim agreement with the purchaser of the assets of PDSG which required the purchaser to pay PDSG $93,450 to subsidize the April 2012 expenses of PDSG during the sale transaction negotiations. On April 30, 2012, we negotiated a sale transaction in which we sold substantially all of the assets of PDSG in exchange for a royalty on PDSG revenues for a period of three years. From April 30, 2012 to November 30, 2013, the gain on the asset sale of PDSG is approximately $45,000.

Summarized operating results of discontinued operations for the three and six months ended November 30, 2013 and 2012 are as follows:

                                         Three Months Ended                                Six Months Ended
                             November 30, 2013         November 30, 2012       November 30, 2013       November 30, 2012
                                (Unaudited)               (Unaudited)             (Unaudited)             (Unaudited)
Operating loss from
discontinued operations     $                 -       $            (1,075 )   $                 -     $            (2,462 )
Gain on sale of
discontinued operations     $               225       $             2,153     $            40,583     $             2,685
Income before income
taxes                       $               225       $             1,078     $            40,583     $               223
Income from discontinued
operations                  $               225       $             1,078     $            40,583     $               223

PDSG activity for the three and six months ended November 30, 2013 consists of PDSG royalty revenues.

PDSG activity for the three and six months ended November 30, 2012 consists of operating expenses for: legal, insurance, taxes and bank fees offset by PDSG royalty revenues.

The following table summarizes the carrying amount at November 30, 2013 and May 31, 2013 of the major classes of assets of PDSG classified as discontinued operations:

                            Unaudited
                        November 30, 2013       May 31, 2013
Current assets:
Other current assets   $            21,225     $       40,682

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 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 available-for-sale based on management's investment intentions relating to these securities. Available-for-sale marketable securities are stated at fair market value. Unrealized gains and losses, net of deferred taxes, are recorded as a component of other comprehensive income (loss). 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 condensed consolidated statements of operations.

2. Investment in Affiliated Company

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 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.

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.

3. Share-Based Compensation

Share-based compensation expense recognized during the period is based on the grant date fair value of the portion of share-based payment awards ultimately expected to vest during the period. As share-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates are based on historical forfeiture experience and estimated future employee forfeitures.

4. 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 placed a full valuation allowance against our deferred tax assets.

5. Assessment of Contingent Liabilities

We are 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 the Three Months Ended November 30, 2013 and Three Months Ended November 30, 2012.

Three months ended November 30, 2013 November 30, 2012 Selling, general and administrative $ 373,491 $ 238,171

Selling, general and administrative expenses increased from approximately $238,000 for the three months ended November 30, 2012 to approximately $373,000 for the three months ended November 30, 2013. The increase consisted primarily of approximately $129,000 in legal and accounting fees.

                                                                Three months ended
                                                                               November 30,
                                                        November 30, 2013          2012
Other income (expense):
Interest income                                        $               675     $       4,024
Other income                                                             -           191,250
Realized loss on marketable securities                                (347 )               -
Equity in earnings of affiliated company                           472,003         1,234,662
       Total other income, net                         $           472,331     $   1,429,936

Our other income for the three months ended November 30, 2013 and 2012 included equity in the earnings of PDS of approximately $1,235,000 and $472,000, respectively. Our investment in PDS is accounted for in accordance with the equity method of accounting for investments. The change in the earnings of PDS is due to the decrease in licensing revenue for the current period. The decrease in other income for the three months ended November 30, 2012 as compared to the same period in the current fiscal year is primarily due to the one time receipt of proceeds associated with the settlement of certain litigation unrelated to our patent portfolio.

                                                                 Three months ended
                                                                                November 30,
                                                         November 30, 2013          2012
Income from continuing operations before income taxes   $            98,840     $   1,191,765

Income from continuing operations before income taxes decreased from approximately $1,192,000 for the three months ended November 30, 2012 to approximately $99,000 for the three months ended November 30, 2013 due to the change in equity in earnings of PDS.

Provision for income taxes

During the three months ended November 30, 2013 and 2012, we recorded a provision for income taxes related to federal and California taxes of approximately $32,000 and $150, respectively.

Net income (loss)

Our net income for the three months ended November 30, 2013 and 2012, was $67,252 and $1,192,695 respectively.

Comparison of the Six Months Ended November 30, 2013 and Six Months Ended November 30, 2012.

Six months ended November 30, 2013 November 30, 2012 Selling, general and administrative $ 812,145 $ 630,233

Selling, general and administrative expenses increased from approximately $630,000 for the six months ended November 30, 2012 to approximately $812,000 for the six months ended November 30, 2013. The increase consisted primarily of approximately $107,000 in legal and accounting fees and approximately $62,000 in stock based compensation expense.

                                                                    Six months ended
                                                        November 30, 2013       November 30, 2012
Other income (expense):
Interest income                                        $             1,165     $             8,170
Other income                                                             -                 191,369
Realized recovery (loss) on marketable securities                     (347 )                55,873
Equity in earnings of affiliated company                           386,819                 677,594
       Total other income, net                         $           387,637     $           933,006

Our other income for the six months ended November 30, 2013 and 2012 included equity in the earnings of PDS of approximately $387,000 and $678,000, respectively. Our investment in PDS is accounted for in accordance with the equity method of accounting for investments. The change in the earnings of PDS is due to the decrease in licensing revenue during the current period. Included in realized recovery on marketable securities for the six months ended November 30, 2012 is approximately $56,000 of recovery on the $600,879 realized loss on sale of marketable securities relating to our auction rate securities recognized during the fiscal year ended May 31, 2011. Through November 2012 we have received proceeds totaling $403,325 relating to the recovery of our fiscal 2011 realized loss. Also included in interest and other income for the six months ended November 30, 2012 is the one time receipt of proceeds associated with the settlement of certain litigation unrelated to our patent portfolio.

                                                                 Six months ended
                                                       November 30,
                                                           2013           November 30, 2012
Income (loss) from continuing operations before
income taxes                                           $    (424,508 )   $           302,773

Income (loss) from continuing operations before income taxes decreased from approximately $303,000 for the six months ended November 30, 2012 to approximately ($425,000) for the six months ended November 30, 2013 due to the change in equity in earnings of PDS.

Provision for income taxes

During the six months ended November 30, 2013 and 2012, we recorded a provision for income taxes related to federal and California taxes of approximately $36,000 and $2,700, respectively.

Net income (loss)

We recorded net income (loss) for the six months ended November 30, 2013 and 2012, of ($419,638) and $300,283, respectively.

Results of Discontinued Operations

Comparison of the Three Months Ended November 30, 2013 and Three Months Ended November 30, 2012.

Three months ended November 30, 2013 November 30, 2012 Selling, general and administrative $ - $ 1,075

Selling, general and administrative expenses decreased from approximately $1,000 for the three months ended November 30, 2012 due to the sale of substantially all of the assets of PDSG in April 2012.

                                         Three months ended
                             November 30, 2013         November 30, 2012
Other income:
Interest and other income   $               225       $             2,153
       Total other income   $               225       $             2,153

Interest and other income for the three months ended November 30, 2013 and 2012 of approximately $200 and $2,000, respectively, consists of royalties earned for the period. On April 30, 2012, we negotiated a sale transaction in which we sold substantially all of the assets of PDSG in exchange for a royalty on PDSG revenues for a period of three years.

Income from discontinued operations, net

We recorded net income from discontinued operations of $225 and $1,078 for the three months ended November 30, 2013 and 2012, respectively.

Comparison of the Six Months Ended November 30, 2013 and Six Months Ended November 30, 2012.

Six months ended November 30, 2013 November 30, 2012 Selling, general and administrative $ - $ 2,462

Selling, general and administrative expenses decreased from approximately $2,500 for the six months ended November 30, 2012 due to the sale of substantially all of the assets of PDSG in April 2012.

                                         Six months ended
                             November 30, 2013       November 30, 2012
Other income:
Interest and other income   $            40,583     $             2,685
       Total other income   $            40,583     $             2,685

Interest and other income of approximately $40,600 and $2,700 for the six months ended November 30, 2013 and 2012, respectively, consists of royalties earned for the period. On April 30, 2012, we negotiated a sale transaction in which we sold substantially all of the assets of PDSG in exchange for a royalty on PDSG revenues for a period of three years.

Income from discontinued operations, net

We recorded net income from discontinued operations of $40,583 and $223 for the six months ended November 30, 2013 and 2012, respectively.

Liquidity and Capital Resources

Liquidity

Our cash and cash equivalents and short-term investment balances decreased from approximately $7,767,000 as of May 31, 2013 to approximately $7,255,000 as of November 30, 2013. We also have restricted cash balances amounting to approximately $21,000 as of May 31, 2013 and November 30, 2013. Total current assets decreased from approximately $8,040,000 as of May 31, 2013 to approximately $7,471,000 as of November 30, 2013. Total current liabilities amounted to approximately $278,000 and approximately $116,000 as of May 31, 2013 and November 30, 2013, respectively. The change in our working capital position as of November 30, 2013 as compared with May 31, 2013 results primarily from payment of our operating expenses.

Cash shortfalls currently experienced by PDS will have an adverse effect on our liquidity. During the fiscal year ended May 31, 2013 and through the date of this filing we and TPL each contributed $1,097,809 in additional capital to fund the operations of PDS. To datewe have determined that it is in the best interests of the MMP licensing program that we provide our 50% share of capital to provide for PDS expenses including legal retainers and litigation related payments, as well as licensing and litigation support payments to Alliacense, in the event license revenues received by PDS are insufficient to meet these needs. We believe it is likely that contributions to PDS to fund working capital will continue to be required.

PDS has been incurring significant third-party costs for expert testimony, depositions and other related litigation costs. We could be required to make capital contributions to PDS for any future litigation related costs in the event that PDS does not receive sufficient licensing revenues to pay these expenses (see Note 6 of the accompanying condensed consolidated financial statements).

Our current liquid cash resources as of November 30, 2013 are expected to provide the funds necessary to support our operations through at least the next twelve months. The cash flows from our interest in PDS represent our only significant source of cash generation. In the event of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and cash equivalents and short-term investment position of $7,254,840 at November 30, 2013.

On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code. We have been appointed to the creditors' committee and have been closely monitoring the progress in this matter as it relates to our interest in PDS. In the event that we provide funding to PDS that is not reciprocated by TPL, which would result in our having a larger ownership percentage in PDS, 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.

Cash Flows From Operating Activities

Cash used in operating activities of continuing operations was approximately $907,000 and $429,000 for the six months ended November 30, 2013 and 2012, respectively. The principal components of the current period amount were net loss from continuing operations of approximately $460,000, the earnings of affiliated company of approximately $387,000 and changes in accounts payable and accrued expenses of approximately $194,000. These decreases were primarily offset by changes in prepaid expenses and other current assets of approximately $91,000, share-based compensation of approximately $62,000 and income taxes payable of approximately $32,000. The principal components of the prior period are the prior period changes in accounts payable and accrued expenses, earnings of affiliated company offset by net income from continuing operations.

Cash provided by operating activities of discontinued operations was approximately $60,000 and $11,000 for the six months ended November 30, 2013 and 2012, respectively. Cash provided by discontinued operations activities relates to royalty revenue received during the period.

Cash Flows From Investing Activities

Cash used in investing activities of continuing operations for the six months ended November 30, 2013 and 2012 was approximately $331,000 and $1,189,000, respectively. Cash activities for the current period were primarily attributable to purchases and sales of marketable securities and distributions from PDS. Cash activities for the prior period were attributable to purchases and sales of marketable securities and contributions to and distributions from PDS.

Cash Flows From Financing Activities

Cash used in financing activities for the six months ended November 30, 2013 and 2012 was approximately $40,000 and $47,000, respectively. Cash activities for the current and prior periods were attributable to purchases of common stock for treasury.

Capital Resources

Our current liquid cash resources as of November 30, 2013, are expected to provide the funds necessary to support our operations through at least the next twelve months. The cash flows from our interest in PDS represent our primary significant source of cash generation. In the event of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and cash equivalents and short-term investment position of $7,254,840 at November 30, 2013.

Recent Accounting Pronouncements

During the six months ended November 30, 2013, there were no recent issuances of accounting pronouncements as compared to those described in our Annual Report on Form 10-K for the fiscal year ended May 31, 2013, that are of significance, or have potential material significance to us.

Risk Factors

We urge you to carefully consider the following discussion of risks as well as other information regarding our common stock. We believe the following to be our most significant risk factors as of the date this report is being filed. The . . .

  Add PTSC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PTSC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.