CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain statements constituting
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Private Securities Litigation Reform Act
of 1995, including statements concerning our beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, operations, future results
and prospects, and we rely on the "safe harbor" provisions in those laws. We are
including this statement for the express purpose of availing ourselves of the
protections of such safe harbors with respect to all such forward-looking
statements. The forward-looking statements in this report reflect our current
views with respect to future events and financial performance. In this report,
the words "anticipates," "believes," "expects," "intends," "future,"
"estimates," "may," "could," "should," "would," "will," "shall," "propose,"
"continue," "predict," "plan" and similar expressions are generally intended to
identify certain of the forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. Any forward-looking statement is not a guarantee of future
performance.
These forward-looking statements are subject to certain risks and uncertainties,
and actual results may differ materially from those in the forward-looking
statements as a result of various factors, including, but not limited to those
discussed under "Risk Factors" in Part I, Item 1A of the Company's Annual Report
on Form 10-K for the year ended May 31, 2019 and in Part II, Item 1A of this
Quarterly Report on Form 10-Q. Additionally, there may be other risks that are
otherwise described from time to time in the reports that we file with the SEC.
You should read this report completely with the understanding that our actual
results may differ materially from what we expect. Unless required by law, we
undertake no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
Overview
Historically, we have been a licensing company and have entered into a number of
agreements in our pursuit of unlicensed users of our intellectual property. On
November 4, 2019, we announced that the Supreme Court of the United States
denied our petition for a writ of certiorari with respect to patent litigation
previously before the United States Court of Appeals for the Federal Circuit
that alleged infringement of the US 5,809,336 patent (the "'336 patent") against
multiple defendants (see Note 6). As result of this adverse decision, we have
halted all licensing efforts as we evaluate the future direction of the Company
and a potential new line of business. Currently, we do not have any potential
sources of revenue and our joint venture, Phoenix Digital Solutions, LLC ("PDS")
has not generated significant license revenues since September 2013.
In addition, there are a number of uncertainties associated with our financial
projections that could increase or expedite our projected expenses, which could
negatively impact our cash on hand. Additionally, we do not expect to generate
any revenue over the foreseeable future and we will be required to seek
additional financing to continue our operations. We will also require additional
financing to develop or acquire new lines of business. We have no current
arrangements with respect to any additional financing. Consequently, there can
be no assurance that any additional financing on commercially reasonable terms,
or at all, will be available when needed. Further, any additional equity
financing, if secured, may involve substantial dilution to our then existing
stockholders.
One opportunity we are evaluating is the potential of establishing a company
that develops a data capturing platform that could be implemented throughout the
drug development process utilizing blockchain technologies in collaboration with
Artius Bioconsulting LLC ("Artius"), under an agreement signed on April 12,
2019. During the quarter ended November 30, 2019, Artius completed and submitted
their feasibility report to us and we are currently evaluating next steps.
However, there are no assurances that we will be successful in developing this
blockchain based business. Further, in the event the next steps in the
development of a blockchain-based business are undertaken, it is expected that
significant additional funding from external sources will be required. If we are
unable to develop or acquire new lines of business, such as those involving
blockchain technologies, and/or we are unable to raise additional capital, we
will be forced to liquidate the Company in a dissolution under Delaware law or
seek protection under the provisions of the U.S. Bankruptcy Code. We currently
anticipate, based on currently operations, that our cash on hand will not
satisfy our operational and capital requirements through twelve months from the
date of filing on this Form 10-Q.
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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require us to make estimates and judgments that significantly affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates, and such differences could affect the results of
operations reported in future periods. We believe the following critical
accounting policies affect our most significant estimates and judgments used in
the preparation of our condensed consolidated financial statements.
1. Investments in Marketable Securities
We classify our investments in marketable securities in certificates of deposit
at the time of purchase as held-to-maturity and reevaluate such classifications
at each balance sheet date. Held-to-maturity investments consist of securities
that we have the intent and ability to retain until maturity. These securities
are recorded at cost and adjusted for the amortization of premiums and
discounts, which approximates fair value. Cash inflows and outflows related to
the sale and purchase of investments are classified as investing activities in
our condensed consolidated statements of cash flows.
2. Investment in Affiliated Companies
We have a 50% interest in PDS. We account for our investment using the equity
method of accounting since the investment provides us the ability to exercise
significant influence, but not control, over the investee. Significant influence
is generally deemed to exist if we have an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method of accounting is appropriate. Under the
equity method of accounting, the investment, originally recorded at cost, is
adjusted to recognize our share of net earnings or losses of the investee and is
recognized in the condensed consolidated statements of operations in the caption
"Equity in loss of affiliated company" and also is adjusted by contributions to
and distributions from PDS.
PDS, as an unconsolidated equity investee, recognizes revenue from technology
license agreements at the time a contract is entered into, the license method is
determined (paid-in-advance or on-going royalty), performance obligations under
the license agreement are satisfied, and the realization of revenue is assured,
which is generally upon the receipt of the license proceeds. PDS may at times
enter into license agreements whereby contingent revenues are recognized as one
or more contractual milestones are met.
We review our investment in PDS to determine whether events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
primary factors we consider in our determination are the financial condition,
operating performance and near term prospects of PDS. If a decline in value is
deemed to be other than temporary, we would recognize an impairment loss.
We own 100% of the preferred stock of Holocom. Prior to impairment, this
investment was accounted for at cost since we did not have the ability to
exercise significant influence over the operating and financial policies of
Holocom.
3. Income Taxes
We follow authoritative guidance in accounting for uncertainties in income
taxes. This authoritative guidance prescribes a recognition threshold and
measurement requirement for the financial statement recognition of a tax
position that has been taken or is expected to be taken on a tax return and also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Under this guidance we
may only recognize tax positions that meet a "more likely than not" threshold.
We follow authoritative guidance to evaluate whether a valuation allowance
should be established against our deferred tax assets based on the consideration
of all available evidence using a "more likely than not" standard. In making
such judgments, significant weight is given to evidence that can be objectively
verified. We assess our deferred tax assets annually under more likely than not
scenarios in which they may be realized through future income.
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With the exception for refundable alternative minimum tax ("AMT") credits, 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, and with the exception for
the aforementioned refundable tax credits, we have recorded a full valuation
allowance against our deferred tax assets.
On December 22, 2017, the United States Government passed new tax legislation
that, among other provisions, lowered 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, with the
exception of those representing certain refundable tax credits, are offset by a
full valuation allowance, these changes had 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.
4. Assessment of Contingent Liabilities
We are involved in various legal matters, disputes, and patent infringement
claims which arise in the ordinary course of our business. We accrue for any
estimated losses at the time when we can make a reliable estimate of such loss
and it is probable that it has been incurred. By their very nature,
contingencies are difficult to estimate. We continually evaluate information
related to all contingencies to determine that the basis on which we have
recorded our estimated exposure is appropriate.
Results of Operations
Comparison of the Three Months Ended February 29, 2020 and the Three Months
Ended February 28, 2019.
Three months ended
February 29, 2020 February 28, 2019
Selling, general and administrative $ 103,834 $ 158,623
Selling, general and administrative expenses decreased approximately $55,000
from approximately $159,000 for the three months ended February 28, 2019 to
approximately $104,000 for the three months ended February 29, 2020. The
decrease consisted primarily of lower compensation expense due to the
resignation Mr. Flowers, our former Chief Financial Officer, in September 30,
2019 combined with a decrease in board fees as our board member volunteered to
cease taking board fees. This decrease was partially offset with an increase in
consulting fees associated with accounting and finance functions.
Three months ended
February 29, 2020 February 28, 2019
Other income (expense):
Interest income $ 2,693 $ 8,433
Equity in loss of affiliated company (139 ) (33,888 )
Total other expense, net $ 2,554 $ (25,455 )
Total other expenses, net was approximately $25,000 for the three months ended
February 28, 2019 compared to other income, net of approximately $3,000 for the
three months ended February 29, 2020. The change primarily consisted of a
decrease in the equity in the loss of PDS resulting from lower PDS legal
expenses as a result of the adverse legal opinion we received on November 4,
2019 (see Note 1 to the interim unaudited consolidated financial statements).
Our investment in PDS continues to be accounted for in accordance with the
equity method of accounting for investments. In addition, interest income was
lower during the current quarter due to a lower cash balance combined with lower
interest rates.
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Three months ended
February 29, 2020 February 28, 2019
Loss before income taxes $ (101,280 ) $ (184,078 )
Loss before income taxes decreased from approximately $(184,000) for the three
months ended February 28, 2019 to approximately $(101,000) for the three months
ended February 29, 2020 for the reasons explained in the preceding "Selling,
general and administrative" and "Other income (expense)" comparisons.
Comparison of the Nine Months Ended February 29, 2020 and the Nine Months Ended
February 28, 2019.
Nine months ended
February 29, 2020 February 28, 2019
Selling, general and administrative $ 894,311 $ 506,029
Selling, general and administrative expenses increased from approximately
$506,000 for the nine months ended February 28, 2019 to approximately $894,000
for the nine months ended February 29, 2020. The current period increase in
expenses was primarily due to higher compensation expense mostly associated with
severance expense owed to Mr. Flowers, our former Chief Financial Officer. Mr.
Flowers resigned on September 30, 2019 and agreed to severance compensation of
$327,750, in lieu of any amounts owed under his amended and restated employment
agreement, payable in seven equal monthly installments commencing October 30,
2019. In addition, during the current nine-month period, we had an increase in
consulting fees, mostly associated with the evaluation of new business
opportunities in collaboration with Artius Bioconsulting LLC. These current
period increases in expenses were offset by lower board fees as our board member
volunteered to cease taking board fees.
Nine months ended
February 29, 2020 February 28, 2019
Other income (expense):
Interest income $ 11,727 $ 21,922
Equity in loss of affiliated company (73,458 ) (63,411 )
Total other expense, net $ (61,731 ) $ (41,489 )
Total other expenses, net increased from approximately $41,000 for the nine
months ended February 28, 2019 to $62,000 for the nine months ended February 29,
2020. The increase consisted of an increase in the equity in the loss of PDS
resulting from an increase in PDS legal expenses. Our investment in PDS
continues to be accounted for in accordance with the equity method of accounting
for investments.
Nine months ended
February 29, 2020 February 28, 2019
Loss before income taxes $ (956,042 ) $ (547,518 )
Loss before income taxes increased from approximately $(548,000) for the nine
months ended February 28, 2019 to approximately $(956,000) for the nine months
ended February 29, 2020 for the reasons explained in the preceding "Selling,
general and administrative" and "Other income (expense)" comparisons.
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Liquidity and Capital Resources
Liquidity
Our cash and cash equivalents and marketable securities balances decreased from
approximately $1,537,000 as of May 31, 2019 to approximately $749,000 as of
February 29, 2020. We also have restricted cash of approximately $199,000 and
$177,000 as of May 31, 2019 and February 29, 2020, respectively. Total current
assets decreased from approximately $1,764,000 as of May 31, 2019 to
approximately $1,010,000 as of February 29, 2020. Total current liabilities were
approximately $228,000 and $306,000 as of May 31, 2019 and February 29, 2020,
respectively. The change in our working capital position as of February 29, 2020
as compared with May 31, 2019 is primarily due our reported net loss for the
nine months ended February 29, 2020.
In addition, on November 4, 2019, we announced that the Supreme Court of the
United States denied our petition for a writ of certiorari with respect to
patent litigation previously before the United States Court of Appeals for the
Federal Circuit that alleged infringement of the '336 patent against multiple
defendants. As a result, we currently do not have any potential sources of
capital from PDS. Based on this adverse decision, we have halted all licensing
efforts as we evaluate the future direction of the Company as we do not have any
potential sources of revenue and PDS has not generated significant license
revenues since September 2013.
In addition, there are a number of uncertainties associated with our financial
projections that could increase or expedite our projected expenses, which could
negatively impact our cash on hand. Additionally, we do not expect to generate
any revenue over the foreseeable future and we will be required to seek
additional financing to continue our operations. We will also require additional
financing to develop or acquire new lines of business. We have no current
arrangements with respect to any additional financing. Consequently, there can
be no assurance that any additional financing on commercially reasonable terms,
or at all, will be available when needed. Further, any additional equity
financing, if secured, may involve substantial dilution to our then existing
stockholders.
One opportunity we are evaluating is the potential of establishing a company
that develops a data capturing platform that could be implemented throughout the
drug development process utilizing blockchain technologies in collaboration with
Artius Bioconsulting LLC ("Artius"), under an agreement signed on April 12,
2019. During the quarter ended November 30, 2019, Artius completed and submitted
their feasibility report to us and we are currently evaluating next steps.
However, there are no assurances that we will be successful in developing this
blockchain based business. Further, in the event the next steps in the
development of a blockchain-based business are undertaken, it is expected that
significant additional funding from external sources will be required. If we are
unable to develop or acquire new lines of business, such as those involving
blockchain technologies, and/or we are unable to raise additional capital, we
will be forced to liquidate the Company in a dissolution under Delaware law or
seek protection under the provisions of the U.S. Bankruptcy Code. We currently
anticipate, based on currently operations, that our cash on hand will not
satisfy our operational and capital requirements through twelve months from the
date of filing on this Form 10-Q.
The above matters raise substantial doubt regarding our ability to continue as a
going concern.
Cash Flows From Operating Activities
Cash used in operating activities was approximately $810,000 and $532,000 for
the nine months ended February 29, 2020 and February 28, 2019, respectively. The
principal components of the current period amount were primarily attributable to
a net loss of approximately $958,000 combined with an increase in prepaid
expenses and other current assets of approximately $4,000 offset by an increase
in accounts payable and accrued expenses of approximately $77,000, and the
equity in loss of affiliated company of approximately $73,000. The principal
components of the prior year period amount were primarily attributable to a net
loss of approximately $549,000 combined with an increase in prepaid expenses and
other current assets of approximately $18,000 and a decrease in accounts
payable, accrued expenses and other of approximately $29,000, which amount was
offset by the equity in loss of affiliated company of approximately $63,000.
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Cash Flows From Investing Activities
Cash provided by investing activities for the nine months ended February 29,
2020 was $750,000 attributable to net maturities of marketable securities. Cash
provided by investing activities for the nine months ended February 28, 2019 was
approximately $177,000, which is comprised of amounts previously held by a third
party in conjunction with the Company's acquisition of Crossflo.
Capital Resources
The condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern. At February 29, 2020, the Company has
an accumulated deficit of $62,083,667, and has incurred recurring losses and
used significant amounts of cash in its operations. As of February 29, 2020, the
Company had cash and cash equivalents of approximately $749,000 and working
capital of approximately $704,000 and we currently have no potential sources of
cash. We will also require additional financing to develop or acquire new
technologies or lines of business. If we are unable to develop or acquire new
lines of business, such as the blockchain technologies, and we are unable to
raise additional capital, we will be forced to halt our operations. We
anticipate, based on currently proposed plans and assumptions, that our cash on
hand will not satisfy our operational and capital requirements through twelve
months from the date of filing on this Form 10-Q.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", as
amended ("ASC 842"), which modifies lease accounting for lessees to increase
transparency and comparability by recording lease assets and liabilities for
operating leases and disclosing key information about leasing arrangements. ASC
842 is effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2018. The Company adopted ASC 842 effective June 1,
2019 using a modified retrospective method and will not restate comparative
periods. As permitted under the transition guidance, the Company will carry
forward the assessment of whether its contracts contain or are leases,
classification of its leases and remaining lease terms. Implementation of this
guidance did not have a material impact on the Company's consolidated financial
statements. We have elected the short-term lease recognition exemption for all
applicable classes of underlying assets. Short-term disclosures include only
those leases with a term greater than one month and twelve months or less. Short
term leases are not recorded on the balance sheet and expense on short-term
leases are recognized on a straight-line basis over the lease term. The Company
elected the "practical expedient package" as permitted under ASC 842. Therefore,
the Company has not reassessed whether any expired or existing contracts are, or
contain, leases; the Company has not reassessed the lease classification for any
expired or existing leases; and the company has not reassessed initial direct
costs for any expired or existing leases. The Company currently leases office
space on a month-to-month basis.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic
820): Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds various
disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is
effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2019. The amendments on changes in unrealized gains
and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative description
of measurement uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal year of
adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. Early adoption is permitted upon issuance
of this update. An entity is permitted to early adopt any removed or modified
disclosures upon issuance of this update and delay adoption of the additional
disclosures until their effective date. The Company does not expect a
significant impact from adopting this update on its consolidated financial
statements.
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