[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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[_]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Delaware
(State or other jurisdiction of incorporation or organization)
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84-1070278
(I.R.S. Employer Identification No.)
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701 Palomar Airport Road, Suite 170, Carlsbad, California
(Address of principal executive offices)
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92011
(Zip Code)
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PART I
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4
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ITEM 1.
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Business
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4
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ITEM 1A.
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Risk Factors
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10
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ITEM 1B.
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Unresolved Staff Comments
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13
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ITEM 2.
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Properties
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13
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ITEM 3.
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Legal Proceedings
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13
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ITEM 4.
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[Removed and Reserved]
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14
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PART II
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14
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ITEM 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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14
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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16
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ITEM 8.
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Financial Statements and Supplementary Data
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25
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ITEM 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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25
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ITEM 9A.
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Controls and Procedures
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25
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ITEM 9B.
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Other Information
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26
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PART III
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26
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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26
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ITEM 11.
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Executive Compensation
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29
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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32
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ITEM 13.
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Certain Relationships and Related Transactions, and Director Independence
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32
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ITEM 14.
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Principal Accountant Fees and Services
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33
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PART IV
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34
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ITEM 15.
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EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
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34
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SIGNATURES
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●
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US 5,809,336 (the “’336 patent”). The ’336 patent covers an early and seminal approach to making microprocessor chips go faster. It allows the “core” of the microprocessor to run at a different speed (usually faster) than the rest of the chip. There are many advantages to this, including higher performance, lower power consumption, and simpler manufacturing.
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●
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US 5,784,584 (the “’584 patent”). The ’584 patent covers an important method for a microprocessor chip to fetch multiple instructions at once. Like speed reading, multiple-instruction fetch allows a chip to get more done in less time - a valuable technique.
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●
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US 6,598,148 (the “’148 patent). The ’148 patent describes on-chip oscillators (clocks) and covers multi-core and multi-processor implementations - important factors in today’s high-end microprocessor chips.
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●
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We entered into a patent license agreement (the “Intel License”) with Intel Corporation (“Intel”) pursuant to which we licensed certain rights in the Microprocessor Patents to Intel.
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●
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We entered into an Escrow Agreement along with TPL (the “Escrow Agreement”) pursuant to which the proceeds arising from the Intel License were allocated for the benefit of us and TPL. Pursuant to the Escrow Agreement, the proceeds were allocable equally to PTSC and TPL. Accordingly, when the initial capitalization obligations of PTSC and those of TPL with regard to PDS (defined below) were satisfied, and when our payment obligations and those of TPL with regard to the Rights Holders (defined below) were made, we received $6,672,349, and the remaining proceeds were allocated to or for the benefit of TPL.
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●
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We caused certain of our respective interests in the Microprocessor Patents to be licensed to PDS, a limited liability company owned 50% by us and 50% by TPL.
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●
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PDS engaged TPL to commercialize the Microprocessor Patents pursuant to a Commercialization Agreement among PDS, TPL and us (the “Commercialization Agreement”).
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●
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We paid $1,327,651 and TPL paid $1,000,000 to certain holders of rights in the Microprocessor Patents (“Rights Holders”) in exchange for the release of such Rights Holders in connection with the Transactions.
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●
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We agreed with TPL and Moore to settle or cause to be dismissed all litigation involving the Microprocessor Patents, pursuant to a stipulated final judgment, including the Inventorship Litigation.
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●
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We issued warrants to TPL which were exercised by TPL in September 2007, to acquire shares of our common stock, $0.00001 par value (“Common Stock”). 1,400,000 warrants were exercisable upon issue; 700,000 warrants became exercisable when our Common Stock traded at $0.50 per share; an additional 700,000 warrants became exercisable when our Common Stock traded at $0.75 per share; and an additional 700,000 warrants became exercisable when our Common Stock traded at $1.00 per share, all such vesting having been achieved as of the date of this filing.
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●
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We agreed with TPL and Moore to indemnify each other for, among other things, any inaccuracy or misrepresentation in any representation or warranty contained in the Master Agreement, any breach of the Master Agreement, certain liabilities relating to the respective interests of each of us in the Microprocessor Patents and the Transactions, and certain tax liabilities.
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2011
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2010
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|||||||
Customer A
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$ | 136,229 | $ | 281,141 | ||||
Customer B
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- | $ | 106,064 | |||||
Customer C
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$ | 81,642 | - | |||||
Customer D
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$ | 151,323 | - |
ITEM 4.
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REMOVED AND RESERVED
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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BID QUOTATIONS
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||
HIGH
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LOW
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||
Fiscal Year Ended May 31, 2011
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|||
First Quarter
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$0.21
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$0.08
|
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Second Quarter
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$0.14
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$0.09
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Third Quarter
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$0.14
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$0.08
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Fourth Quarter
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$0.13
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$0.08
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HIGH
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LOW
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Fiscal Year Ended May 31, 2010
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|||
First Quarter
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$0.18
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$0.11
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Second Quarter
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$0.36
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$0.14
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Third Quarter
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$0.19
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$0.12
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Fourth Quarter
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$0.15
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$0.09
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Plan Category
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Number of securities
to be issued
upon exercise of outstanding
options
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Weighted-average
exercise price of outstanding
options
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Number of securities remaining available for future issuance under equity compensation plans
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|||||||||
Equity compensation plans approved by security holders
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3,010,000 | $ | 0.33 | 10,703,404 |
Period
|
Total
Number of
Shares
Purchased
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Average
Price Paid
per Share
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Total Number of
Shares Purchased as
Part of Publicly Announced Plans or Programs
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|||||||||
March 1 - 31, 2011
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- | $ | - | - | ||||||||
April 1 - 30, 2011
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127,598 | $ | 0.10 | 127,598 | ||||||||
May 1 - 31, 2011
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138,385 | $ | 0.09 | 138,385 | ||||||||
Total
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265,983 | $ | 0.09 | 265,983 |
May 31, 2011
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May 31, 201
0
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|||||||||||||||
Dollars
|
% of Revenue
|
Dollars
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% of Revenue
|
|||||||||||||
Revenue:
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||||||||||||||||
License and service revenue
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$ | 468,678 | 100.0 | % | $ | 567,934 | 100.0% | |||||||||
Cost of sales:
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||||||||||||||||
License and service revenue
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76,242 | 16.3 | % | 119,568 | 21.0% | |||||||||||
Amortization of purchased intangibles
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252,593 | 53.9 | % | 551,154 | 97.0% | |||||||||||
Impairment of purchased intangibles
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1,469,629 | - | % | 3,530,263 | -% | |||||||||||
Total cost of sales
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1,798,464 | - | % | 4,200,985 | -% | |||||||||||
Gross loss
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$ | (1,329,786 | ) | - | % | $ | (3,633,051 | ) | -% |
May 31, 2011
|
May 31, 2010
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|||||||
Research and development
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$ | 753,017 | $ | 1,503,724 |
May 31, 2011
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May 31, 2010
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|||||||
Selling, general and administrative
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$ | 3,713,240 | $ | 6,530,972 |
May 31, 2011
|
May 31, 2010
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|||||||
PDSG:
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||||||||
Selling, general and administrative
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$ | 1,162,574 | $ | 2,714,965 | ||||
PTSC:
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||||||||
Selling, general and administrative
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$ | 2,550,666 | $ | 3,816,007 |
May 31, 2011
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May 31, 2010
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|||||||
Impairment of goodwill
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$ | 642,981 | $ | 1,096,268 |
May 31, 2011
|
May 31, 2010
|
|||||||
Operating loss
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$ | (6,439,024 | ) | $ | (12,764,015 | ) |
May 31, 2011
|
May 31, 2010
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|||||||
PDSG:
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||||||||
Operating loss
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$ | (3,888,358 | ) | $ | (8,948,008 | ) | ||
PTSC:
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||||||||
Operating loss
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$ | (2,550,666 | ) | $ | (3,816,007 | ) |
May 31, 2011
|
May 31, 2010
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|||||||
Other income (expense):
|
||||||||
Interest and other income
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$ | 109,246 | $ | 154,482 | ||||
Interest expense
|
(20,810 | ) | (80,567 | ) | ||||
Gain on sale of Verras Medical, Inc. assets
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- | 182,397 | ||||||
Gain on sale of Vigilys business line
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60,000 | - | ||||||
Recovery of (reserve for) loan losses
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1,013,151 | (1,013,151 | ) | |||||
Impairment of investment in affiliated company
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- | (1,548,807 | ) | |||||
Realized loss on sale of marketable securities
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(600,879 | ) | - | |||||
Equity in earnings of affiliated companies
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600,460 | 4,461,483 | ||||||
Total other income, net
|
$ | 1,161,168 | $ | 2,155,837 |
May 31, 2011
|
May 31, 201
0
|
|||||||
PDSG:
|
||||||||
Interest and other income
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$ | 763 | $ | 9,579 | ||||
Gain on sale of Verras Medical, Inc. assets
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- | 182,397 | ||||||
Gain on sale of Vigilys business line
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60,000 | - | ||||||
Total other income, net
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$ | 60,763 | $ | 191,976 | ||||
PTSC:
|
||||||||
Interest and other income
|
$ | 108,483 | $ | 144,903 | ||||
Interest expense
|
(20,810 | ) | (80,567 | ) | ||||
Recovery of (reserve for) loan losses
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1,013,151 | (1,013,151 | ) | |||||
Impairment of investment in affiliated company
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- | (1,548,807 | ) | |||||
Realized loss on sale of marketable securities
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(600,879 | ) | - | |||||
Equity in earnings of affiliated companies
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600,460 | 4,461,483 | ||||||
Total other income, net
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$ | 1,100,405 | $ | 1,963,861 |
May 31, 2011
|
May 31, 2010
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|||||||
Loss before income taxes
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$ | (5,277,856 | ) | $ | (10,608,178 | ) |
May 31, 2011
|
May 31, 2010
|
|||||||
PDSG:
|
||||||||
Loss before income taxes
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$ | (3,827,595 | ) | $ | (8,756,032 | ) | ||
PTSC:
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||||||||
Loss before income taxes
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$ | (1,450,261 | ) | $ | (1,852,146 | ) |
|
·
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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.
|
|
·
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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 Securities and Exchange Commission for service on the Audit Committee.
|
|
·
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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.
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NAME
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AGE
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POSITION and TERM
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Carlton M. Johnson, Jr.
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51
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Director (since August 2001)
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Gloria H. Felcyn
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64
|
Director (since October 2002)
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Clifford L. Flowers
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53
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Chief Financial Officer/Secretary (since September 17, 2007)
Interim CEO (since October 5, 2009)
Director (since January 19, 2011)
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Name and Principal Position
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Year
|
Salary ($)
|
Bonus ($)
|
Option Awards ($)(1)
|
All Other
Compensation
($) (2)
|
Total
Compensation
($)
|
|||||||||||||||
Frederick C. Goerner, CEO(a)
|
2010
|
$
|
95,731
|
$
|
-
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$
|
-
|
$
|
168,236
|
$
|
263,967
|
||||||||||
Clifford L. Flowers, Interim
|
2011
|
292,872
|
-
|
12,000
|
8,455
|
313,327
|
|||||||||||||||
CEO and CFO
|
|||||||||||||||||||||
Clifford L. Flowers, Interim
|
2010
|
272,103
|
208,375
|
(3)
|
-
|
8,095
|
488,573
|
||||||||||||||
CEO and CFO
|
|||||||||||||||||||||
Paul R. Bibeau,
|
2010
|
85,354
|
-
|
-
|
18,655
|
104,009
|
|||||||||||||||
V.P. Business Development
|
1.
|
Represents the aggregate grant date fair value of grants awarded in fiscal 2011 and 2010 computed in accordance with authoritative guidance issued by the Financial Accounting Standards Board. For the fiscal year ended May 31, 2010, Mr. Goerner forfeited 2,000,000 options due to vesting criteria not being met upon our October 5, 2009 restructuring.
|
2.
|
See the All Other Compensation Table below for details of the total amounts represented.
|
3.
|
Mr. Flowers was paid a $62,500 discretionary bonus in July 2009 per his employment contract. At May 31, 2010 $145,875 was accrued for his interim CEO bonus which was paid to him in fiscal 2011.
|
(a)
|
Mr. Goerner served as CEO until October 5, 2009. Mr. Flowers is currently serving as Interim CEO.
|
Name and Principal Position
|
Year
|
Vacation
Payout On Termination ($)
|
401(k) Company Match ($)
|
Severance
($) (1)
|
Other ($) (2)
|
Total ($)
|
|||||||||||||||
Frederick C. Goerner, CEO
|
2010
|
$ | 7,267 | $ | 3,023 | $ | 145,833 | $ | 12,113 | $ | 168,236 | ||||||||||
Clifford L. Flowers, Interim
|
2011
|
- | 8,455 | - | - | 8,455 | |||||||||||||||
CEO and CFO
|
|||||||||||||||||||||
Clifford L. Flowers, Interim
|
2010
|
- | 8,095 | - | - | 8,095 | |||||||||||||||
CEO and CFO
|
|||||||||||||||||||||
Paul R. Bibeau,
|
2010
|
3,050 | 2,624 | 12,981 | - | 18,655 | |||||||||||||||
V.P. Business Development
|
1.
|
Severance for both Mr. Goerner and Mr. Bibeau was paid entirely in fiscal 2010.
|
2.
|
Consists of $3,500 in outplacement services and $8,613 in health and dental insurance premium reimbursement payments to Mr. Goerner in connection with his Separation Agreement.
|
Name
|
Number of Securities Underlying Options (#)Exercisable
|
Number of Securities Underlying Unexercised Options (#) Unexercisable
|
Option Exercise Price($)
|
Option
Expiration Date
|
|||||||||
Clifford L. Flowers
|
750,000
|
(1)
|
-
|
0.45
|
9/17/2012
|
||||||||
150,000
|
-
|
0.10
|
6/3/2015
|
1.
|
On October 5, 2009, in connection with Mr. Flowers’ appointment as Interim CEO, the Compensation Committee authorized his unvested options to immediately vest.
|
Name
|
Fees Earned or
Paid in Cash
($)
|
Option Awards
($)
|
All
Other
Compensation
|
Total
Compensation
($)
|
||||||||||||
Carlton M. Johnson, Jr.
|
$
|
122,400
|
(1)
|
$
|
20,000
|
--
|
$
|
142,400
|
||||||||
Gloria H. Felcyn
|
96,000
|
(2)
|
20,000
|
--
|
116,000
|
|||||||||||
Helmut Falk, Jr.
|
24,000
|
(3)
|
-
|
--
|
24,000
|
|||||||||||
Donald E. Schrock
|
38,400
|
(4)
|
-
|
--
|
38,400
|
|||||||||||
Dharmesh Mistry
|
56,000
|
(5)
|
-
|
--
|
56,000
|
1.
|
Consists of $28,800 board fee, $36,000 Phoenix Digital Solutions, LLC management committee fee, $28,800 Compensation Committee Chair fee and $28,800 Executive Committee Chair fee.
|
2.
|
Consists of $28,800 board fee and $67,200 Audit Committee Chair fee.
|
3.
|
Mr. Falk was paid board fees through January 2011. Mr. Falk was not nominated to be reelected at our annual meeting of stockholders in January 2011.
|
4.
|
Consists of $19,200 board fee and $19,200 Corporate Development, M & A Committee Chair fee through January 2011. Mr. Schrock was not nominated to be reelected at our annual meeting of stockholders in January 2011.
|
5.
|
Consists of $24,000 board fee and $32,000 Technology Committee Chair fee through January 2011. Mr. Mistry was not nominated to be reelected at our annual meeting of stockholders in January 2011.
|
Compensation Item
|
Amount
|
|||
Board
|
$
|
36,000/28,800(1)
|
||
Corporate Development, M & A Committee Chair
|
28,800
|
|||
Audit Committee Chair
|
67,200
|
|||
Compensation Committee Chair
|
28,800
|
|||
Executive Committee Chair
|
28,800
|
|||
Technology Committee Chair
|
48,000
|
|||
Phoenix Digital Solutions, LLC Management Committee Board Member
|
36,000
|
1.
|
Mr. Johnson, Ms. Felcyn and Mr. Schrock receive the lesser amount in conjunction with their fee reductions implemented in May 2009.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
(1)
|
Includes 450,000 shares issuable upon the exercise of outstanding stock options exercisable within 60 days of August 12, 2011.
|
(2)
|
Includes 450,000 shares issuable upon the exercise of outstanding stock options exercisable within 60 days of August 12, 2011.
|
(3)
|
Represents shares issuable upon the exercise of outstanding stock options exercisable within 60 days of August 12, 2011.
|
(4)
|
Includes 1,800,000 shares issuable upon the exercise of outstanding stock options exercisable within 60 days of August 12, 2011.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
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, 2011 and 2010
Consolidated Statements of Operations for the Years Ended May 31, 2011 and 2010
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the Years Ended May 31, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended May 31, 2011 and 2010
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, 2011 and 2010
Statements of Income for the Years Ended May 31, 2011 and 2010
Statement of Members’ Equity for the Years Ended May 31, 2011 and 2010
Statements of Cash Flows for the Years Ended May 31, 2011 and 2010
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 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.
|
Exhibit No.
|
Document
|
2.1
|
Agreement to Exchange Technology for Stock in the Company, incorporated by reference to Exhibit 2.1 to Form 8-K dated August 10, 1989 (Commission file No. 33-23143-FW)
|
2.2.1
|
Amendment to Development Agreement dated April 23, 1996 between the Company and Sierra Systems, incorporated by reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 filed April 29, 1996 (Commission file No. 333-01765)
|
2.3
|
Form of Exchange Offer dated December 4, 1996 between the Company and certain shareholders of Metacomp, Inc., incorporated by reference to Exhibit 2.3 to Form 8-K filed January 9, 1997 (Commission file No. 000-22182)
|
2.4
|
Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996, incorporated by reference to Exhibit 2.4 to Form 8-K filed January 9, 1997 (Commission file No. 000-22182)
|
2.5
|
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)
|
31.1*
|
Certification of Clifford L. Flowers, Interim CEO, pursuant to Rule 13a-15(e) or Rule 15d-15(e)
|
31.2*
|
Certification of Clifford L. Flowers, CFO, pursuant to Rule 13a-15(e) or Rule 15d-15(e)
|
32.1*
|
Certification of Clifford L. Flowers, Interim CEO and CFO, pursuant to 18 U.S.C. Section 1350
|
99.1
|
Form of Incentive Stock Option Agreement to the Company’s 2001 Stock Option Plan incorporated by reference to Exhibit 99.6 to Registration Statement on Form S-8 filed March 26, 2001 (Commission file No. 333-57602)
|
99.2
|
Form of Non-Qualified Stock Option Agreement to the Company’s 2001 Stock Option Plan incorporated by reference to Exhibit 99.7 to Registration Statement on Form S-8 filed March 26, 2001 (Commission file No. 333-57602)
|
99.3
|
Form of Incentive Stock Option Agreement to the Company’s 2003 Stock Option Plan incorporated by reference to Exhibit 99.8 to Registration Statement on Form S-8 filed September 4, 2003 (Commission file No. 333-108489)
|
99.4
|
Form of Non-Qualified Stock Option Agreement to the Company’s 2003 Stock Option Plan incorporated by reference to Exhibit 99.9 to Registration Statement on Form S-8 filed September 4, 2003 (Commission file No. 333-108489)
|
99.5
|
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)
|
99.6
|
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)
|
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 and Comprehensive Loss
|
F-5
|
||
Consolidated Statements of Cash Flows
|
F-6
|
||
Notes to Consolidated Financial Statements
|
F-8
|
May 31,
|
2011
|
2010
|
||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 8,453,665 | $ | 10,340,110 | ||||
Restricted cash and cash equivalents
|
20,809 | 20,705 | ||||||
Current portion of marketable securities
|
2,207,009 | 12,105 | ||||||
Accounts receivable
|
187,465 | 149,504 | ||||||
Accounts receivable – affiliated company
|
129,345 | 7,010 | ||||||
Notes receivable, net
|
- | 1,116,382 | ||||||
Work-in-process
|
30,581 | 136,637 | ||||||
Prepaid income taxes
|
904,200 | 930,272 | ||||||
Current portion of deferred tax assets
|
- | 472,707 | ||||||
Prepaid expenses and other current assets
|
262,629 | 231,718 | ||||||
Total current assets
|
12,195,703 | 13,417,150 | ||||||
Marketable securities, net of current portion
|
- | 5,133,835 | ||||||
Property and equipment, net
|
17,613 | 37,099 | ||||||
Goodwill
|
- | 642,981 | ||||||
Other intangible assets, net
|
- | 1,722,222 | ||||||
Deferred tax assets, net of current portion
|
- | 5,911,732 | ||||||
Other assets
|
83,804 | 43,033 | ||||||
Investment in affiliated company
|
300,283 | 507,629 | ||||||
Total assets
|
$ | 12,597,403 | $ | 27,415,681 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 328,245 | $ | 493,519 | ||||
Accrued expenses and other
|
196,830 | 292,004 | ||||||
Deferred revenue
|
50,502 | 156,084 | ||||||
Total current liabilities
|
575,577 | 941,607 | ||||||
Other non-current liabilities
|
3,240 | - | ||||||
Long term debt, including accrued interest
|
- | 3,122,144 | ||||||
Total liabilities
|
578,817 | 4,063,751 | ||||||
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: 438,167,618 shares issued and 407,526,799 shares outstanding at May 31, 2011 and 438,167,618 shares issued and 408,821,071 shares outstanding at May 31, 2010
|
4,381 | 4,381 | ||||||
Additional paid-in capital
|
77,314,301 | 77,241,227 | ||||||
Accumulated deficit
|
(51,077,059 | ) | (39,561,669 | ) | ||||
Common stock held in treasury, at cost – 30,640,819 shares at May 31, 2011 and 29,346,547 shares at May 31, 2010
|
(14,223,037 | ) | (14,085,015 | ) | ||||
Accumulated other comprehensive loss
|
- | (246,994 | ) | |||||
Total stockholders’ equity
|
12,018,586 | 23,351,930 | ||||||
Total liabilities and stockholders’ equity
|
$ | 12,597,403 | $ | 27,415,681 |
Years Ended May 31,
|
2011
|
2010
|
||||||
Revenues:
|
||||||||
License and service revenue
|
$ | 468,678 | $ | 567,934 | ||||
Cost of sales:
|
||||||||
License and service revenue
|
76,242 | 119,568 | ||||||
Amortization of purchased intangibles
|
252,593 | 551,154 | ||||||
Impairment of purchased intangibles
|
1,469,629 | 3,530,263 | ||||||
Total cost of sales
|
1,798,464 | 4,200,985 | ||||||
Gross loss
|
(1,329,786 | ) | (3,633,051 | ) | ||||
Operating expenses:
|
||||||||
Research and development
|
753,017 | 1,503,724 | ||||||
Selling, general and administrative
|
3,713,240 | 6,530,972 | ||||||
Impairment of goodwill
|
642,981 | 1,096,268 | ||||||
Total operating
expenses
|
5,109,238 | 9,130,964 | ||||||
Operating loss
|
(6,439,024 | ) | (12,764,015 | ) | ||||
Other income (expense):
|
||||||||
Interest and other income
|
109,246 | 154,482 | ||||||
Interest expense
|
(20,810 | ) | (80,567 | ) | ||||
Gain on sale of Verras Medical, Inc. assets
|
- | 182,397 | ||||||
Gain on sale of Vigilys business line
|
60,000 | - | ||||||
Recovery of (reserve for) loan loss
|
1,013,151 | (1,013,151 | ) | |||||
Impairment of investment in affiliated companies
|
- | (1,548,807 | ) | |||||
Realized loss on sale of marketable securities
|
(600,879 | ) | - | |||||
Equity in earnings of affiliated companies, net
|
600,460 | 4,461,483 | ||||||
Total other income, net
|
1,161,168 | 2,155,837 | ||||||
Loss before income taxes
|
(5,277,856 | ) | (10,608,178 | ) | ||||
Provision (benefit) for income taxes
|
6,237,534 | (3,928,357 | ) | |||||
Net loss
|
$ | (11,515,390 | ) | $ | (6,679,821 | ) | ||
Basic loss per common share
|
$ | (0.03 | ) | $ | (0.02 | ) | ||
Diluted loss per common share
|
$ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted average number of common shares outstanding - basic
|
405,252,953 | 407,051,407 | ||||||
Weighted average number of common shares outstanding - diluted
|
405,252,953 | 407,051,407 |
See accompanying notes to consolidated financial statements.
|
Common Stock
|
Accumulated
|
|||||||||||||||||||||||||||||||
Shares
|
Amounts
|
Additional Paid-in Capital
|
Accumulated Deficit
|
Treasury Stock
|
Other Comprehensive Loss
|
Stockholders’ Equity
|
Comprehensive Loss
|
|||||||||||||||||||||||||
Balance, June 1, 2009
|
410,354,054 | $ | 4,380 | $ | 77,008,332 | $ | (32,881,848 | ) | $ | (13,850,659 | ) | $ | (629,314 | ) | $ | 29,650,891 | ||||||||||||||||
Exercise of options at $0.07 per share
|
100,000 | 1 | 7,449 | 7,450 | ||||||||||||||||||||||||||||
Share-based compensation
|
221,642 | 221,642 | ||||||||||||||||||||||||||||||
Tax effect of exercise of stock options
|
3,804 | 3,804 | ||||||||||||||||||||||||||||||
Purchase of common stock for treasury
|
(1,632,983 | ) | - | - | - | (234,356 | ) | - | (234,356 | ) | ||||||||||||||||||||||
Net loss
|
(6,679,821 | ) | (6,679,821 | ) | (6,679,821 | ) | ||||||||||||||||||||||||||
Unrealized gain on investments, net of tax
|
- | - | - | - | - | 382,320 | 382,320 | 382,320 | ||||||||||||||||||||||||
Total comprehensive loss
|
$ | (6,297,501 | ) | |||||||||||||||||||||||||||||
Balance, May 31, 2010
|
408,821,071 | $ | 4,381 | $ | 77,241,227 | $ | (39,561,669 | ) | $ | (14,085,015 | ) | $ | (246,994 | ) | $ | 23,351,930 | ||||||||||||||||
Share-based compensation
|
- | 76,879 | - | - | - | 76,879 | ||||||||||||||||||||||||||
Tax effect of exercise of stock options
|
- | (3,805 | ) | - | - | - | (3,805 | ) | ||||||||||||||||||||||||
Purchase of common stock for treasury
|
(1,294,272 | ) | - | - | - | (138,022 | ) | - | (138,022 | ) | ||||||||||||||||||||||
Net loss
|
- | - | (11,515,390 | ) | - | - | (11,515,390 | ) | (11,515,390 | ) | ||||||||||||||||||||||
Reversal of unrealized loss due to recognition in current fiscal year
|
246,994 | 246,994 | 246,994 | |||||||||||||||||||||||||||||
Total comprehensive
loss
|
$ | (11,268,396 | ) | |||||||||||||||||||||||||||||
Balance May 31, 2011
|
407,526,799 | $ | 4,381 | $ | 77,314,301 | $ | (51,077,059 | ) | $ | (14,223,037 | ) | $ | - | $ | 12,018,586 |
Years Ended May 31,
|
2011
|
2010
|
||||||
Operating activities:
|
||||||||
Net loss
|
$ | (11,515,390 | ) | $ | (6,679,821 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Amortization and depreciation
|
277,163 | 602,226 | ||||||
Share-based compensation relating to issuance of stock options
|
76,879 | 221,642 | ||||||
Impairment of intangibles
|
1,469,629 | 3,530,263 | ||||||
Impairment of goodwill
|
642,981 | 1,096,268 | ||||||
Accrued interest income added to investments and notes receivable
|
(13,826 | ) | (55,020 | ) | ||||
Equity in earnings of affiliated companies
|
(600,460 | ) | (4,461,483 | ) | ||||
Realized loss on sale of marketable securities
|
600,879 | - | ||||||
Impairment of investment in affiliated companies
|
- | 1,548,807 | ||||||
Gain on sale of Verras Medical, Inc. assets
|
- | (182,397 | ) | |||||
Gain on sale of Vigilys business line
|
(60,000 | ) | - | |||||
Loss on sale of assets
|
1,719 | 3,122 | ||||||
Reserve for (recovery of) loan loss
|
(1,013,151 | ) | 1,013,151 | |||||
Deferred income taxes
|
6,215,268 | (3,508,416 | ) | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(37,961 | ) | 18,146 | |||||
Receivable from affiliated company
|
(122,335 | ) | (1,543 | ) | ||||
Work-in-process
|
106,056 | (109,358 | ) | |||||
Prepaid expenses and other current assets
|
(11,682 | ) | 83,213 | |||||
Prepaid income taxes
|
26,072 | (423,746 | ) | |||||
Deferred revenue
|
(105,582 | ) | 129,773 | |||||
Accounts payable and accrued expenses
|
(257,208 | ) | (142,083 | ) | ||||
Net cash used in operating activities
|
(4,320,949 | ) | (7,317,256 | ) | ||||
Investing activities:
|
||||||||
Proceeds from sale of marketable securities
|
4,961,226 | 6,146,187 | ||||||
Purchases of marketable securities
|
(2,205,000 | ) | - | |||||
Proceeds from sale of restricted investments
|
- | 31,643 | ||||||
Purchases of property and equipment
|
(6,803 | ) | (72,669 | ) | ||||
Issuance of note receivable
|
- | (2,005,000 | ) | |||||
Repayment of note receivable
|
2,141,246 | 628,112 | ||||||
Investments in affiliated companies
|
- | (612,500 | ) | |||||
Distributions from affiliated company
|
807,806 | 7,557,827 | ||||||
Net cash provided by investing activities
|
5,698,475 | 11,673,600 | ||||||
Financing activities:
|
||||||||
Proceeds from exercise of common stock options
|
- | 7,450 | ||||||
Repurchase of common stock for treasury
|
(138,022 | ) | (234,356 | ) | ||||
Tax effect of expiration/cancellation/exercise of stock options
|
(3,805 | ) | 3,804 | |||||
Payment on note payable
|
(3,122,144 | ) | - | |||||
Net cash used in financing activities
|
(3,263,971 | ) | (223,102 | ) | ||||
Net increase (decrease) in cash and cash equivalents
|
(1,886,445 | ) | 4,133,242 | |||||
Cash and cash equivalents, beginning of year
|
10,340,110 | 6,206,868 | ||||||
Cash and cash equivalents, end of year
|
$ | 8,453,665 | $ | 10,340,110 |
Years Ended May 31,
|
2011
|
2010
|
||||||
Supplemental Disclosure of Cash Flow Information:
|
||||||||
Cash payments for interest
|
$ | 137,785 | $ | - | ||||
Cash payments for income taxes
|
$ | - | $ | - | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
|
||||||||
Unrealized recovery on investments in marketable securities charged to other comprehensive income adjusted for deferred tax benefit
|
$ | - | $ | 382,320 | ||||
Reversal of unrealized loss charged to other comprehensive income at May 31, 2010 adjusted for deferred tax benefit due to recognition of loss in current fiscal year
|
$ | (246,994 | ) | $ | - |
2011
|
2010
|
|||||||
Customer A
|
13.2% | 71.5 | ||||||
Customer B
|
- | 22.1 | ||||||
Customer C
|
71.3% | - | ||||||
Customer D
|
15.5% | - |
Year Ended May 31, 2011 | ||||||||||||
Numerator
(Loss)
|
Denominator
(Shares)
|
Per Share
Amount
|
||||||||||
Basic EPS:
|
||||||||||||
Net loss
|
$ | (11,515,390 | ) | 405,252,953 | $ | (0.03 | ) | |||||
Diluted EPS:
|
- | - | ||||||||||
Loss available to common shareholders
|
$ | (11,515,390 | ) | 405,252,953 | $ | (0.03 | ) |
Year Ended May 31, 2010
|
||||||||||||
Numerator
(Loss)
|
Denominator
(Shares)
|
Per Share
Amount
|
||||||||||
Basic EPS:
|
||||||||||||
Net loss
|
$ | (6,679,821 | ) | 407,051,407 | $ | (0.02 | ) | |||||
Diluted EPS:
|
- | - | ||||||||||
Loss available to common shareholders
|
$ | (6,679,821 | ) | 407,051,407 | $ | (0.02 | ) |
Estimated
Life in
|
Allocated
Value
|
Accumulated
Amortization
|
Impairment
|
Net Carrying Value
May 31,
|
||||||||||||||||
Technologies and processes
|
6.75 | $ | 1,722,222 | $ | (252,593 | ) | $ | (1,469,629 | ) | $ | - |
Estimated
|
Net Carrying
Value
|
|||||||||||||||||||
Life in
|
Allocated
|
Accumulated
|
May 31,
|
|||||||||||||||||
Years
|
Value
|
Amortization
|
Impairment
|
2010
|
||||||||||||||||
Customer contracts –open orders
|
0.75 | $ | 63,600 | $ | (63,600 | ) | $ | - | $ | - | ||||||||||
Customer relationships
|
5.00 | 65,000 | (11,064 | ) | (53,936 | ) | - | |||||||||||||
Maintenance agreements
|
4.00 | 75,400 | (23,565 | ) | (51,835 | ) | - | |||||||||||||
Trademarks/names
|
10.00 | 124,500 | (11,972 | ) | (112,528 | ) | - | |||||||||||||
Technologies and processes
|
5.00–8.00 | 6,136,900 | (1,102,714 | ) | (3,311,964 | ) | 1,722,222 | |||||||||||||
$ | 6,465,400 | $ | (1,212,915 | ) | $ | (3,530,263 | ) | $ | 1,722,222 |
Fiscal Year Ended
|
Fiscal Year Ended
|
|||||||
May 31, 2011
|
May 31, 2010
|
|||||||
Amortization of intangible assets included in:
|
||||||||
Cost of sales
|
$ | 252,593 | $ | 551,154 |
Balance, June 1, 2009
|
$ | 1,739,249 | ||
Impairment of Verras goodwill
|
(196,512 | ) | ||
Impairment of Vigilys goodwill
|
(110,004 | ) | ||
Impairment of Crossflo goodwill
|
(789,752 | ) | ||
Balance, May 31, 2010
|
$ | 642,981 | ||
Impairment of Crossflo goodwill
|
(642,981 | ) | ||
Balance, May 31, 2011
|
$ | - |
Fair Value Measurements at May 31, 2011 Using
|
||||||||||||||||
Quoted Prices
|
Significant
|
|||||||||||||||
in Active
|
Other
|
Significant
|
||||||||||||||
Fair Value at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
May 31,
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
2011
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Cash and cash equivalents:
|
||||||||||||||||
Cash:
|
||||||||||||||||
Cash
|
$ | 128,655 | $ | 128,655 | $ | - | $ | - | ||||||||
Restricted cash
|
20,809 | 20,809 | - | - | ||||||||||||
Cash equivalents:
|
||||||||||||||||
Money market funds
|
8,080,005 | 8,080,005 | - | - | ||||||||||||
Certificates of deposit
|
245,005 | 245,005 | - | - | ||||||||||||
Marketable securities:
|
||||||||||||||||
Certificates of deposit
|
2,207,009 | 2,207,009 | - | - | ||||||||||||
Total
|
$ | 10,681,483 | $ | 10,681,483 | $ | - | $ | - |
Fair Value Measurements at May 31, 2010 Using
|
||||||||||||||||
Quoted Prices
|
Significant
|
|||||||||||||||
in Active
|
Other
|
Significant
|
||||||||||||||
Fair Value at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
May 31,
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
2010
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Cash and cash equivalents:
|
||||||||||||||||
Cash:
|
||||||||||||||||
Cash
|
$ | 244,870 | $ | 244,870 | $ | - | $ | - | ||||||||
Restricted cash
|
20,705 | 20,705 | - | - | ||||||||||||
Cash equivalents:
|
||||||||||||||||
Money market funds
|
10,095,240 | 10,095,240 | - | - | ||||||||||||
Marketable securities:
|
||||||||||||||||
Auction rate securities
|
5,133,835 | - | - | 5,133,835 | ||||||||||||
Total
|
$ | 15,494,650 | $ | 10,360,815 | $ | - | $ | 5,133,835 |
Fair Value
Measurements
Using Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
|||||||
Time Deposits
|
Auction Rate
Securities
|
|||||||
Beginning balance June 1, 2010
|
$ | - | $ | 5,133,835 | ||||
Purchases and interest
|
2,452,014 | - | ||||||
Total realized/unrealized recovery (losses):
|
||||||||
Realized loss included in earnings
|
- | (600,879 | ) | |||||
Reversal of unrealized losses included in other comprehensive income (loss)
|
- | 416,165 | ||||||
Settlements
|
- | (350,000 | ) | |||||
Settlements
|
- | (4,599,121 | ) | |||||
Ending balance May 31, 2011
|
$ | 2,452,014 | $ | - |
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
||||
Description
|
Auction Rate
Securities
|
|||
Beginning balance, June 1, 2009
|
$
|
10,598,389
|
||
Transfers in to Level 3
|
—
|
|||
Total realized/unrealized recovery (losses):
|
—
|
|||
Included in earnings
|
—
|
|||
Recoveries of unrealized losses included in other comprehensive loss
|
635,446
|
|||
Unrealized losses included in other comprehensive income (loss)
|
-
|
|||
Settlements
|
(6,100,000
|
)
|
||
Ending balance, May 31, 2010
|
$
|
5,133,835
|
||
Total amount of unrealized losses for the fiscal year ended May 31, 2010 included in accumulated other comprehensive loss (before taxes) attributable to the change in fair market value relating to assets still held at the reporting date.
|
$
|
(416,165)
|
May 31, 2011
|
||||||||||||
Cost
|
Gross Unrealized Gains/(Losses)
|
Fair
Value
|
||||||||||
Maturity
|
||||||||||||
Due in one year or less
|
$ | 2,452,014 | $ | - | $ | 2,452,014 |
As of May 31, 2010
|
||||||||||||
Amortized
Cost
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
||||||||||
Short-term
|
||||||||||||
Accrued interest - auction rate securities
|
$ | 12,105 | $ | — | $ | 12,105 | ||||||
Long-term
|
||||||||||||
Auction rate securities
|
5,550,000 | (416,165 | ) | 5,133,835 | ||||||||
Total
|
$ | 5,562,105 | $ | (416,165 | ) | $ | 5,145,940 |
May 31, 2010
|
||||||||
Amortized
Cost
|
Fair
Value
|
|||||||
Maturity
|
||||||||
Greater than two years
|
$ | 5,550,000 | $ | 5,133,835 |
2011
|
2010
|
|||||||
Computer equipment and software
|
$ | 82,865 | $ | 92,416 | ||||
Furniture and fixtures
|
31,580 | 51,725 | ||||||
114,445 | 144,141 | |||||||
Less: accumulated depreciation and amortization
|
(96,832 | ) | (107,042 | ) | ||||
Net property and equipment
|
$ | 17,613 | $ | 37,099 |
2011
|
2010
|
|||||||
Cash and cash equivalents
|
$ | 1,895,653 | $ | 779,932 | ||||
Prepaid expenses
|
600,000 | 25,000 | ||||||
Licenses receivable
|
- | 2,000,000 | ||||||
Total assets
|
$ | 2,495,653 | $ | 2,804,932 |
Related party payables and accrued expenses
|
$ | 1,883,296 | $ | 1,777,884 | ||||
LLC tax payable
|
11,790 | 11,790 | ||||||
Members’ equity
|
600,567 | 1,015,258 | ||||||
Total liabilities and members’ equity
|
$ | 2,495,653 | $ | 2,804,932 |
2011
|
2010
|
|||||||
License revenues
|
$ | 11,090,000 | $ | 14,278,855 | ||||
Operating expenses
|
9,922,580 | 5,301,273 | ||||||
Operating income
|
1,167,420 | 8,977,582 | ||||||
Interest and other income
|
46,091 | 588 | ||||||
Income before LLC taxes
|
1,213,511 | 8,978,170 | ||||||
Provision for LLC taxes
|
12,590 | 11,790 | ||||||
Net income
|
$ | 1,200,921 | $ | 8,966,380 |
2011
|
2010
|
|||||||
Accrued lease obligation
|
$ | 17,362 | $ | 19,837 | ||||
Compensation and benefits
|
175,864 | 269,611 | ||||||
Commissions payable
|
3,604 | 2,556 | ||||||
$ | 196,830 | $ | 292,004 |
2011
|
2010
|
|||||||
Number of shares repurchased
|
1,294,272 | 1,632,983 | ||||||
Aggregate cost
|
$ | 138,022 | $ | 234,356 |
2011
|
2010
|
|||||||
Issued in conjunction with:
|
||||||||
Services
|
$ | - | 300,000 | |||||
Legal settlements
|
- | 25,000 | ||||||
Total warrants outstanding
|
- | 325,000 |
Year Ended
May 31, 2011
|
Year Ended
May 31, 2010
|
|||||||
Expected term
|
5 yrs
|
5 yrs
|
||||||
Expected volatility
|
106% | 116 – 117% | ||||||
Risk-free interest rate
|
2.17% | 2.14 - 2.55% |
Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term (Years)
|
Aggregate Intrinsic Value
|
|||||||||||||
Options outstanding at June 1, 2010
|
5,637,917 | $ | 0.42 | |||||||||||||
Options granted
|
650,000 | $ | 0.10 | |||||||||||||
Options exercised
|
- | $ | - | |||||||||||||
Options forfeited
|
(3,277,917 | ) | $ | 0.44 | ||||||||||||
Options outstanding at May 31, 2011
|
3,010,000 | $ | 0.33 | 2.19 | $ | - | ||||||||||
Options vested and expected to vest at May 31, 2011
|
2,901,306 | $ | 0.33 | 2.18 | $ | - | ||||||||||
Options exercisable at May 31, 2011
|
2,792,612 | $ | 0.34 | 2.17 | $ | - |
Year Ended
|
Year Ended
|
|||||||
May 31, 2011
|
May 31, 2010
|
|||||||
Research and development - PDSG
|
$ | 2,038 | $ | 19,523 | ||||
Selling, general and administrative expense - PDSG
|
18,462 | 49,498 | ||||||
Selling, general and administrative expense - PTSC
|
56,379 | 158,696 | ||||||
Total
|
$ | 76,879 | $ | 227,717 |
Options
|
Warrants
|
|||||||||||||||
Shares
|
Weighted Average Exercise Price
|
Shares
|
Weighted Average Exercise Price
|
|||||||||||||
Outstanding, June 1, 2009
|
10,210,000 | $ | 0.39 | 550,000 | $ | 0.41 | ||||||||||
Granted
|
670,000 | 0.18 | 25,000 | 0.15 | ||||||||||||
Cancelled/Expired
|
(5,142,083 | ) | 0.33 | (250,000 | ) | 0.23 | ||||||||||
Exercised
|
(100,000 | ) | 0.07 | - | - | |||||||||||
Outstanding, May 31, 2010
|
5,637,917 | 0.42 | 325,000 | 0.53 | ||||||||||||
Granted
|
650,000 | 0.10 | - | - | ||||||||||||
Cancelled/Expired
|
(3,277,917 | ) | 0.44 | (325,000 | ) | 0.53 | ||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Outstanding, May 31, 2011
|
3,010,000 | $ | 0.33 | - | $ | - | ||||||||||
Exercisable, May 31, 2010
|
5,000,108 | $ | 0.45 | 325,000 | $ | 0.53 | ||||||||||
Exercisable, May 31, 2011
|
2,792,612 | $ | 0.34 | - | $ | - | ||||||||||
Weighted average fair value of options and warrants granted during the year ended May 31, 2010
|
$ | 0.15 | $ | 0.03 | ||||||||||||
Weighted average fair value of options granted during the year ended May 31, 2011
|
$ | 0.08 |
2011
|
2010
|
|||||||
Current:
|
|
|||||||
Federal
|
$ | (110,102 | ) | $ | (627,000 | ) | ||
State
|
(36,803 | ) | (46,066 | ) | ||||
Total current
|
(146,905 | ) | (673,066 | ) | ||||
Deferred:
|
||||||||
Federal
|
5,161,525 | (2,447,633 | ) | |||||
State
|
1,222,914 | (807,658 | ) | |||||
Total deferred
|
6,384,439 | (3,255,291 | ) | |||||
Total provision (benefit)
|
$ | 6,237,534 | $ | (3,928,357 | ) |
2011
|
2010
|
|||||||
Statutory federal income tax rate
|
35.0 % | 35.0 % | ||||||
State income tax rate, net of Federal effect
|
(13.8% | ) | 5.3 % | |||||
Change in tax rate
|
(1.0% | ) | (1.0% | ) | ||||
Stock option expense
|
(0.7% | ) | - % | |||||
Tax credits
|
- % | 0.2 % | ||||||
Tax exempt interest
|
- % | 0.2 % | ||||||
Deconsolidation of variable interest entity
|
- % | (0.2% | ) | |||||
Goodwill
|
(4.1%% | ) | (2.5% | ) | ||||
Other
|
(4.5% | ) | - % | |||||
Change in valuation allowance
|
(129.1% | ) | - % | |||||
Effective income tax rate
|
(118.2% | ) | 37.0 % |
2011
|
2010
|
|||||||
Current deferred tax assets (liabilities):
|
|
|||||||
State taxes
|
$ | 49,287 | $ | (34,509 | ) | |||
Accrued expenses
|
72,031 | 73,182 | ||||||
Reserve for loan loss
|
- | 434,034 | ||||||
Less: valuation allowance
|
(121,318 | ) | - | |||||
Total net current deferred tax asset
|
- | 472,707 | ||||||
Long-term deferred tax assets (liabilities):
|
||||||||
Investment in affiliated company
|
(507,180 | ) | 212,202 | |||||
Basis difference in property and equipment
|
5,905 | (5,486 | ) | |||||
Basis difference in intangibles
|
176,415 | (240,892 | ) | |||||
Stock based compensation expense
|
462,607 | 480,869 | ||||||
Impairment of note receivable
|
331,896 | 331,896 | ||||||
State taxes
|
- | (796,678 | ) | |||||
Deferred rent
|
5,721 | 8,498 | ||||||
Other comprehensive loss
|
- | 178,285 | ||||||
Capital loss carryover
|
887,155 | 29,131 | ||||||
Net operating loss carryforwards
|
7,919,035 | 6,178,342 | ||||||
Credit carryover
|
111,090 | 78,090 | ||||||
Valuation allowance
|
(9,392,644 | ) | (542,525 | ) | ||||
Total net long-term deferred tax asset
|
- | 5,911,732 | ||||||
Net deferred tax asset
|
$ | - | $ | 6,384,439 |
Balance at June 1, 2009
|
$
|
-
|
||
Increase in unrecognized tax benefit liability
|
-
|
|||
Decrease in unrecognized tax benefit liability
|
-
|
|||
Accrual of interest related to unrecognized tax benefits
|
7,000
|
|||
Balance at May 31, 2010
|
$
|
7,000
|
||
Increase in unrecognized tax benefit liability
|
-
|
|||
Decrease in unrecognized tax benefit liability
|
-
|
|||
Accrual of interest related to unrecognized tax benefits
|
-
|
|||
Balance at May 31, 2011
|
$
|
7,000
|
Year Ended
|
Year Ended
|
|||||||
May 31, 2011
|
May 31, 2010
|
|||||||
Rental expense
|
$ | 213,154 | $ | 275,392 |
Fiscal Year
|
||||
2012
|
$ | 112,166 | ||
2013
|
21,253 | |||
Total minimum lease payments
|
133,419 |
2011
|
2010
|
|||||||
Net revenue:
|
|
|||||||
PDSG
|
$ | 468,678 | $ | 567,934 | ||||
PTSC
|
- | - | ||||||
Total net revenue
|
$ | 468,678 | $ | 567,934 | ||||
Operating loss:
|
||||||||
PDSG
|
$ | (3,888,358 | ) | $ | (8,948,008 | ) | ||
PTSC
|
(2,550,666 | ) | (3,816,007 | ) | ||||
Total operating loss
|
$ | (6,439,024 | ) | $ | (12,764,015 | ) | ||
Loss before income taxes:
|
||||||||
PDSG
|
$ | (3,827,595 | ) | $ | (8,756,032 | ) | ||
PTSC
|
(1,450,261 | ) | (1,852,146 | ) | ||||
Total loss before income taxes
|
$ | (5,277,856 | ) | $ | (10,608,178 | ) | ||
Provision (benefit) for income taxes:
|
||||||||
PDSG
|
$ | 4,267,167 | $ | (2,996,841 | ) | |||
PTSC
|
1,970,367 | (931,516 | ) | |||||
Total provision (benefit) for income taxes
|
$ | 6,237,534 | $ | (3,928,357 | ) |
2011
|
2010
|
|||||||||||||||||||||||
Sales
|
% of sales
|
% of A/R
|
Sales
|
% of sales
|
% of A/R
|
|||||||||||||||||||
Customer A
|
$ | 136,229 | 29% | - | $ | 281,141 | 50% | 22% | ||||||||||||||||
Customer B
|
$ | 23,928 | 5% | 13% | $ | 106,064 | 19% | 72% | ||||||||||||||||
Customer C
|
$ | 81,642 | 17% | 15% | - | - | - | |||||||||||||||||
Customer D
|
$ | 151,323 | 32% | 71% | - | - | - |
2011
|
2010
|
|||||||
Depreciation and amortization:
|
||||||||
PDSG
|
$ | 267,797 | $ | 588,806 | ||||
PTSC
|
9,366 | 13,420 | ||||||
Total depreciation and amortization
|
$ | 277,163 | $ | 602,226 |
2011
|
2010
|
|||||||
Total assets:
|
||||||||
PDSG
|
$ | 399,560 | $ | 7,227,033 | ||||
PTSC
|
12,197,843 | 20,188,648 | ||||||
Total assets
|
$ | 12,597,403 | $ | 27,415,681 |
Page
|
|||
Report of Independent Registered Public Accounting Firm
|
F-39
|
||
Financial Statements:
|
|||
Balance Sheets
|
F-40
|
||
Statements of Income
|
F-41
|
||
Statements of Members’ Equity
|
F-42
|
||
Statements of Cash Flows
|
F-43
|
||
Notes to Financial Statements
|
F-44
|
May 31,
|
2011
|
2010
|
||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 1,895,653 | $ | 779,932 | ||||
Prepaid expenses
|
600,000 | 25,000 | ||||||
Licenses receivable
|
- | 2,000,000 | ||||||
Total assets
|
$ | 2,495,653 | $ | 2,804,932 | ||||
LIABILITIES AND MEMBERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Related party payables and accrued expenses
|
$ | 1,883,296 | $ | 1,777,884 | ||||
LLC tax payable
|
11,790 | 11,790 | ||||||
Total liabilities
|
1,895,086 | 1,789,674 | ||||||
Commitments and Contingencies
|
||||||||
Members’ equity
|
600,567 | 1,015,258 | ||||||
Total liabilities and members’ equity
|
$ | 2,495,653 | $ | 2,804,932 |
Years Ended May 31,
|
2011
|
2010
|
||||||
License revenues
|
$ | 11,090,000 | $ | 14,278,855 | ||||
Operating expenses:
|
||||||||
General and administrative
|
9,922,580 | 5,301,273 | ||||||
Operating income
|
1,167,420 | 8,977,582 | ||||||
Other income:
|
||||||||
Interest and other income
|
46,091 | 588 | ||||||
Income before LLC taxes
|
1,213,511 | 8,978,170 | ||||||
Provision for LLC taxes
|
12,590 | 11,790 | ||||||
Net income
|
$ | 1,200,921 | $ | 8,966,380 |
Balance June 1, 2009
|
$
|
6,004,533
|
||
Contributions
|
1,160,000
|
|||
Net income
|
8,966,380
|
|||
Distributions
|
(15,115,655
|
)
|
||
Balance May 31, 2010
|
1,015,258
|
|||
Net income
|
1,200,921
|
|||
Distributions
|
(1,615,612
|
)
|
||
Balance May 31, 2011
|
$
|
600,567
|
Years Ended May 31,
|
2011
|
2010
|
||||||
Operating activities:
|
||||||||
Net income
|
$ | 1,200,921 | $ | 8,966,380 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Changes in operating assets and liabilities:
|
||||||||
Prepaid expenses
|
(575,000 | ) | (25,000 | ) | ||||
Licenses receivable
|
2,000,000 | 4,148,750 | ||||||
Related party payables and accrued expenses
|
105,412 | 290,085 | ||||||
LLC tax payable
|
- | 11,790 | ||||||
Net cash provided by operating activities
|
2,731,333 | 13,392,005 | ||||||
Financing activities:
|
||||||||
Contributions from members
|
- | 1,160,000 | ||||||
Distributions to members
|
(1,615,612 | ) | (15,115,655 | ) | ||||
Net cash used in financing activities
|
(1,615,612 | ) | (13,955,655 | ) | ||||
Net increase (decrease) in cash and cash equivalents
|
1,115,721 | (563,650 | ) | |||||
Cash and cash equivalents, beginning of year
|
779,932 | 1,343,582 | ||||||
Cash and cash equivalents, end of year
|
$ | 1,895,653 | $ | 779,932 | ||||
Supplemental Disclosure of Cash Flow Information
|
||||||||
Cash payments for income taxes
|
$ | 12,590 | $ | 800 |
DATED: August 29, 2011
|
PATRIOT SCIENTIFIC CORPORATION
/S/ CLIFFORD L. FLOWERS
Clifford L. Flowers
Interim Chief Executive Officer and Chief Financial Officer
(Duly Authorized and Principal Financial Officer)
|
PATRIOT SCIENTIFIC CORPORATION | INDEMNITEE | ||||
By:
|
|
By:
|
|
||
Name:
|
|
Name:
|
|
||
Title:
|
|
|
|||
Address:
|
701 Palomar Airport Road Ste, 170
Carlsbad, California 92011
Attn: Clifford Flowers
Facsimile: (760) 547-2705
|
Address:
|
|
Jurisdiction
|
|
Plasma Scientific Corporation
|
Delaware
|
Patriot Data Solutions Group, Inc.
|
California
|
/s/ CLIFFORD L. FLOWERS
Clifford L. Flowers
Interim Chief Executive Officer
and Chief Financial Officer
|
/s/ CLIFFORD L. FLOWERS
Clifford L. Flowers
Interim Chief Executive Officer
|
/s/ CLIFFORD L. FLOWERS
Clifford L. Flowers
Chief Financial Officer
|