Note 2 - Basis of Presentation and Liquidity

9 Months Ended

Sep. 30, 2017

Business Description and Basis of Presentation [Text Block]

Basis of Presentation and Liquidity

The

condensed consolidated financial statements include the accounts of PTG and its wholly-owned subsidiaries, Goldrush Insurance Services, Inc. and Prism Technologies LLC. All significant inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form

-Q and Rule

of Regulation S-

Accordingly, they do

not

contain all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of

September 30, 2017

and the results of operations for the

three

and

nine

months ended

September 30, 2017

and

2016

and of cash flows for the

nine

months ended

September 30, 2017

and

2016.

The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results for the

three

and

nine

months ended

September 30, 2017

are

not

necessarily indicative of the results to be expected for any future period.

The accompanying financial statements have been prepared under the assumption that PTG will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The

condensed consolidated financial statements do

not

include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that

may

result from uncertainty related to PTG’s ability to continue as a going concern.

As of

September 30, 2017,

our cash and cash equivalents totaled

$0.2

million. In addition to the expenses associated with the patent licensing business, such as salaries and overhead, we have notes payable of

$3.5

million, which represent installment payments due in

2017.

With the consent of the note holder, these installment payments have

not

been paid as of the date of this report. We have implemented certain initiatives to preserve cash and we have discussed restructuring

one

of our notes payable with the note holder, but there can be

assurance that the discussions will be successful. We cannot estimate when or if we will receive revenues from our operations due to the uncertainty associated with the patent licensing business. In late

2016,

we entered into a revenue sharing arrangement with an unrelated party from which we received

$500,000

and we have also received a capital contribution from a related party of

$250,000.

We have implemented significant expense reduction initiatives, including a moratorium on salaries for most employees. Unless we are able to defer or restructure our liabilities, substantially reduce our operating expenses, or receive revenues, we anticipate that our cash will be insufficient to fund our operations beyond the

fourth

quarter of

2017.

As described in Footnote

No.

(“

Subsequent Events

”), on

October 20, 2017

we announced the entry into an Asset Purchase Transaction by which we will acquire intellectual property assets and further develop our technology licensing business. Obtaining a minimum of

$500,000

in capital is a condition to closing the Asset Purchase Transaction. However, if these efforts are unsuccessful, we

may

need to cease operations and investors could lose their investment. These factors raise substantial doubt about PTG's ability to continue as a going concern within

twelve

months following the date of the filing of this Form

-Q. If our business does

not

generate revenues before our cash is exhausted and we are unable to raise capital on acceptable terms, we

may

need to cease operations and, as a result, investors could lose their investment.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form

-K and other information as filed with the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The

December 31, 2016

condensed consolidated balance sheet was derived from audited financial statements, but does

not

include all disclosures required by U.S. GAAP. We believe the disclosures in its notes to the condensed consolidated financial statements are adequate to make the information presented

not

misleading. We have evaluated subsequent events through the time of filing these financial statements. Based upon the evaluation, there was

material impact on the accompanying condensed consolidated financial statements.

Summary of Significant Accounting Policies

Revenue recognition

PTG recognizes revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectabi

lity is reasonably assured.

Revenue results from grants of certain intellectual property rights for patented technologies owned or controlled by PTG

and settlements reached from legal enforcement of PTG’s patent rights. Revenue is recognized when the arrangement with the licensee has been signed and the license has been delivered and made effective, provided license fees are fixed or determinable and collectability is reasonably assured. The fair value of licenses achieved is recognized as revenue.

The a

mount of consideration received upon any settlement or judgment is allocated to each element of the settlement based on the fair value of each element. Elements related to licensing agreements and royalty revenues, is recognized as revenue in the Consolidated Statement of Operations. Elements that are

not

related to license agreements and royalty revenue in nature will be reflected as a separate line item within the Other Income section of the Condensed Consolidated Statements of Operations. Elements provided in either settlement agreements or judgments include the value of a license, legal release, and interest. When settlements or judgments are achieved at discounts to the fair value of a license, PTG allocates the full settlement or judgment, excluding specifically named elements as mentioned above, to the value of the license agreement or royalty revenue under the residual method relative to full license fair value prior to the discount. Legal release as part of a settlement agreement is recognized as a separate line item in the Consolidated Statements of Operations when value can be allocated to the legal release. When PTG reaches a settlement with a defendant,

value is allocated to the legal release since the existence of a settlement removes legal standing to bring a claim of infringement, and without a legal claim, the legal release has

economic value. The element that is applicable to interest income will be recorded as a separate line item in Other Income of the Condensed Consolidated Statements of Operations.

Cost of Revenues

Cost of revenues include the costs and expenses incurred in connection with PTG's patent licensing and enforcement activities, including contingent fee based legal expenses, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting expenses and

revenue share payments paid to

third

-parties. These costs are included under the caption "Cost of revenues" in the accompanying Condensed Consolidated Statements of Operations.

Intangible Assets

The fair value amount assigned to each acquired patent asset was being amortized on a straight-line basis over a period ranging from

1.5

6.5

years, depending on the patent. The amortization period of the entire acquired patent portfolio used

a weighted average of

4.8

years and was determined using the estimated life of each patent, which is represented by the period over which

100%

of the expected discounted cash flows from licensing activities was expected to be received, and then used a weighted average approach based on the value of the patent and the estimated life.

PTG recorded amortization expense of

and

$2.6

million in the Condensed Consolidated Statement of Operations for the

three

and

nine

months ended

September 30, 2017

and

$1.9

million and

$6.3

million for the comparable periods in

2016.

As part of the Merger, PTG acquired covenants

not

to compete agreements with Prism LLC

’s officers.

The amortization period of the covenants

not

to compete

was

three

years; the expected term of the agreements.

PTG evaluates the recoverability of its long-lived assets, including intangible assets subject to amortization in accordance with Financial Accounting Standards Board

("FASB") Accounting Standards Codification ("ASC") Topic

360,

Property, Plant and Equipment

. ASC

360

requires the recognition of impairment losses related to long-lived assets in the event the net carrying value of such assets exceeds fair value. PTG assesses the impairment of its long-lived assets when events or changes in circumstances indicate that the carrying amount of the intangible asset or asset group

may

not

be recoverable. Significant judgment is required in determining whether a potential indicator of impairment of the assets exists and in estimating future cash flows from licensing activities for any necessary impairment tests. Recoverability of the intangible assets to be held and used is measured by the comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

The fair value of the acquired intangible assets were based on estimated future cash flows to be generated from the patent portfolio discounted using a rate commensurate with the risk involved.

PTG determined that the carrying value of certain of its intangible assets were in excess of fair value because the receipt of the forecasted cash flows would likely

not

be realized. PTG recorded impairment charges, net of

and

$1.0

million in the Condensed Consolidated Statement of Operations for the

three

and

nine

months ended

September 30, 2017

and

million and

$0.2

million for the comparable periods in

2016.

This included impairment of intangible assets of

and

$12.7

million, net of reductions in the fair value of contingent consideration liabilities of

and

$11.7

million for the

three

and

nine

months ended

September 30, 2017,

respectively. PTG recorded impairment of intangible assets of

and

$2.2

million, net of reductions in the fair value of contingent consideration liabilities of

and

$2.0

million respectively, for the comparable periods in

2016.

Goodwill

Goodwill represents the excess of:

(a) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition date fair value of PTG’s previously held equity interest in the acquiree (if any), over (b) the fair value of assets acquired and liabilities assumed. Goodwill, deemed to have an indefinite life is subject to periodic impairment testing as described below.

Goodwill

is tested for impairment on a periodic basis, and at least annually in the

fourth

quarter of the year. In the

first

step of testing for goodwill and intangible assets impairment, we will estimate the fair value of the net assets associated with the goodwill. If the fair value of these net assets is greater than the carrying value of the net assets, including goodwill, then there will be

impairment. If the fair value is less than the carrying value, then we would perform a

second

step and determine the fair value of the goodwill. In this

second

step, the fair value of goodwill is determined by deducting the fair value of the identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. If the fair value of the goodwill is less than its carrying value for a reporting unit, an impairment charge would be recorded to earnings in PTG’s condensed consolidated statements of operations.

In addition, PTG would evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment.

Examples of such events or circumstances include the following:

	●	a significant adverse change in legal factors or in the business climate;
	●	a more likely than not expectation that a segment or a significant portion thereof will be sold; or
	●	the testing for recoverability of a significant asset group within the segment.

PTG determined that the carrying value of

goodwill was in excess of fair value because the receipt of the forecasted cash flows would likely

not

be realized. PTG recorded impairment charges of

and

$0.1

million in the Condensed Consolidated Statement of Operations for the

three

and

nine

months ended

September 30, 2017

and

impairment charges were recorded for the comparable periods in

2016.

As a result of the recorded impairment charge, the carrying value of goodwill was reduced to

zero

as of

September 30, 2017.

Derivative instruments

assess whether activities which provide capital to fund our operations include embedded features that are derivatives instruments. If a derivative instrument is embedded, the instrument is accounted for separately from the host contract. Changes in fair value are recognized in other income or loss, consistent with the underlying derivative instrument. As a result, any change in the value of our derivative instrument would be substantially offset by an opposite change in the value of the underlying derivative item. We do

not

use derivative instruments for trading or speculative purposes.

Share-Based Payments

We account for share-based compensation in accordance with ASC

718

“Compensation – Stock Compensation.”

Under the provisions of ASC

718,

share-based compensation cost is generally estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option-pricing model. The BSM option-pricing model requires various highly judgmental assumptions including expected option life, volatility, and forfeiture rates. If any of the assumptions used in the BSM option-pricing model change significantly, share-based compensation expense

may

differ materially in the future from that recorded in the current period. Generally, compensation cost is recognized over the requisite service period. However, to the extent performance conditions affect the vesting of an award, compensation cost will be recognized only if the performance condition is satisfied. Compensation cost will

not

be recognized, and any previously recognized compensation cost will be reversed, if the performance condition is

not

satisfied.

Recent Accounting

Standards

May 2014,

the Financial Accounting Standards Board (“

FASB”) FASB issued Accounting Standards Update (“ASU”)

No.

2014

09,

Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after

December 15, 2017.

The standard permits the use of either the retrospective or cumulative effect transition method. We have

not

yet selected a transition method.

We are continuing to assess the impact of the new guidance on our accounting policies and procedures and

are evaluating the new requirements as applied to existing revenue contracts. The new guidance

may

result in an acceleration of revenue as under the new standard, we

may

longer be required to defer revenues when the consideration associated with the contract can be calculated using either the expected value or the most likely amount. This change

may

also impact our balance sheet presentation with an expected increase in accounts or unbilled receivables. We are reviewing our revenue contracts and working on its plan for implementation of the new guidance which it will adopt beginning in the

first

quarter of

2018.

The adoption of this standard is

not

expected to have a material impact on the Company’s condensed consolidated financial position and results of operations

There have been

four

new ASUs issued amending certain aspects of ASU

2014

09,

ASU

2016

08,

“

Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),

” was issued in

March, 2016

to clarify certain aspects of the principal versus agent guidance in ASU

2014

09.

In addition, ASU

2016

10,

“

Identifying Performance Obligations and Licensing,”

issued in

April

2016,

amends other sections of ASU

2014

including clarifying guidance related to identifying performance obligations and licensing implementation. ASU

2016

12,

“Revenue from Contracts with Customers — Narrow Scope Improvements and Practical Expedients”

provides amendments and practical expedients to the guidance in ASU

2014

in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU

2014

09.

Finally, ASU

2016

20,

“

Technical Corrections and Improvements to Topic

606,

Revenue from Contracts with Customers,”

was issued in

December

2016,

and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU

2014

09,

the Company will also consider the impact on its condensed consolidated financial statements related to the updated guidance provided by these

four

new ASUs.

November 2015,

the FASB issued ASU

No.

2015

17,

Balance Sheet Classification of Deferred Taxes (“ASU

2015

17”

), which amends the current requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. ASU

2015

is effective for public companies for financial statements issued for fiscal years beginning after

December

15,

2016,

including interim periods within those fiscal years. Early adoption is permitted. The amendments

may

be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted ASU

2015

effective

January 1, 2017.

Adoption of this standard did

not

have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

February 2016,

FASB issued ASU

No.

2016

“

Leases” that requires a lessee to recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of

months or less, a lessee is permitted to make an accounting policy election by class of underlying asset

not

to recognize lease assets and lease liabilities. The new guidance is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its condensed consolidated financial statements and related disclosures.

March 2016,

the FASB issued ASU

2016

09,

Compensation - Stock Compensation

(Topic

718

)

: Improvements to Employee Share-Based Payment Accounting

, related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the statement of operations when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. The pronouncement is effective for annual periods (and for interim periods within those annual periods) beginning after

December 15, 2016.

The Company adopted ASU

2016

effective

January 1, 2017.

The adoption of this standard decreased the deferred tax asset by

$2.4

million from

$64.7

million to

$62.3

million, with a corresponding decrease to the valuation allowance at

September 30, 2017.

The Company elected to account for forfeitures based upon an estimated forfeiture rate and on a retrospective basis.

In Augus

2016,

the FASB issued ASU

No.

2016

15,

“Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. The amendments in this update clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU

No.

2016

will be effective for fiscal years beginning after

December 15, 2017,

with early adoption permitted. The Company has

not

elected to early adopt this guidance and is currently evaluating ASU

2016

to determine the impact to its condensed consolidated financial statements.

January 5, 2017,

the FASB issued ASU

2017

“Business Combinations (Topic

805

): Clarifying the Definition of a Business”,

which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are

not

a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after

December 15, 2017,

including interim periods within that reporting period. The adoption of this standard is

not

expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

January 2017,

the FASB issued ASU

2017

04:

“

Intangibles — Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment” (“ASU

017

04”

), which removes Step

from the goodwill impairment test. It is effective for annual and interim periods beginning after

December 15, 2019.

Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after

January 1, 2017.

The adoption of this standard is

not

expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

May 2017,

the FASB issued (ASU

2017

09:

Compensation – Stock Compensation (Topic

718

): Scope of Modification Accounting

which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective beginning after

December

15,

2017;

early adoption is permitted. The Company has adopted this standard and its impact on its condensed consolidated financial statements and related disclosures was immaterial.

July 2017,

FASB issued ASU

No.

2017

11,

Earnings per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

), Derivatives and Hedging (Topic

815

). ASU

2017

consists of

two

parts. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature

longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)

longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic

260

to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic

470

20,

Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic

260

). The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic

480

that now are presented as pending content in the Codification, to a scope exception. Those amendments do

not

have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after

December

15,

2018.

For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after

December

15,

2019,

and interim periods within fiscal years beginning after

December

15,

2020.

Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do

not

require any transition guidance because those amendments do

not

have an accounting effect. The Company is in the process of evaluating this ASU and adoption of this ASU is

not

expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

Prism Technologies Group, Inc. 10-Q