Document and Entity Information
Document and Entity Information - shares | 6 Months Ended | |
Nov. 30, 2017 | Jan. 11, 2018 | |
Document And Entity Information | ||
Entity Registrant Name | PATRIOT SCIENTIFIC CORP | |
Entity Central Index Key | 836,564 | |
Document Type | 10-Q | |
Document Period End Date | Nov. 30, 2017 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --05-31 | |
Is Entity a Well-known Seasoned Issuer | No | |
Is Entity a Voluntary Filer | No | |
Is Entity's Reporting Status Current | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 401,392,948 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2,018 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets (Unaudited) - USD ($) | Nov. 30, 2017 | May 31, 2017 |
Current assets: | ||
Cash and cash equivalents | $ 445,194 | $ 979,641 |
Restricted cash and cash equivalents | 21,497 | 21,443 |
Marketable securities | 2,256,105 | 2,203,396 |
Prepaid income tax | 2,285 | 2,285 |
Prepaid expenses and other current assets | 60,931 | 110,421 |
Total current assets | 2,786,012 | 3,317,186 |
Property and equipment, net | 1,427 | 1,877 |
Investment in affiliated company | 324,096 | 441,988 |
Total assets | 3,111,535 | 3,761,051 |
Current liabilities: | ||
Accounts payable | 9,227 | 13,786 |
Accrued expenses and other | 41,546 | 42,801 |
Total current liabilities | 50,773 | 56,587 |
Total liabilities | 50,773 | 56,587 |
Commitments and contingencies | ||
Stockholders' equity | ||
Preferred stock, $0.00001 par value; 5,000,000 shares authorized: none outstanding | 0 | 0 |
Common stock, $0.00001 par value: 600,000,000 shares authorized: 438,242,618 shares issued and 401,392,948 shares outstanding at November 30, 2017 and May 31, 2017 | 4,382 | 4,382 |
Additional paid-in capital | 77,444,062 | 77,444,062 |
Accumulated deficit | (59,761,814) | (59,118,112) |
Common stock held in treasury, at cost - 36,849,670 shares at August 31, 2017 and May 31, 2017 | (14,625,868) | (14,625,868) |
Total stockholders' equity | 3,060,762 | 3,704,464 |
Total liabilities and stockholders' equity | $ 3,111,535 | $ 3,761,051 |
Condensed Consolidated Balance3
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares | Nov. 30, 2017 | May 31, 2017 |
Statement of Financial Position [Abstract] | ||
Preferred stock, par value (in Dollars per share) | $ .00001 | $ .00001 |
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value (in Dollars per share) | $ .00001 | $ .00001 |
Common stock, shares authorized | 600,000,000 | 600,000,000 |
Common stock, shares issued | 438,242,618 | 438,242,618 |
Common stock, shares outstanding | 401,392,948 | 401,392,948 |
Common stock held in treasury, at cost | 36,849,670 | 36,849,670 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Nov. 30, 2017 | Nov. 30, 2016 | Nov. 30, 2017 | Nov. 30, 2016 | |
Operating expenses: | ||||
Selling, general and administrative | $ 254,159 | $ 284,244 | $ 537,483 | $ 606,616 |
Total operating expenses | 254,159 | 284,244 | 537,483 | 606,616 |
Other income (expense): | ||||
Interest income | 7,813 | 3,988 | 14,073 | 8,487 |
Equity in earnings (loss) of affiliated company | (104,690) | 1,247,280 | (117,892) | 1,191,885 |
Total other income (expense), net | (96,877) | 1,251,268 | (103,819) | 1,200,372 |
Income (loss) before income taxes | (351,036) | 967,024 | (641,302) | 593,756 |
Provision for income taxes | 0 | 0 | 2,400 | 2,400 |
Net income (loss) | $ (351,036) | $ 967,024 | $ (643,702) | $ 591,356 |
Basic and diluted income (loss) per common share | $ 0 | $ 0 | $ 0 | $ 0 |
Weighted average number of common shares outstanding - basic | 398,548,318 | 398,548,318 | 398,548,318 | 398,548,318 |
Weighted average number of common shares outstanding - diluted | 398,548,318 | 401,392,948 | 398,548,318 | 401,392,948 |
Condensed Consolidated Stateme5
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) | 6 Months Ended | |
Nov. 30, 2017 | Nov. 30, 2016 | |
Operating activities: | ||
Net income (loss) | $ (643,702) | $ 591,356 |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||
Depreciation | 450 | 375 |
Accrued interest income | (2,763) | (273) |
Equity in (earnings) loss of affiliated company | 117,892 | (1,191,885) |
Changes in operating assets and liabilities: | ||
Prepaid expenses and other current assets | 49,490 | (72,257) |
Prepaid income tax | 0 | 100 |
Accounts payable, accrued expenses, and other | (5,814) | (21,195) |
Net cash used in operating activities | (484,447) | (693,779) |
Investing activities: | ||
Proceeds from sales of marketable securities | 2,450,000 | 1,250,000 |
Purchases of marketable securities | (2,500,000) | (500,000) |
Purchase of property and equipment | 0 | (2,703) |
Distributions from affiliated company | 0 | 883,600 |
Net cash (used in) provided by investing activities | (50,000) | 1,630,897 |
Net decrease in cash and cash equivalents | (534,447) | 937,118 |
Cash and cash equivalents, beginning of period | 979,641 | 1,159,576 |
Cash and cash equivalents, end of period | 445,194 | 2,096,694 |
Supplemental Disclosure of Cash Flow Information: | ||
Cash paid for income taxes | $ 2,400 | $ 2,300 |
1. Basis of Presentation and Su
1. Basis of Presentation and Summary of Significant Accounting Policies | 6 Months Ended |
Nov. 30, 2017 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Basis of Presentation and Summary of Significant Accounting Policies | The unaudited condensed consolidated financial statements of Patriot Scientific Corporation (the “Company”, “PTSC”, “Patriot”, “we”, “us” or “our”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Report on Form 10-K for our fiscal year ended May 31, 2017. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim period presented. Operating results for the six month period ended November 30, 2017 are not necessarily indicative of the results that may be expected for the year ending May 31, 2018. Basis of Consolidation The condensed consolidated balance sheets at November 30, 2017 and May 31, 2017 and condensed consolidated statements of operations and condensed consolidated statements of cash flows for the six months ended November 30, 2017 and 2016 include our accounts and those of our inactive subsidiaries: Patriot Data Solutions Group, Inc. (“PDSG”) which includes Crossflo Systems, Inc. (“Crossflo”), and Plasma Scientific Corporation. All significant intercompany accounts and transactions have been eliminated. Liquidity and Management’s Plans Cash shortfalls currently experienced by Phoenix Digital Solutions, LLC (“PDS”) will have an adverse effect on our liquidity. To date, we have determined that it is in the best interests of the Moore Microprocessor Patent (“MMP”) licensing program that we provide our 50% share of capital to provide for PDS expenses including legal retainers, and litigation related payments 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 had 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. Our current liquid cash resources are expected to provide the funds necessary to support our operations through at least the next twelve months from the date of this report. 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. On March 20, 2013, Technology Properties Limited, Inc. (“TPL”) filed a petition under Chapter 11 of the United States Bankruptcy Code. We have been appointed to the creditors’ committee. A Joint Plan of Reorganization (the “Joint Plan”) between TPL and the creditor’s committee was confirmed by the Bankruptcy Court on February 11, 2015 with the entered confirmation order becoming final on April 2, 2015. 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 condensed consolidated financial statements. 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. 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. Investment in Affiliated Company We have a 50% interest in PDS (see Note 3). 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 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. Earnings (Loss) Per Share Basic earnings per share includes no dilution and is computed by dividing earnings 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. For the three and six months ended November 30, 2017, potential common shares of 2,600,000 related to our outstanding options were not included in the calculation of diluted loss per share as we recorded a loss. Had we reported net income for the three and six months ended November 30, 2017, no shares of common stock would have been included in the calculation of diluted income per share using the treasury stock method. For the three and six months ended November 30, 2016, potential common shares of 2,600,000 related to our outstanding options were not included in the calculation of diluted income per share as their inclusion would be anti-dilutive. For the three and six months ended November 30, 2016, we included the PDSG escrow shares of 2,844,630 in the calculation of diluted income per share. In connection with our acquisition of Crossflo, which is part of PDSG, we issued escrow shares that are contingent upon certain representations and warranties made by Crossflo at the time of the merger agreement (see Note 6). We excluded these escrow shares from the basic loss per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income for the three and six months ended November 30, 2017. 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. We follow authoritative guidance to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections. On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our condensed consolidated balance sheet. Given that our current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on our condensed consolidated balance sheet. However, if we become profitable, we will receive a reduced benefit from such deferred tax assets. 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. Intellectual Property Rights PDS, our investment in affiliated company, relies 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. These patents, while expired, may have certain retrospective statutory benefits that will fully diminish six years after the patent expiration dates. The patent useful life for purposes of negotiating licenses is finite and these patents are subject to legal challenges, which in combination with the limited life, could adversely impact the stream of revenues. A successful challenge to the ownership of the technology or the proprietary nature of the intellectual property would materially damage business prospects. Any issued patent may be challenged and invalidated. 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 new revenue standards are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period (fiscal year 2019 for the Company). Early adoption is permitted. We are currently assessing the potential impact of this standard on the revenues generated by 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. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (fiscal 2019 for the Company). Early adoption is permitted. We have not yet determined the potential effects of the adoption of ASU 2016-15 on our condensed 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. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (fiscal 2019 for the Company), with early adoption permitted. We are currently evaluating the effect ASU 2016-18 will have on our condensed consolidated statements of cash flows. On December 22, 2017, the date the Tax Cuts and Jobs Act (“Tax Cuts Act”) was signed into law, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance regarding accounting for the income tax effects of the Tax Cuts Act, including the impact of the Tax Cuts Act on deferred tax assets and liabilities for financial statements issued in the reporting period that includes the enactment date of December 22, 2017. Given that our current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on our condensed consolidated financial statements. However, if we become profitable, we will receive a reduced benefit from such deferred tax assets. |
2. Cash, Cash Equivalents, Rest
2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities | 6 Months Ended |
Nov. 30, 2017 | |
Cash and Cash Equivalents [Abstract] | |
Cash, 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 November 30, 2017 and May 31, 2017 consist of a savings account held as collateral for our corporate credit card account. At November 30, 2017 and May 31, 2017, our short-term marketable securities in the amount of $2,256,105 and $2,203,396, respectively, consist of certificates of deposit with various financial institutions, with maturity dates between three months and twelve months from the purchase date. 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). 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 November 30, 2017 Using Fair Value at Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2017 (Level 1) (Level 2) (Level 3) Cash and cash equivalents: Cash $ 97,564 $ 97,564 $ – $ – Money market funds 347,630 347,630 – – Restricted cash and cash equivalents 21,497 21,497 – – Marketable securities: Short-term: Certificates of deposit 2,256,105 – 2,256,105 – Total $ 2,722,796 $ 466,691 $ 2,256,105 $ – Fair Value Measurements at May 31, 2017 Using Fair Value at May 31, Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2017 (Level 1) (Level 2) (Level 3) Cash and cash equivalents: Cash $ 93,321 $ 93,321 $ – $ – Money market funds 435,899 435,899 – – Certificates of deposit 450,421 – 450,421 – Restricted cash and cash equivalents 21,443 21,443 – – Marketable securities: Short-term: Certificates of deposit 2,203,396 – 2,203,396 – Total $ 3,204,480 $ 550,663 $ 2,653,817 $ – 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 November 30, 2017: November 30, 2017 Cost Gross Unrealized Gains/(Losses) Fair Maturity Due in one year or less $ 2,256,105 $ – $ 2,256,105 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, 2017: May 31, 2017 Cost Gross Unrealized Gains/(Losses) Fair Maturity Due in three months or less $ 450,421 $ – $ 450,421 Due in one year or less $ 2,203,396 $ – $ 2,203,396 |
3. Investment in Affiliated Com
3. Investment in Affiliated Company | 6 Months Ended |
Nov. 30, 2017 | |
Equity Method Investments and Joint Ventures [Abstract] | |
Investment in Affiliated Company | On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore (“Moore”), the co-inventor of the technology which is the subject of the MMP Portfolio of microprocessor patents, pursuant to which the parties resolved all legal disputes between them. Pursuant to the Master Agreement, we and TPL entered into the Limited Liability Company Operating Agreement of PDS (the “LLC Agreement”) into which we and Moore contributed our rights to certain of our technologies. We and TPL each own 50% of the membership interests of PDS, and 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. There had not been a third management committee member since May 2010; however, as a result of our initiation of arbitration seeking the appointment of a third member, on December 16, 2014, an independent manager to the PDS management committee was selected by the arbitrator. Pursuant to the LLC Agreement, we and TPL initially agreed to establish a working capital fund for PDS of $4,000,000, of which our contribution was $2,000,000. The working capital fund was increased to a maximum of $8,000,000 as license revenues are achieved. We and TPL are obligated to fund future working capital requirements at the discretion of the management committee of PDS in order to maintain working capital of not more than $8,000,000. If the management committee determines that additional capital is required, neither we nor TPL are required to contribute more than $2,000,000 in any fiscal year. No such contributions were made during the three and six months ended November 30, 2017 and 2016. Distributable cash and allocation of profits and losses have been allocated to the members in the priority defined in the LLC Agreement. On July 11, 2012, we entered into the Program Agreement with PDS, TPL, and Alliacense, and an Agreement (the “TPL Agreement”) with TPL. Pursuant to the Program Agreement, PDS engaged Alliacense to negotiate MMP portfolio licenses and to pursue claims against violators of the MMP portfolio on behalf of PDS, TPL, and the Company. The Program Agreement continued through the useful life of the MMP portfolio patents. Pursuant to the TPL Agreement, we and TPL agreed to certain allocations of obligations in connection with the engagement of Alliacense. On July 24, 2014, the Program Agreement was amended with PDS 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. On August 10, 2016, PDS 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 requires Alliacense to provide PDS’s second licensing company with certain materials and to cooperate with reasonable discovery requests relating to infringement litigation currently pending in the U.S. District Court for the Northern District of California. MMP Licensing, LLC will provide commercialization services to PDS for the MMP portfolio with respect to certain companies. PDS and Alliacense have agreed to cause the arbitration between the parties to be dismissed with prejudice. The August 10, 2016 agreement will expire on October 4, 2022. Terms of the settlement agreement required PDS to pay Alliacense $84,000 within 24 hours after delivery of materials to PDS’s second licensing agent and to pay Alliacense $84,000 out of subsequent recoveries. On August 11, 2016, PDS paid Alliacense $84,000. During January 2013, TPL and Moore settled their litigation. Terms of the settlement included the payment by PDS 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 PDS paid Moore $150,000 on the settlement date and paid Moore $16,667 per month from August 2013 through January 2014 and paid $20,833 per month from February 2014 through January 2017. During the three and six months ended November 30, 2016, PDS expensed $62,499 and $124,998, respectively, pursuant to this commitment. These expenses are recorded in the accompanying PDS statements of operations presented below. 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 three and six months ended November 30, 2017 of $104,690 and $117,892, respectively, as a decrease in our investment. We have recorded our share of PDS’s net income during the three and six months ended November 30, 2016 of $1,247,280 and $1,191,885, respectively, as an increase in our investment. We have recorded our share of PDS’s net income and loss for the three and six months ended November 30, 2017 and 2016 as “Equity in earnings (loss) of affiliated company” in the accompanying condensed consolidated statements of operations. On March 20, 2013, TPL filed a petition under Chapter 11 of the United States Bankruptcy Code. A Joint Plan of Reorganization (the “Joint Plan”) between TPL and the creditor’s committee was confirmed by the Bankruptcy Court on February 11, 2015 with the entered confirmation order becoming final on April 2, 2015. We have been appointed to the creditors’ committee. 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 condensed 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. PDS’s balance sheets at November 30, 2017 and May 31, 2017 and statements of operations for the three and six months ended November 30, 2017 and 2016 are as follows: Balance Sheets Assets: November 30, 2017 May 31, 2017 (Unaudited) (Audited) Cash $ 650,858 $ 864,180 Prepaid expenses 23,884 26,378 Total assets $ 674,742 $ 890,558 Liabilities and Members’ Equity: November 30, 2017 May 31, 2017 (Unaudited) (Audited) Payables $ 26,550 $ 6,582 Members’ equity 648,192 883,976 Total liabilities and members’ equity $ 674,742 $ 890,558 Statements of Operations Three Months Ended Six Months Ended November 30, 2017 November 30, 2016 November 30, 2017 November 30, 2016 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues $ – $ 3,000,000 $ – $ 3,000,000 Expenses 209,381 505,441 229,785 616,020 Income (loss) before provision for income taxes (209,381 ) 2,494,559 (229,785 ) 2,383,980 Provision for income taxes – – 6,000 210 Net income (loss) $ (209,381 ) $ 2,494,559 $ (235,785 ) $ 2,383,770 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. |
4. Income Taxes
4. Income Taxes | 6 Months Ended |
Nov. 30, 2017 | |
Income Tax Disclosure [Abstract] | |
Income Taxes | 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. There have been no changes to our determination during the current fiscal year. On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our condensed consolidated balance sheet. Given that our current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on our condensed consolidated balance sheet. However, if we become profitable, we will receive a reduced benefit from such deferred tax assets. |
5. Stockholders' Equity
5. Stockholders' Equity | 6 Months Ended |
Nov. 30, 2017 | |
Equity [Abstract] | |
Stockholders' Equity | Share-based Compensation Summary of Assumptions and Activity 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 particular 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. A summary of option activity as of November 30, 2017 and changes during the six months then ended, is presented below: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Options outstanding at June 1, 2017 2,600,000 $ 0.06 Options granted – $ – Options exercised – $ – Options forfeited/expired – $ – Options outstanding at November 30, 2017 2,600,000 $ 0.06 1.87 $ – Options vested and expected to vest at November 30, 2017 2,600,000 $ 0.06 1.87 $ – Options exercisable at November 30, 2017 2,600,000 $ 0.06 1.87 $ – The aggregate intrinsic value represents the differences in market price at the close of the quarter ($0.008 per share on November 30, 2017) and the exercise price of outstanding, in-the-money options (those options with exercise prices below $0.008 per share) on November 30, 2017. |
6. Commitments and Contingencie
6. Commitments and Contingencies | 6 Months Ended |
Nov. 30, 2017 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Litigation Patent Litigation We, TPL, and PDS (collectively referred to as “Plaintiffs”) are Plaintiffs in ongoing 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. This litigation is proceeding in front of District Court Judge Vince Chhabria. These ongoing 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. Plaintiffs’ filed notices of appeal in these district court matters on January 5, 2018. An appellate briefing schedule would then be set in accordance with the rules and calendar of the United States Court of Appeals for the Federal Circuit. Defendant Samsung submitted a Bill of Costs seeking $30,170 in costs. On January 9, 2018, Plaintiffs filed an objection to virtually all of the submitted costs. The company does not consider the reimbursement of these costs to the defendant to be probable. 401(k) Plan We have a retirement plan that complies with Section 401(k) of the Internal Revenue Code. All employees are eligible to participate in the plan. We match 100% of elective deferrals subject to a maximum of 4% of the participant’s eligible earnings. Our participants vest 33% per year over a three year period in their matching contributions. Our matching contributions during the three months ended November 30, 2017 and 2016 were $5,414, respectively. Our matching contributions during the six months ended November 30, 2017 and 2016 were $10,055 and $10,828, respectively. 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 and 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 condensed 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. |
7. Subsequent Events
7. Subsequent Events | 6 Months Ended |
Nov. 30, 2017 | |
Subsequent Events [Abstract] | |
Subsequent Events | We have evaluated subsequent events after the balance sheet date and based on our evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying condensed consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes. |
1. Summary of Significant Accou
1. Summary of Significant Accounting Policies (Policies) | 6 Months Ended |
Nov. 30, 2017 | |
Accounting Policies [Abstract] | |
Basis of Presentation | The unaudited condensed consolidated financial statements of Patriot Scientific Corporation (the “Company”, “PTSC”, “Patriot”, “we”, “us” or “our”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Report on Form 10-K for our fiscal year ended May 31, 2017. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim period presented. Operating results for the six month period ended November 30, 2017 are not necessarily indicative of the results that may be expected for the year ending May 31, 2018. |
Basis of Consolidation | Basis of Consolidation The condensed consolidated balance sheets at November 30, 2017 and May 31, 2017 and condensed consolidated statements of operations and condensed consolidated statements of cash flows for the six months ended November 30, 2017 and 2016 include our accounts and those of our inactive subsidiaries: Patriot Data Solutions Group, Inc. (“PDSG”) which includes Crossflo Systems, Inc. (“Crossflo”), and Plasma Scientific Corporation. All significant intercompany accounts and transactions have been eliminated. |
Liquidity and Management's Plans | Liquidity and Management’s Plans Cash shortfalls currently experienced by Phoenix Digital Solutions, LLC (“PDS”) will have an adverse effect on our liquidity. To date, we have determined that it is in the best interests of the Moore Microprocessor Patent (“MMP”) licensing program that we provide our 50% share of capital to provide for PDS expenses including legal retainers, and litigation related payments 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 had 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. Our current liquid cash resources are expected to provide the funds necessary to support our operations through at least the next twelve months from the date of this report. 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. On March 20, 2013, Technology Properties Limited, Inc. (“TPL”) filed a petition under Chapter 11 of the United States Bankruptcy Code. We have been appointed to the creditors’ committee. A Joint Plan of Reorganization (the “Joint Plan”) between TPL and the creditor’s committee was confirmed by the Bankruptcy Court on February 11, 2015 with the entered confirmation order becoming final on April 2, 2015. 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 condensed consolidated financial statements. |
Investments in Marketable Securities | 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. 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. |
Investment in Affiliated Company | Investment in Affiliated Company We have a 50% interest in PDS (see Note 3). 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 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. |
Earnings (Loss) Per Share | Earnings (Loss) Per Share Basic earnings per share includes no dilution and is computed by dividing earnings 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. For the three and six months ended November 30, 2017, potential common shares of 2,600,000 related to our outstanding options were not included in the calculation of diluted loss per share as we recorded a loss. Had we reported net income for the three and six months ended November 30, 2017, no shares of common stock would have been included in the calculation of diluted income per share using the treasury stock method. For the three and six months ended November 30, 2016, potential common shares of 2,600,000 related to our outstanding options were not included in the calculation of diluted income per share as their inclusion would be anti-dilutive. For the three and six months ended November 30, 2016, we included the PDSG escrow shares of 2,844,630 in the calculation of diluted income per share. In connection with our acquisition of Crossflo, which is part of PDSG, we issued escrow shares that are contingent upon certain representations and warranties made by Crossflo at the time of the merger agreement (see Note 6). We excluded these escrow shares from the basic loss per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income for the three and six months ended November 30, 2017. |
Income Taxes | 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. We follow authoritative guidance to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections. On December 22, 2017, the United States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%. In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects the way we can use and carryforward net operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our condensed consolidated balance sheet. Given that our current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on our condensed consolidated balance sheet. However, if we become profitable, we will receive a reduced benefit from such deferred tax assets. |
Assessment of Contingent Liabilities | 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. |
Intellectual Property Rights | Intellectual Property Rights PDS, our investment in affiliated company, relies 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. These patents, while expired, may have certain retrospective statutory benefits that will fully diminish six years after the patent expiration dates. The patent useful life for purposes of negotiating licenses is finite and these patents are subject to legal challenges, which in combination with the limited life, could adversely impact the stream of revenues. A successful challenge to the ownership of the technology or the proprietary nature of the intellectual property would materially damage business prospects. Any issued patent may be challenged and invalidated. |
Recent Accounting Pronouncements | 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 new revenue standards are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period (fiscal year 2019 for the Company). Early adoption is permitted. We are currently assessing the potential impact of this standard on the revenues generated by 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. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (fiscal 2019 for the Company). Early adoption is permitted. We have not yet determined the potential effects of the adoption of ASU 2016-15 on our condensed 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. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years (fiscal 2019 for the Company), with early adoption permitted. We are currently evaluating the effect ASU 2016-18 will have on our condensed consolidated statements of cash flows. On December 22, 2017, the date the Tax Cuts and Jobs Act (“Tax Cuts Act”) was signed into law, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance regarding accounting for the income tax effects of the Tax Cuts Act, including the impact of the Tax Cuts Act on deferred tax assets and liabilities for financial statements issued in the reporting period that includes the enactment date of December 22, 2017. Given that our current deferred tax assets are offset by a full valuation allowance, these changes will have no net impact on our condensed consolidated financial statements. However, if we become profitable, we will receive a reduced benefit from such deferred tax assets. |
2. Cash, Cash Equivalents, Re14
2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities (Tables) | 6 Months Ended |
Nov. 30, 2017 | |
Cash and Cash Equivalents [Abstract] | |
Schedule of fair value of cash, cash equivalents and investments in marketable securities | Fair Value Measurements at November 30, 2017 Using Fair Value at Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2017 (Level 1) (Level 2) (Level 3) Cash and cash equivalents: Cash $ 97,564 $ 97,564 $ – $ – Money market funds 347,630 347,630 – – Restricted cash and cash equivalents 21,497 21,497 – – Marketable securities: Short-term: Certificates of deposit 2,256,105 – 2,256,105 – Total $ 2,722,796 $ 466,691 $ 2,256,105 $ – Fair Value Measurements at May 31, 2017 Using Fair Value at May 31, Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs 2017 (Level 1) (Level 2) (Level 3) Cash and cash equivalents: Cash $ 93,321 $ 93,321 $ – $ – Money market funds 435,899 435,899 – – Certificates of deposit 450,421 – 450,421 – Restricted cash and cash equivalents 21,443 21,443 – – Marketable securities: Short-term: Certificates of deposit 2,203,396 – 2,203,396 – Total $ 3,204,480 $ 550,663 $ 2,653,817 $ – |
Schedule of maturities, gross unrealized gains or losses and fair value of certificates of deposit | November 30, 2017 Cost Gross Unrealized Gains/(Losses) Fair Maturity Due in one year or less $ 2,256,105 $ – $ 2,256,105 May 31, 2017 Cost Gross Unrealized Gains/(Losses) Fair Maturity Due in three months or less $ 450,421 $ – $ 450,421 Due in one year or less $ 2,203,396 $ – $ 2,203,396 |
3. Investment in Affiliated C15
3. Investment in Affiliated Company (Tables) | 6 Months Ended |
Nov. 30, 2017 | |
Equity Method Investments and Joint Ventures [Abstract] | |
Financial statements of affiliates | PDS’s balance sheets at November 30, 2017 and May 31, 2017 and statements of operations for the three and six months ended November 30, 2017 and 2016 are as follows: Balance Sheets Assets: November 30, 2017 May 31, 2017 (Unaudited) (Audited) Cash $ 650,858 $ 864,180 Prepaid expenses 23,884 26,378 Total assets $ 674,742 $ 890,558 Liabilities and Members’ Equity: November 30, 2017 May 31, 2017 (Unaudited) (Audited) Payables $ 26,550 $ 6,582 Members’ equity 648,192 883,976 Total liabilities and members’ equity $ 674,742 $ 890,558 Statements of Operations Three Months Ended Six Months Ended November 30, 2017 November 30, 2016 November 30, 2017 November 30, 2016 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues $ – $ 3,000,000 $ – $ 3,000,000 Expenses 209,381 505,441 229,785 616,020 Income (loss) before provision for income taxes (209,381 ) 2,494,559 (229,785 ) 2,383,980 Provision for income taxes – – 6,000 210 Net income (loss) $ (209,381 ) $ 2,494,559 $ (235,785 ) $ 2,383,770 |
5. Stockholders' Equity (Tables
5. Stockholders' Equity (Tables) | 6 Months Ended |
Nov. 30, 2017 | |
Equity [Abstract] | |
Schedule of Stock Option Activity | Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Options outstanding at June 1, 2017 2,600,000 $ 0.06 Options granted – $ – Options exercised – $ – Options forfeited/expired – $ – Options outstanding at November 30, 2017 2,600,000 $ 0.06 1.87 $ – Options vested and expected to vest at November 30, 2017 2,600,000 $ 0.06 1.87 $ – Options exercisable at November 30, 2017 2,600,000 $ 0.06 1.87 $ – |
1. Basis of Presentation and 17
1. Basis of Presentation and Summary of Significant Accounting Policies (Details Narrative) - shares | 3 Months Ended | 6 Months Ended | ||
Nov. 30, 2017 | Nov. 30, 2016 | Nov. 30, 2017 | Nov. 30, 2016 | |
Options [Member] | ||||
Common shares not included in calculation of diluted net income and loss per share | 2,600,000 | 2,600,000 | 2,600,000 | 2,600,000 |
PDS [Member] | ||||
Ownership interest | 50.00% | 50.00% |
2. Cash, Cash Equivalents, Re18
2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities (Details) - USD ($) | Nov. 30, 2017 | May 31, 2017 |
Cash and cash equivalents: | ||
Cash | $ 97,564 | $ 93,321 |
Money market funds | 347,630 | 435,899 |
Certificates of deposit | 450,421 | |
Restricted cash and cash equivalents | 21,497 | 21,443 |
Short-term: | ||
Certificates of deposit | 2,256,105 | 2,203,396 |
Long-term: | ||
Total | 2,722,796 | 3,204,480 |
Fair Value Inputs Level 1 [Member] | ||
Cash and cash equivalents: | ||
Cash | 97,564 | 93,321 |
Money market funds | 347,630 | 435,899 |
Certificates of deposit | 0 | |
Restricted cash and cash equivalents | 21,497 | 21,443 |
Short-term: | ||
Certificates of deposit | 0 | 0 |
Long-term: | ||
Total | 466,691 | 550,663 |
Fair Value Inputs Level 2 [Member] | ||
Cash and cash equivalents: | ||
Cash | 0 | 0 |
Money market funds | 0 | 0 |
Certificates of deposit | 450,421 | |
Restricted cash and cash equivalents | 0 | 0 |
Short-term: | ||
Certificates of deposit | 2,256,105 | 2,203,396 |
Long-term: | ||
Total | 2,256,105 | 2,653,817 |
Fair Value Inputs Level 3 [Member] | ||
Cash and cash equivalents: | ||
Cash | 0 | 0 |
Money market funds | 0 | 0 |
Certificates of deposit | 0 | |
Restricted cash and cash equivalents | 0 | 0 |
Short-term: | ||
Certificates of deposit | 0 | 0 |
Long-term: | ||
Total | $ 0 | $ 0 |
2. Cash, Cash Equivalents, Re19
2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities (Details - Certificates of Deposit) - USD ($) | Nov. 30, 2017 | May 31, 2017 |
Due in one year or less [Member] | ||
Certificates of deposit | ||
Cost | $ 2,256,105 | $ 2,203,396 |
Gross Unrealized Gains/(Losses) | 0 | 0 |
Fair Value | $ 2,256,105 | 2,203,396 |
Due in three months or less [Member] | ||
Certificates of deposit | ||
Cost | 450,421 | |
Gross Unrealized Gains/(Losses) | 0 | |
Fair Value | $ 450,421 |
2. Cash, Cash Equivalents, Re20
2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities (Details Narrative) - USD ($) | Nov. 30, 2017 | May 31, 2017 |
Cash and Cash Equivalents [Abstract] | ||
Current portion of marketable securities | $ 2,256,105 | $ 2,203,396 |
3. Investment in Affiliated C21
3. Investment in Affiliated Company (Details - balance sheet) - USD ($) | Nov. 30, 2017 | May 31, 2017 |
Total assets | $ 674,742 | $ 890,558 |
Total liabilities and members' equity | 674,742 | 890,558 |
Cash [Member] | ||
Total assets | 650,858 | 864,180 |
Prepaid Expenses [Member] | ||
Total assets | 23,884 | 26,378 |
Payables [Member] | ||
Total liabilities and members' equity | 26,550 | 6,582 |
Members equity [Member] | ||
Total liabilities and members' equity | $ 648,192 | $ 883,976 |
3. Investment in Affiliated C22
3. Investment in Affiliated Company (Details - Statement of Operations) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Nov. 30, 2017 | Nov. 30, 2016 | Nov. 30, 2017 | Nov. 30, 2016 | |
Equity Method Investments and Joint Ventures [Abstract] | ||||
Revenues | $ 0 | $ 3,000,000 | $ 0 | $ 3,000,000 |
Expenses | 209,381 | 505,441 | 229,785 | 616,020 |
Income (loss) before provision for income taxes | (209,381) | 2,494,559 | (229,785) | 2,383,980 |
Provision for income taxes | 0 | 0 | 6,000 | 210 |
Net income (loss) | $ (209,381) | $ 2,494,559 | $ (235,785) | $ 2,383,770 |
3. Investment in Affiliated C23
3. Investment in Affiliated Company (Details Narrative PDS) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Nov. 30, 2017 | Nov. 30, 2016 | Nov. 30, 2017 | Nov. 30, 2016 | |
Net loss from PDS | $ (104,690) | $ 1,247,280 | $ (117,892) | $ 1,191,885 |
PDS [Member] | ||||
Cash contributions to PDS | $ 0 | 0 | $ 0 | 0 |
Legal fees paid | 84,000 | |||
PDS [Member] | Moore [Member] | ||||
Litigation settlement expense | $ 62,499 | $ 124,998 |
5. Stockholders' Equity (Detail
5. Stockholders' Equity (Details - Option activity) - Options [Member] | 6 Months Ended |
Nov. 30, 2017USD ($)$ / sharesshares | |
Number of Options Outstanding, Beginning | shares | 2,600,000 |
Number of Options Granted | shares | 0 |
Number of Options Exercised | shares | 0 |
Number of Options Forfeited | shares | 0 |
Number of Options Outstanding, Ending | shares | 2,600,000 |
Options vested and expected to vest, Ending | shares | 2,600,000 |
Number of Options Exercisable, Ending | shares | 2,600,000 |
Weighted Average Exercise Price Outstanding, Beginning | $ / shares | $ .06 |
Weighted Average Exercise Price Granted | $ / shares | |
Weighted Average Exercise Price Exercised | $ / shares | |
Weighted Average Exercise Price Forfeited | $ / shares | |
Weighted Average Exercise Price Outstanding, Ending | $ / shares | .06 |
Weighted Average Exercise Price, Options vested and expected to vest, Ending | $ / shares | .06 |
Weighted Average Exercise Price Exercisable | $ / shares | $ .06 |
Weighted Average Remaining Contractual Life (in years) Outstanding | 1 year 10 months 13 days |
Weighted Average Remaining Contractual Life (in years) Options vested and expected to vest | 1 year 10 months 13 days |
Weighted Average Remaining Contractual Life (in years) Exercisable | 1 year 10 months 13 days |
Aggregate Intrinsic Value Outstanding | $ | $ 0 |
Aggregate Intrinsic Value Options vested and expected to vest | $ | 0 |
Aggregate Intrinsic Value Exercisable | $ | $ 0 |
6. Commitments and Contingenc25
6. Commitments and Contingencies (Details Narrative) - USD ($) | 3 Months Ended | 6 Months Ended | ||
Nov. 30, 2017 | Nov. 30, 2016 | Nov. 30, 2017 | Nov. 30, 2016 | |
Commitments and Contingencies Disclosure [Abstract] | ||||
Patriot's matching contributions to the 401K plan | $ 5,414 | $ 5,414 | $ 10,055 | $ 10,828 |