Investment in Affiliated CompaniesCompany

We have a 50% interest in PDS.Phoenix Digital Solutions LLC (“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 lossearnings (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 the decline in value is deemed to be other than temporary, we would recognize an impairment loss.loss (see Note 4).

We own 100%Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the preferred stockfinancial statements and the reported amounts of Holocom (see Note 3). Priorexpenses during the reporting period. Significant estimates in these unaudited condensed consolidated financial statements include those related to impairment, thisthe fair value of the anti-dilution issuance rights liability (derivative liability), investment was accountedin affiliated company, the provision or benefit for at cost since we do not haveincome taxes and the corresponding valuation allowance on deferred tax assets. In addition, management’s assessment of the Company’s ability to exercise significant influence overcontinue as a going concern involves the operatingestimation of the amount and timing of future cash inflows and outflows. On an ongoing basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Due to the inherent uncertainty involved in making such accounting estimates and assumptions, the actual financial policiesstatement results could differ materially from such accounting estimates and assumptions.

Patent Costs

Patent related costs in connection with filing and prosecuting patent applications and patents filed by the Company are expensed as incurred and are classified as general and administrative expenses in the accompanying unaudited condensed consolidated statements of Holocom.operations.

Income (Loss) Per Share

Basic income (loss) per share includes no dilution and is computed by dividing income (loss) 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.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

At November 30, 2019 and 2018, potential commonFor the quarter ended August 31, 2020, the issuance of 3,612,536,340 shares of 1,600,000 related to our outstanding optionscommon stock upon the conversion of Series A Preferred and Series B Preferred were not includedexcluded in the calculation of diluted loss per share as we recorded athe impact was anti-dilutive during periods of net loss. Had we reported net income for the three and six months ended November 30, 2019 and 2018, no shares of common stock would have been included in the calculation of diluted income per share using the treasury stock method.

In connection with ouran acquisition of Crossflo which became a part of PDSG, we issuedby PTSC, 2,844,630 escrow shares were issued that are contingent upon certain representations and warranties made by Crossflo at the time of the merger agreement (see Note 6).Crossflo. We exclude these escrow shares from the basic lossincome (loss) per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income.

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.

In addition, utilization of our net operating loss carry forwards may be subject to an annual limitation due to ownership change limitations that may have occurred as a result of the Reverse Merger, or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of the net operating loss carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a Company by certain stockholders. Moreover, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could result in increased future tax liability to us.

With the exception forof refundable alternative minimum tax (“AMT”) credits,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.losses in addition to the potential loss of deferred tax assets as a result of the Reverse Merger (see Note 1). As a result of this determination, and with the exception for the aforementioned refundable tax credits,income taxes, we have recorded a full valuation allowance against our deferred tax assets.

On December 22, 2017, the United States Government passed the Tax Cuts and Jobs Act (“Tax Cuts Act”) that, among other provisions, has 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. 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, 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.

Assessment of Contingent Liabilities

We aremay be 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.

Segment Data

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Intellectual Property Rights

PDS, our investmentThe Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. No revenue has been generated since inception, and all tangible assets are held in affiliated company, has historically relied 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 2016. These patents, while expired, may have certain retrospective statutory benefits that will fully diminish six years after the patent expiration dates. 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. Based on this decision, we have halted all licensing efforts as we evaluate the future direction of the Company.States.

Recent Accounting Pronouncements

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. The Company adopted this standard on March 30, 2020 (date of inception). The adoption did not have a material effect on the Company’s 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. The Company adopted this standard on March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. The Company adopted ASU 2016-01 on March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 842ASU 2018-13 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.March 30, 2020 (date of inception). 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 less than twelve months. 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 issuanceThe Company adopted ASU 2018-13 effective March 30, 2020 (date of inception). Implementation of this update and delay adoption ofguidance did not have a material impact on the additional disclosures until their effective date. The Company does not expect a significant impact from adopting this update on itsCompany’s consolidated financial statements.

3. Fair Value of Financial Instruments

Patriot Scientific Corporation

NotesThe Company’s financial instruments consist of money market funds as well as an anti-dilution issuance rights liability pursuant to Unaudited Condensed Consolidated Financial Statementsthe License Option Agreement with Case Western Reserve University (“CWRU”) (see Note 6). The anti-dilution issuance rights meet the definition of a derivative under FASB’s ASC Topic 815 and the liability is carried at fair value.

2. Cash, Cash Equivalents and Restricted Cash

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 detailset forth the fair value measurementsof the Company’s financial assets and liabilities by level within the fair value hierarchy of our cash, cash equivalents and investments in marketable securities:hierarchy:

Patriot Scientific Corporation

Anti-Dilution Issuance Rights Liability

Pursuant to the Series B Preferred Certificate of Designation, the Series B Preferred includes certain anti-dilution issuance rights, whereby the holder will continue to maintain equity ownership equal to 10% of the fully diluted shares of common stock outstanding, calculated on an as converted basis, including all other convertible securities outstanding and reserved for issuance (and excluding stock options issued and outstanding and reserved for issuance under a Board approved employee stock option plan reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company) until the Company raises approximately $626,000 from the sale of common or preferred stock, or a combination thereof (see Note 6).

We purchase certificates of deposit with varying maturity dates. The following tables summarizeTo determine the purchase date maturities, gross unrealized gains or losses andestimated fair value of the certificatesanti-dilution issuance rights liability, the Company used a Monte Carlo simulation methodology, which models the future movement of depositstock prices based on several key variables. At the date of issuance on August 21, 2020 (at inception) and as of November 30, 2019the quarter ended August 31, 2020, the estimated fair value of the anti-dilution issuance rights was $83,500. We initially recorded the fair value as a derivative liability with a corresponding charge to research and May 31, 2019:development expense and we will mark-to-market at each reporting period, with changes in fair value recognized in other income (expense) in the consolidated statement of operations at each period-end while this derivative instrument is outstanding.

The primary inputs used in valuing the anti-dilution issuance rights liability at inception and upon remeasurement at August 31, 2020, were as follows:

The fair value of the derivative liability was determined by management with the assistance of an independent third-party specialist. The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption. In addition, the Company incorporated the estimated number of shares, timing, and probability of future equity financings in the calculation of the anti-dilution issuance rights liability.

Patriot Scientific Corporation

3.4. Investment in Affiliated Companies

Phoenix Digital Solutions, LLC (“PDS”)

On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore (“Moore”), the co-inventorPDS was previously formed by PTSC to pursue licensing 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.

its intellectual property. We and TPL each own 50% of the membership interests of PDS, and each member hasrepresenting $28,632 as of August 31, 2020. On September 29, 2020, the right to appoint one membermanaging members 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 forwind up and dissolve PDS of $4,000,000, of whichas the underlying intellectual property was no longer enforceable. We expect that 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, 2019 and 2018. Distributable cash and allocation of profits and losses have been allocated to the members50% membership interest in the priority defined inremaining net cash on hand will approximate the LLC Agreement.book value at August 31, 2020. PDS’s balance sheet at August 31, 2020 is as follows:

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 required Alliacense to provide PDS’s second licensing company, Dominion Harbor Group (“DHG”), with certain materials and to cooperate with reasonable discovery requests relating to infringement litigation 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, and the agreement retaining DHG as PDS’s second licensing company, will both 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. PDS paid Alliacense $84,000 on each of August 11, 2016 and October 3, 2016.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

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 $20,833 per month beginning February 2014 through January 2017.

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, 2019 of $29,007 and $73,319, respectively, and $14,743 and $29,523, respectively, for the three and six months ended November 30, 2018, as a decrease in our investment as “Equity in 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. On March 5, 2018, TPL’s Motion for Entry of Final Decree Closing Chapter 11 was granted. 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, 2019 and May 31, 2019 and statementsstatement of operations for the three monthsquarter ended November 30, 2019 and 2018 areAugust 31, 2020 is as follows:

Balance Sheets

Assets:

Liabilities and Members’ Equity:

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Statements of Operations:

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.

Holocom, Inc.Inc.

We currently own 2,100,000 shares of preferred stock, equivalent to an approximaterepresenting approximately a 46% ownership interest, on an after convertedas-converted basis, in Holocom, Inc. (“Holocom”), a California corporation that manufactures products that protect information transmitted over secure networks. The shares are convertible at our option into shares of Holocom’s common stock on a one-to-one basis. The preferred stock entitles us to receive non-cumulative dividends at the per annum rate of $0.04 per share, when and if declared by the Board of Directors of Holocom, as well as a liquidation preference of $0.40 per share, plus an amount equal to all declared but unpaid dividends.

In 2010, we determined thatAs of the inabilityClosing Date (see Note 1) and as of Holocom to meet its business plan, raise capital, and the general economic environment were indicators of impairment on our investment and we wrote-off our cost basis investment in Holocom. At November 30, 2019 and MayAugust 31, 2019,2020, our investment in Holocom was valued at $0.

4. Income Taxes

On December 22, 2017, the United States Government passed the Tax Cuts$0 based on various indicators of impairment, including Holocom’s inability to meet its business plan and Jobs Act (“Tax Cuts Act”) that, among other provisions, has lowered the corporate tax rate from 35% to 21%. Inraise sufficient capital, 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. 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, 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.general economic environment.

Patriot Scientific Corporation

5. Stockholders’ EquityAccrued Expenses and Other Current Liabilities; Accrued Payable to Founders

Share-based CompensationAccrued expenses and other current liabilities consisted of the following as of:

SummaryIn September 2008, PTSC acquired Patriot Data Solutions Group, Inc. formerly known as Crossflo Systems, Inc. (“PDSG”). In connection with an acquisition of AssumptionsCrossflo by PTSC, we have accrued $177,244 that could be payable to Crossflo investors. We have set aside restricted cash and Activitycash equivalents in the amount of $177,244 to cover any potential liability.

The fair value of share-based awardsAccrued Payable 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.Founders

The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected timeAt May 31, 2020, accrued payable to exercise, which greatly affect the calculated values. The expected termfounders 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$1,011 represents reimbursable advances to the pricing termCompany to establish the Company and a bank account for operations. At August 31, 2020, accrued payable to founders of $55,777 represents advances to the grant effective asCompany to establish the Company and a bank account for operations, consulting services provided by a founder, plus the overpayment of the date of the grant. The expected volatility$49,997 in common stock subscribed. Such accrued payable to founders does not earn interest and 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, 2019 and changes during the six months then ended, is presented below:

The aggregate intrinsic value represents the differences in market price at the close of the quarter ($0.0025) per share on November 29, 2019) and the exercise price of outstanding, in-the-money options (those options with exercise prices below $0.0025 per share) on November 30, 2019.not convertible into any other security.

Patriot Scientific Corporation

6. CommitmentsLicense Option Agreement

On July 1, 2020, we signed a Material Transfer, Evaluation, and ContingenciesExclusive Option Agreement (“License Option Agreement”) with Case Western Reserve University (“CWRU”), granting the Company the exclusive right to license technology for a novel platform technology using virus-like nanoparticles to treat and prevent cancer and infectious diseases in humans and for veterinary use. Under the License Option Agreement, CWRU granted the Company the exclusive option for a period of two (2) years to negotiate and enter into a license agreement with CWRU, provided that we meet certain diligence milestones, including but not limited to, (i) delivering a development plan within 18 months, (ii) raising $3 million in either equity, debt, or grant funding, or a combination thereof within 18 months, (iii), generating sufficient preclinical data to support the identification of the initial field of use to support the initial planned clinical indication for the technology, (iv) determining manufacturing processes and cGMP requirements to manufacture the initial product for use in toxicology studies, and (v) identifying required toxicology studies required to support Phase I clinical trials in the initial field of use. In addition, the parties agreed to the royalty rates payable on net sales of licensed products to fall within the range of 4% to 8% and the parties agree to negotiate in good faith on the final licensing terms.

Under the License Option Agreement, Private Mosaic issued CWRU 70,000 shares of Class B Common Stock at the fair market value of $7 on the date of issuance, representing 10% of the fully diluted shares of common stock outstanding of Private Mosaic. On August 21, 2020, the Class B Stock was exchanged for shares of Series B Preferred under the Reverse Merger, which included certain anti-dilution rights. Pursuant to the Certificate of Designation, the Series B Preferred holder will continue to maintain ownership equal to 10% of the fully diluted shares of common stock outstanding of the Company, including for such purposes all other convertible securities outstanding and reserved for issuance except stock options issued and outstanding and reserved for issuance under a board approved employee stock option plans reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company then outstanding, until we initially raise at least $1 million from the sale of either preferred or common stock, or a combination thereof (“Capital Threshold”). In addition, pursuant to the License Option Agreement, net working capital acquired under the Reverse Merger of approximately $374,000 was applied against the Capital Threshold. As of August 31, 2020, the remaining Capital Threshold was approximately $626,000. The anti-dilution issuance rights under the License Option Agreement meet the definition of a derivative instrument under FASB’s ASC Topic 815, LitigationDerivatives and Hedging (see Note 3).

Patent LitigationIn addition, if we enter into a license agreement with CWRU, we would be responsible for the reimbursement of all past patent costs incurred by CWRU though the date of the License Option Agreement, which amount has been estimated to be approximately $267,000. This amount will be expensed when the Company intends to enter into a license agreement with CWRU.

We, TPL,7. Stockholders’ Equity

On the Closing Date of the Reverse Merger, PTSC acquired 100% of the issued and PDSoutstanding common stock of Private Mosaic, representing 630,000 shares of its Class A common stock (“Class A Stock”) and 70,000 shares of its Class B common stock (“Class B Stock”) (collectively referred to as “Plaintiffs”“Target Common Stock”) are Plaintiffs were in proceedings in the U.S. District Court. In exchange for the Northern District of California whereTarget Common Stock, the Plaintiffs allege infringementholders of the US 5,809,336 patent (the “‘336 patent”Class A Stock received 630,000 shares of the Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) by: Huawei Technologies Co. Ltd., LG Electronics, Nintendo Co. Ltd., Samsung Electronics Co. Ltd., and ZTE Corporation (collectively referred to asholders of the “Defendants”Class B Stock received 70,000 shares of the Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). This litigation was proceeding in front of District Court Judge Vince Chhabria.

These 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 infringementIn addition, holders of the US 5,440,749 patent (the “‘749 patent”),Series A Preferred and Series B Preferred have certain investor registration rights. At any time after 180 days following 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 resultClosing Date of the claim construction reportReverse Merger, holders of at least 75% of the Series A Preferred and recommendation, Plaintiffs and defendants, withSeries B Preferred can demand that the exceptionCompany file a registration statement on Form S-1 within 60 days 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,holders request. Furthermore, in the event that the Court does not materially modifyCompany is eligible to file a registration statement on Form S-3, the claim construction, Plaintiffsholders can request the Company file the registration at any time, and defendants ask that the Court enter a final judgment of non-infringement. After Plaintiffs and Huawei filed opposing letter briefsCompany will have 60 days to comply with such request. In any event, there are no penalties if the Company is unable to comply 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.holders request.

On December 7, 2015, Plaintiffs filed noticesMoreover, the holders of appeal withSeries A Preferred and Series B Preferred agreed to vote all shares owned in favor of an increase in 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. Courtauthorized number of Appealsshares of common stock or to vote for the Federal Circuit rendered its decision modifying the claim construction that was issued in September 2016a reverse stock split, at a ratio determined by the U.S. District Court for the Northern DistrictBoard 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.

Defendant Samsung submitted a bill of costs seeking $30,170 in taxable costs in the underlying district court proceedings; Plaintiffs filed an objection to significant portions of that request. On March 1, 2018, the ClerkDirectors of the District Court taxed costs inCompany, to ensure that the amount $829.Company has sufficient authorized shares of common stock upon the conversion of Series A Preferred and Series B Preferred into shares of common stock.

Patriot Scientific Corporation

Plaintiffs filed notices of appeal in these district court matters on January 5, 2018. The appeals were docketed and consolidated under lead case No. 18-1439, captioned as Technology Properties Limited v. Huawei Technologies Co., Ltd in the United States Court of Appeals for the Federal Circuit. Oral argument proceeded on February 4, 2019. The Court affirmed the lower court’s determination without written opinion pursuant to Federal Circuit Rule 36 on February 6, 2019. Plaintiffs filed a Petition for Rehearing En Banc on March 8, 2019 which was denied by the Court on April 10, 2019.Series A Preferred

On September 6, 2019 Plaintiffs filedAugust 21, 2020, the Company issued 630,000 shares of Series A Preferred (classified as permanent equity), in exchange for 630,000 shares of Series A Common Stock of Private Mosaic. Each share of Series A Preferred has a petition forpar value of $0.00001 per share, no dividend rate, a writstated value of certiorari with the Supreme Court$6.50 per share, and each share of Series A Preferred converts into 5,097.053 shares of common stock of the United StatesCompany (“Series A Conversion Number”). In addition, the Series A Preferred possesses full voting rights, on an as-converted basis, as a resultthe common stock of the United States CourtCompany, as defined in the Series A Certificate of Appeals outcome.Designation. Furthermore, the Series A Preferred will automatically convert into common stock of the Company upon (i) the Company filing an Amended and Restated Articles of Incorporation so that the Company has a sufficient number of authorized and unissued shares of Common Stock so as to permit the conversion of all outstanding shares of the Series A Preferred into common stock and (ii) the effectiveness of any registration statement registering the resale of the underlying shares.

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary (a “Liquidation Event”), the Holders of Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock, an amount per share in cash equal to the greater of (x)  the stated value of $6.50 for each share of Series A Preferred then held by the holder or (y) the amount payable per share of common stock which such holder of Series A Preferred would have received if such Holder had converted to common stock immediately prior to the Liquidation Event.

Series B Preferred

On November 4, 2019, we announced thatAugust 21, 2020, the Supreme CourtCompany issued 70,000 shares of Series B Preferred (classified as permanent equity), in exchange for 70,000 shares of Series B Common Stock of Private Mosaic. Each share of Series B Preferred has a par value of $0.00001 per share, no dividend rate, a stated value of $6.50 per share, and each share of Series B Preferred converts into 5,734.185 shares of common stock of the United States denied our petitionCompany (“Series B Conversion Number”). In addition, the Series B Preferred possesses full voting rights, on an as-converted basis, as the common stock of the Company, as defined in the Series B Certificate of Designation. Furthermore, the Series B Preferred does not have any mandatory conversion rights and only converts upon written notice from the holder.

The Class B Preferred also includes certain anti-dilution rights (“anti-dilution issuance rights”), whereby the holder of Class B Preferred will continue to maintain ownership equal to 10% of the fully diluted shares of common stock outstanding, including for such purposes all other convertible securities outstanding and reserved for issuance except stock options issued and outstanding and reserved for issuance under a writboard approved employee stock option plans reserving for issuance no more than ten percent (10%) of certiorarithe outstanding common stock of the Company then outstanding, until we raise at least $1 million from the sale of either preferred or common stock, or a combination thereof (“Capital Threshold”). In addition, pursuant to the License Option Agreement, any net working capital acquired under a reverse merger or acquisition shall be applied against the Capital Threshold. The preliminary net working capital of PTSC on the Closing Date was approximately $374,000. As such, remaining Capital Threshold is approximately $626,000 as of August 31, 2020. The anti-dilution issuance rights meet the definition of a derivative instrument under FASB’s ASC Topic 815, Derivatives and Hedging (see Note 3).

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary (a “Liquidation Event”), the Holders of Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock, an amount per share in cash equal to the greater of (x)  the stated value of $6.50 for each share of Series A Preferred then held by the holder or (y) the amount payable per share of common stock which such holder of Series B Preferred would have received if such Holder had converted to common stock immediately prior to the Liquidation Event.

8. Commitments and Contingencies

Legal Matters

While the Company is not involved in any litigation as of August 31, 2020, the Company may be involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to patentintellectual property, employment, and contractual matters. Any litigation previously beforecould have a material adverse effect on the United States CourtCompany’s business, financial condition, results of Appeals foroperations, and/or cash flows in the Federal Circuit that alleged infringement ofperiod in which the ‘336 patent against the Defendants (see Note 1).

Employment Contractsunfavorable outcome occurs or becomes probable, and potentially in future periods.

In connection with Cliff Flowers’ appointment as the Chief Financial Officer of the Company, and commencing on September 17, 2007, we entered into an employment agreement with Mr. Flowers for an initial 120-day term if not terminated pursuant to the agreement, with an extension period of one year and on a continuing basis thereafter. On December 30, 2016, we entered into an amended and restated employment agreement with Mr. Flowers. Pursuant to the amended December 30, 2016 agreement, if Mr. Flowers was terminated without cause or resigns with good reason any time after two years of continuous employment, he was entitled to receive an amount equal to 1.25 times his annual base salary. Mr. Flowers was also entitled to certain payments upon a change of control of the Company if the surviving corporation did not retain him. All such payments were conditional upon the execution of a general release. On October 1, 2019, Mr. Flowers and the Company signed a Separation Agreement and General Release of all Claims (“Separation Agreement”). Pursuant to the Separation Agreement, Mr. Flowers resigned on September 30, 2019 and agreed to severance compensation of $327,750, in lieu if any amounts owed under his amended and restated employment agreement, payable in seven equal monthly installments commencing October 30, 2019. As of November 30, 2019, we have a remaining liability of $246,698 included inAccrued expenses and other in the accompanying unaudited condensed consolidated financial statements. There were no known disagreements with Mr. Flowers regarding our operations, policies or practices. The Board appointed Carlton M. Johnson to assume all management roles on an interim basis.

Guarantees and IndemnitiesIndemnification

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.

Patent Expenses

Under the License Option Agreement (see Note 6), if we enter into a license agreement with CWRU, we would be responsible for the reimbursement of all past patent costs incurred by CWRU though the date of the License Option Agreement, which amount has been estimated to be approximately $267,000. This amount will be expensed when the Company intends to enter into a license agreement with CWRU.

9. Subsequent Events

We have evaluated subsequent events after the consolidated balance sheet date and through the filing date of these consolidated financial statements, and based on our evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidatedfinancial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited financial statements and notes thereto of Private Mosaic as of and for the period ended May 31, 2020 included in our Current Report on Form 8-K/A, filed with the Securities and Exchange Commission, or SEC, on October 14, 2020. As further described in “Note 1 – Organization and Business” and “Note 2 – Significant Accounting Policies” in this Quarterly Report, Private Mosaic was determined to be the accounting acquirer in the Reverse Merger and, accordingly, the pre-Merger historical financial information presented in this Quarterly Report reflects the standalone financial statements of Private Mosaic.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, references to the “Company,” the “combined company” “Mosaic” “Patriot,” “we,” “our” or “us” in this Quarterly Report refer to Patriot Scientific Corporation and its subsidiaries immediately following the Reverse Merger, as the Registrant, until its name change to Mosaic ImmunoEngineering Inc. is approved and effective.. References to “PTSC” refer to Patriot Scientific Corporation prior to the completion of the Reverse Merger and references to “Private Mosaic” refer to privately held Mosaic ImmunoEngineering Inc. prior to the completion of the Reverse Merger.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes certaincontains forward-looking statements constituting “forward-looking”that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.

In addition to historical information, this discussion and analysis contains 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 concerning1995. Please see Part II, Item 1A. Risk Factors for a discussion of certain risk factors applicable to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, futurebusiness, financial condition, and results and prospects, and we rely on the “safe harbor” provisions in those laws. Weof operations. Operating results are including this statementnot necessarily indicative of results that may occur for the express purpose of availing ourselves of the protections of such safe harbors with respect to all such forward-looking statements. Thefull fiscal year or any other future period.

Any forward-looking statements in this reportQuarterly Report reflect our current views and assumptions only as of the date that this report is signed with respect to future events or to our future financial performance and financial performance. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “estimates,” “may,” “could,” “should,” “would,” “will,” “shall,” “propose,” “continue,” “predict,” “plan”involve known and similar expressions are generally intendedunknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to identify certain of thebe materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  Readers are cautionedGiven these uncertainties, you should not to place undue reliance on these forward-looking statements, which speak onlystatements. Except 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 undertakeassume no obligation to publicly release the result of any revision ofupdate or revise these forward-looking statements to reflect events or circumstances afterfor any reason, even if new information becomes available in the date they are made or to reflect the occurrence of unanticipated events.future.

Overview

Historically, we have been a licensing company and entered into a number of agreements to facilitate the pursuit of unlicensed usersWe qualify all 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 certiorariforward-looking statements by these cautionary statements. In addition, with respect to patent litigation previously beforeall of our forward-looking statements, we claim the United States Court of Appeals for the Federal Circuit that alleged infringementprotection of the ‘336 patent against multiple defendants (see Footnote 6, Commitments and Contingencies,safe harbor for forward-looking statements contained in the accompanying unaudited condensed consolidated financial statements). Based on this decision, we have halted all licensing efforts as we evaluate the future directionPrivate Securities Litigation Reform Act of the Company as we do not have any potential sources of revenue and our joint venture, PDS, has not generated significant license revenues since September 2013.1995.

There areAbout Mosaic

Mosaic, a numberDelaware corporation incorporated on March 30, 2020, is a development-stage biotechnology company focused on a novel platform technology using immunostimulatory nanotechnology-based therapeutics and vaccines to treat and prevent cancer and infectious diseases in humans and for veterinary use.  Mosaic’s founders came together to advance the development of uncertainties associateda novel nanoparticle-based intra-tumoral immunotherapy with broad potential to treat solid cancers in both humans and companion animals.

Mosaic will maintain the name of Patriot Scientific Corporation as the Registrant (the “Company”, “Patriot”, “we”, “us” or “our”) until our financial projections that could increase our projected expenses, which would further accelerate cash usage. Additionally, we do not expectname change to realize satisfactory cash from operations overMosaic ImmunoEngineering Inc. is approved and effective.

On July 1, 2020, Mosaic signed a License Option Agreement with Case Western Reserve University, granting Private Mosaic the foreseeable future and we will be requiredexclusive right to seek additional financing to continue our operations. We will also require additional financinglicense certain technology for a period of two years.  Under the License Option Agreement, Mosaic has exclusive right 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.and license the following novel platforms technologies:

One opportunity we are evaluating isNanoparticle-based Immunotherapy for the Treatment of Cancer

The Company’s lead oncology candidate, MI-O-101, resulted from years of research by the scientific co-founders that was supported by numerous grants totaling more than $20 million in aggregate from federal and private funding agencies. Published data from these studies and ongoing research supports MI-O-101 anti-cancer activity as a monotherapy and has established its ability to improve standard cancer therapies including chemotherapy, radiation and immunotherapy in a wide variety of tumor types, including data from preclinical animal models, veterinary studies in companion animals with naturally occurring cancer, as well as the potential to activate human immune cells. MI-O-101 is currently in late-stage preclinical development with plans to advance the lead candidate towards Phase 1 as funding becomes available.

Modular Vaccine Platform (“MVP”)

Mosaic's MVP is based on combining the same nanotechnology-based adjuvant used in immuno-oncology with carefully selected targets of establishinginterest to direct a company that developsprotective or potentially a data capturingtherapeutic immune response. This technology platform that couldhas been successfully evaluated for effectiveness with oncology cancer targets, oncology virus targets and recently in infectious diseases.

The MVP platform is designed to facilitate the rapid development of vaccine candidates due to its modular nature. The adjuvant and linking chemistry can be implemented throughoutstockpiled and ready for the drug development process utilizing blockchain technologiesrapid identification of targets of interest which can be linked for testing in collaborationa shorter timeline. The MVP platform combined with Artius Bioconsulting LLC (“Artius”), under an agreement signed on April 12, 2019. During the quarter ended November 30, 2019, Artius completedCompany's proprietary delivery system which allows for self-administration and submitted their feasibility report to usshipment of materials at room temperature makes the platform ideal for rapid response situations.

Mosaic and weits research partners are currently evaluating next steps. However, there are no assurances that we will be successful in developing this blockchain based business. Further, inactively working towards a possible lead candidate for COVID-19 while simultaneously advancing the event the next steps insystem for rapid response, as well as the development of more traditional vaccine candidates in infectious diseases and oncology.

Recent Developments

Reverse Merger

On August 21, 2020 (the “Closing Date”), PTSC acquired 100% of the issued and outstanding common stock of Private Mosaic, representing 630,000 shares of its Class A common stock (“Class A Stock”) and 70,000 shares of its Class B common stock (“Class B Stock”) (collectively referred to as “Target Common Stock”). In exchange for the Target Common Stock, the holders of the Class A Stock received 630,000 shares of Patriot’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of PTSC’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). Each share of Series A Preferred converts into 5,097.053 shares of common stock of Patriot and possesses full voting rights, on an as-converted basis, as the common stock of PTSC, as defined in the Series A Certificate of Designation. Each share of Series B Preferred converts into 5,734.185 shares of common stock of PTSC, possesses full voting rights, on an as-converted basis, as the common stock of the PTSC, and contains certain anti-dilution rights, as defined in the Series B Certificate of Designation. On a blockchain based business are undertaken, itfully diluted, as converted basis, the holders of Series A Preferred and Series B Preferred, in aggregate, own 90% of the issued and outstanding common stock of the Company as of the Closing Date.

The Reverse Merger was treated by the Company as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, Private Mosaic is expected that significant additional funding from external sourcesconsidered to have acquired PTSC as the accounting acquirer because: (i) Private Mosaic stockholders owned 90% of the combined company, on an as-converted basis, immediately following the Closing Date, (ii) Private Mosaic directors held a majority of board seats in the combined company and (iii) Private Mosaic management held all key positions in the management of the combined company. Accordingly, Private Mosaic’s historical results of operations will replace PTSC’s historical results of operations for all periods prior to the Reverse Merger and, for all periods following the Reverse Merger, the results of operations of the combined company will be required. If we are unable to develop or acquire new linesincluded in the Company’s financial statements.

Based on the inception of business, such as those involving blockchain technologies, and/or we are unable to raise additional capital, we will be forced to liquidatePrivate Mosaic on March 30, 2020, the financial condition and results of operations of the Company for the periods presented in a dissolution under Delaware law or seek protection underthis Quarterly Report bear no relationship to the provisionsfuture business, financial condition and results of operations of the U.S. Bankruptcy Code. We currently anticipate, based on currentlyCompany, and are not indicative of the business, financial condition and results of operations that our cash on hand will not satisfy our operational and capital requirements through twelve months fromof the date of filing on this Form 10-Q.Company, for any future period.

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 investmentsOn August 21, 2020, Private Mosaic completed a Reverse Merger with PTSC pursuant to which Private Mosaic merged into PTSC. Due to the nominal assets and limited operations of PTSC prior to the Reverse Merger, the transaction was treated as a reverse acquisition under the provision of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, whereby Private Mosaic became the accounting acquirer (legal acquiree) and PTSC was treated as the accounting acquiree (legal acquirer). As the transaction was treated as a reverse asset acquisition, no intangibles, including goodwill, were recognized. The net tangible assets acquired and liabilities assumed totaled $374,435, which were acquired by Private Mosaic in marketable securities in certificates of deposit atconnection with the time of purchase as held-to-maturitytransaction 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 fortheir estimated acquisition date fair values as of the amortization of premiums and discounts, which approximates fair value. Cash inflows and outflows related to the sale and purchase of investments are classifiedClosing Date, as investing activities in our condensed consolidated statements of cash flows.follows:

2.        

We have a 50% interest in PDS.Phoenix Digital Solutions LLC (“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 lossearnings (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 areIf 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 currently own 2,100,000 shares of preferred stock, representing approximately a 46% ownership interest, on an as-converted basis, in Holocom, Inc. (“Holocom”), a California corporation that manufactures products that protect information transmitted over secure networks. The shares are convertible at our option into shares of Holocom’s common stock on a one-to-one basis. The preferred stock entitles us to receive non-cumulative dividends at the per annum rate of $0.04 per share, when and if declared by the Board of Directors of Holocom, as well as a liquidation preference of $0.40 per share, plus an amount equal to all declared but unpaid dividends. As of the Closing Date and as of August 31, 2020, our investment in Holocom was valued at $0 based on various indicators of impairment, including Holocom’s inability to meet its business plan and raise sufficient capital, in addition to the general economic environment.

Anti-Dilution Issuance Rights Liability

Pursuant to the Series B Preferred Certificate of Designation, the Series B Preferred includes certain anti-dilution issuance rights, whereby the holder will continue to maintain equity ownership equal to 10% of the fully diluted shares of common stock outstanding, calculated on an as converted basis, including all other convertible securities outstanding and reserved for issuance (and excluding stock options issued and outstanding and reserved for issuance under a Board approved employee stock option plan reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company) until we raise approximately $626,000 from the sale of common or preferred stock, or a combination thereof .

To determine the estimated fair value of the anti-dilution issuance rights liability, the Company used a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables. At the date of issuance on August 21, 2020 (at inception) and as of the quarter ended August 31, 2020, the estimated fair value of the anti-dilution issuance rights was $83,500. We initially recorded the fair value as a derivative liability with a corresponding charge to research and development expense and we will mark-to-market at each reporting period, with changes in fair value recognized in other income (expense) in the consolidated statement of operations at each period-end while this derivative instrument is outstanding.

The primary inputs used in valuing the anti-dilution issuance rights liability at inception and upon remeasurement at August 31, 2020, were as follows:

The fair value of the common stock was determined by management with the assistance of an independent third-party specialist. The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption. In addition, the Company incorporated the estimated number of shares, timing, and probability of future equity financings in the calculation of the anti-dilution issuance rights liability.

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.

In addition, utilization of our net operating loss carry forwards may be subject to an annual limitation due to ownership change limitations that may have occurred as a result of the Reverse Merger, or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of the net operating loss carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a Company by certain stockholders. Moreover, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could result in increased future tax liability to us.

With the exception forof refundable alternative minimum tax (“AMT”) credits,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.losses in addition to the potential loss of deferred tax assets as a result of the change in control (see Note 1 to the accompanying unaudited condensed consolidated financial statements). As a result of this determination, and with the exception for the aforementioned refundable tax credits,income taxes, 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 aremay be 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

ComparisonMosaic was incorporated on March 30, 2020 (date of inception). Therefore, no comparative information is provided herein. Private Mosaic’s historical results of operations replaced PTSC’s historical results of operations for all periods prior to the Reverse Merger and, for all periods following the Reverse Merger, the results of operations of the Three Months Ended November 30, 2019 and the Three Months Ended November 30, 2018.

Selling, general and administrative expenses increased approximately $344,000 from approximately $144,000 for the three months ended November 30, 2018 to approximately $487,000 for the three months ended November 30, 2019. The increase consisted primarily of approximately $321,000 in higher compensation expense mostly pertaining to severance amounts for Mr. Flowers. Effective September 30, 2019, Mr. Flowers resigned and Mr. Flowers and the Company signed a Separation Agreement and General Release of all Claims (“Separation Agreement”). Pursuant to the Separation Agreement, Mr. Flowers agreed to severance compensation of $327,750, in lieu if any amounts owed under his amended and restated employment agreement, payable in seven equal monthly installments commencing October 30, 2019. This increase was supplemented by increases in legal fees and feasibility costs of Artius, partially offset by approximately $21,000 in reduced board fees due to a board member volunteering to cease taking board fees.

Total other expenses increased from approximately $8,000 for the three months ended November 30, 2018 to approximately $26,000 for the three months ended November 30, 2019. The increase primarily consisted of an increasecombined company will be included in the equity in the loss of PDS resulting from an increase in PDS legal expenses combined with lower interest income. Our investment in PDS continues to be accounted for in accordance with the equity method of accounting for investments.

Loss before income taxes increased from approximately $(152,000) for the three months ended November 30, 2018 to approximately $(513,000) for the three months ended November 30, 2019 for the reasons explained in the preceding “Selling, general and administrative” and “Other income (expense)” comparisons.

Comparison of the Six Months Ended November 30, 2019 and the Six Months Ended November 30, 2018.

Selling, general and administrative expenses increased from approximately $347,000 for the six months ended November 30, 2018 to approximately $790,000 for the six months ended November 30, 2019. The increase primarily pertained to higher compensation expense mostly pertaining to severance for Mr. Flowers as mentioned above.Company’s financial statements.

Total other expenses increased from approximately $16,000 for the six months ended November 30, 2018 to $64,000 for the six months ended November 30, 2019. 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.

Loss before income taxes increased from approximately $(363,000) for the six months ended November 30, 2018 to approximately $(855,000) for the six months ended November 30, 2019 for the reasons explained in the preceding “Selling, general and administrative” and “Other income (expense)” comparisons.

Liquidity and Capital Resources

Liquidity

Our cash and cash equivalents and marketable security balances decreased from approximately $1,537,000 as of May 31, 2019 to approximately $963,000 as of November 30, 2019. We also have restricted cash of approximately $199,000 and $177,000 as of May 31, 2019 and November 30, 2019, respectively. Total current assets decreased from approximately $1,764,000 as of May 31, 2019 to approximately $1,247,000 as of November 30, 2019. Total current liabilities were approximately $228,000 and $442,000 as of May 31, 2019 and November 30, 2019, respectively. The change in our working capital position as of November 30, 2019 as compared with May 31, 2019 is primarily due losses incurred due to the inability of PDS to generate revenues and provide partnership distributions sufficient to cover our operating expenses.

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 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.

There are a number of uncertainties associated with our financial projections that could increase our projected expenses, which would further accelerate cash usage. Additionally, we do not expect to realize satisfactory cash from operations 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.Three Months Ended August 31, 2020:

One opportunity we are evaluating is the potentialResearch and development expenses. Research and development expenses 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 under an agreement signed on April 12, 2019. During$83,507 for the quarter ended November 30, 2019, Artius completedAugust 31, 2020 are related to the recognition of the fair market value of the Class B common stock issued under the License Option Agreement combined with the fair market value of the anti-dilution issuance rights issued to the holder of the Series B Preferred. The estimated fair value of the anti-dilution issuance rights liability was based on a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables. Pursuant to the License Option Agreement, we receive rights to materials and submitted their feasibility reportresearch information to usevaluate the technology for a period of two years with an option to license the technology, provided we achieve certain research and we are currently evaluating next steps. However, there are no assurances that we will be successful in developing this blockchain based business. Further,development milestones and financial milestones, as defined in the eventagreement (see Note 6 to 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.accompanying unaudited condensed consolidated financial statements).

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 $596,000General and $425,000administrative expenses. General and administrative expenses of $28,293 for the six monthsquarter ended November 30, 2019August 31, 2020 are primarily related to legal fees of $15,000 associated with the License Option Agreement combined with payroll and 2018, respectively. The principal components of the current period amount were primarily attributable to a net lossconsulting fees of approximately $856,000 combined with an increase in prepaid expenses$8,000 and other current assets of approximately $26,000 offset by an increase in accounts payable and accrued expenses of approximately $213,000, and the equity$5,000.

Equity in loss of affiliated company. Equity in loss of affiliated company of approximately $73,000.$4,107 for the quarter ended August 31, 2020 primarily represents expenses accrued in conjunction with the winding up and dissolving of Phoenix Digital Solutions LLC. The principal componentsCompany has determined that the underlying patents were no longer enforceable and therefore, deemed it to be in the best interest of shareholders to dissolve the LLC and distribute the remaining assets. In October, the Certificate of Cancellation was filed with Secretary of State of the prior year period amount were primarily attributable to a net lossstate of approximately $365,000 combined with an increase in prepaid expenses and other current assets of approximately $46,000 and an decrease in accounts payable and accrued expenses of approximately $44,000, offset by the equity in loss of affiliated company of approximately $30,000.Delaware.

Cash Flows From Investing ActivitiesLiquidity and Capital Resources

CashOn August 21, 2020, we completed our Reverse Merger with PTSC, which provided by investing activities for the six months ended November$427,971 in cash and cash equivalents and restricted cash and cash equivalents of $177,244. Since our inception on March 30, 2019 was $750,000 attributable to net maturities of marketable securities. No cash was provided or used in investing activities in the same prior year period.

Capital Resources

The condensed consolidated financial statements2020, we have been prepared assuming the Company will continue as a going concern. At November 30, 2019, the Company has an accumulated deficit of $61,982,387, and has incurred recurring losses and used significant amounts of cash in its operations.not raised any other capital. As of November 30, 2019, the CompanyAugust 31, 2020, we had cash and cash equivalents of $373,378 and marketable securitiesrestricted cash and cash equivalents of approximately $963,000 and working capital of approximately $805,000 and we currently have no potential sources of cash. We will also require additional financing$177,244. Our ability 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 unablecontinue our operations is highly dependent on our ability to raise additional capital we will be forced to halt ourfund future 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 filing date of filingthis quarterly report on this Form 10-Q.

Our primary uses of capital to date are primarily related to corporate activities associated with corporate formation, fees associated with the License Option Agreement and the Reverse Merger. On a go forward basis, we will need additional capital to support our research and development efforts, compensation and related expenses, hiring additional staff (including clinical, scientific, operational, financial, and management personnel) and costs associated with operating as a public company. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates.

We plan to continue to fund losses from operations and capital funding needs through cash on hand and future equity and/or debt financings, as well as potential additional collaborations or strategic partnerships with other companies.

There are a number of uncertainties associated with our ability to raise additional capital and we have no current arrangements with respect to any additional financing. In addition, the continuation of disruptions caused by COVID-19 may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. Consequently, there can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital will delay our ability to conduct our business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. The above matters raise substantial doubt regarding our ability to continue as a going concern.

Cash Flow Summary

The following table provides a summary of our net cash flow activity for the quarter ended August 31, 2020:

Cash Flows From Operating Activities

Net cash used in operating activities for the quarter ended August 31, 2020 consisted of our net loss of $115,883, offset by non-cash items consisting of (i) equity in loss of affiliated company of $4,107, (ii) the fair value of common stock issued under the License Option Agreement of $7, and (iii) the fair value of derivative liability associated with anti-dilution issuance rights of $83,500. Additionally, cash used in operating activities for the quarter ended August 31, 2020 was supplemented with a net change in operating assets and liability of $26,887.

Cash Flows From Investing Activities

Net cash provided by investing activities for the quarter ended August 31, 2020 consisted of cash, cash equivalents, and restricted cash acquired in the Reverse Merger of $605,215.

Cash Flows From Financing Activities

Net cash provided by financing activities for the quarter ended August 31, 2020 represents the proceeds received from the founders of Private Mosaic from the issuance of Class A common stock.

Recent Accounting Pronouncements

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. The Company adopted this standard on March 30, 2020 (date of inception). The adoption did not have a material effect on the Company’s 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. The Company adopted this standard on March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The accounting standard update also updates certain presentation and disclosure requirements. The Company adopted ASU 2016-01 on March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 842ASU 2018-13 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.March 30, 2020 (date of inception). 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 doesadopted ASU 2018-13 effective March 30, 2020 (date of inception). Implementation of this guidance did not expecthave a significantmaterial impact from adopting this update on itsthe Company’s consolidated financial statements.statements

Not applicable.Interest Rate Risk

Our cash, cash equivalents, and restricted cash as of August 31, 2020 consisted of readily available cash in bank accounts. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operations. We do not believe that our cash or cash equivalents have significant risk of default or illiquidity. While we believe our cash and cash equivalents are not subject to excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

As required by Rule 13a-15(b) under the Exchange Act, as of November 30, 2019,August 31, 2020, the end of the period to which this quarterly report relates, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).procedures. This evaluation was carried out under the supervision and with the participation of our management, including our InterimPresident and Chief Executive Officer and our InterimEVP, Chief Financial Officer.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the InterimPresident and Chief Executive Officer and our Interimthe EVP, Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of November 30, 2019,August 31, 2020, our management, with the participation of our InterimPresident and Chief Executive Officer/InterimOfficer and our EVP, Chief Financial Officer, concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II- OTHER INFORMATION

Footnote 6,Information pertaining to legal proceedings is provided in Note 8, Commitments and Contingencies—Litigation, inContingencies, to the accompanyingcondensed unaudited condensed consolidated financial statements and is incorporated herein by reference.reference herein.

Item 1A. Risk Factors

In addition toInvesting in our common stock involves a high degree of risk. You should consider carefully the other information set forthrisks described below, together with our unaudited interim condensed consolidatedfinancial statements and related notes thereto appearing elsewhere in this quarterly report you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K10-Q (this “Quarterly Report”) and with the audited financial statements and notes thereto of Private Mosaic as of and for the year ended May 31, 20192020 included in our Current Report on Form 8-K/A, filed with the Securities and those listed below, which could materially affect our business, financial conditionExchange Commission, or future results.  Such risks are notSEC, on October 14, 2020.

Unless the only risks facingcontext otherwise requires, references to the Company. Additional risks“Company,” the “combined company” “Mosaic” “Patriot,” “we,” “our” or “us” in this Quarterly Report refer to Patriot Scientific Corporation and uncertainties not currently knownits subsidiaries immediately following the Reverse Merger, as the Registrant, until its name change to us or that we currently deemMosaic ImmunoEngineering Inc. is approved and effective.. References to be immaterial may also materially adversely affect our business, financial condition or operating results..

If We Are Unable To Develop Or Acquire New Lines of Business, 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 And, In Either Event, It Is Unlikely That Stockholders Would Receive Any Value For Their Shares.

As of November 30, 2019,“PTSC” refer to Patriot Scientific Corporation prior to the Company had cash and cash equivalents and marketable securities of approximately $963,000 and working capital of approximately $805,000. Historically, we have been a licensing company and entered into a number of agreements to facilitate the pursuit of unlicensed users of our intellectual property. On November 4, 2019, we announced that the Supreme Courtcompletion of the United States denied our petition for a writ of certiorari with respectReverse Merger and references to patent litigation previously before“Private Mosaic” refer to privately held Mosaic ImmunoEngineering Inc. prior to the United States Court of Appeals for the Federal Circuit that alleged infringementcompletion of the ‘336 patent against multiple defendants (see Footnote 6, Commitments and Contingencies, in the accompanying unaudited condensed consolidated financial statements). Based on this 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 our joint venture, PDS, has not generated significant license revenues since September 2013.Reverse Merger.

There are a number of uncertainties associated with our financial projections that could increase our projected expenses, which would further accelerate cash usage. Additionally, we do notRisks Related to Our Operations

We expect to realize satisfactory cash from operations 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 under an agreement signed on April 12, 2019. However, there are no assurances that we will be successful in developing this blockchain based business. Further, in the eventincur significant losses over the next stepsseveral years and may never achieve or maintain profitability.

Mosaic was formed on March 30, 2020, and therefore, we have limited operating history and have not raised any capital other than the remaining net assets acquired under the Reverse Merger. Therefore, our historical results do not reflect the significant costs required to develop our product candidates. In addition, our products are in preclinical development and therefore, we anticipate that our expenses will increase substantially over the development of a blockchain based business are undertaken,next several years, if and as we:

We expect that it is expected that significant additional funding from external sources will be required.several years, if ever, before we have a product candidate ready for commercialization. If we are unable to develop or acquire new lines of business, such as those involving blockchain technologies, and/oradvance our product candidates and begin to generate clinical data, we are unable to raisemay have greater difficulty raising additional capital we will be forced to liquidate the Company in a dissolution under Delaware lawon favorable terms, or seek protection under the provisions of the U.S. Bankruptcy Code. In either of these events, we might realize significantly less from our assets than the values at which they are carried on our financial statements. The funds resulting from the liquidation of our assets would be used first to satisfy obligations to creditors before any funds would be available to pay our stockholders, and any shortfall in the proceeds would directly reduce the amounts available for distribution, if any, to our creditors and to our stockholders. In the event we are required to liquidate under Delaware law or the federal bankruptcy laws, it is highly unlikely that stockholders would receive any value for their shares.all.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses that we incur may fluctuate significantly from quarter to quarter.

To become and remain profitable, we must develop and eventually commercialize a product or products with significant market potential. This will require us to be successful in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates and manufacturing, marketing and selling those products for which we obtain marketing approval. We may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our Auditors Have Expressed Substantial Doubt About development efforts will take several years and will require significant capital, that will dilute the ownership interest of common stockholders. A decline in the value of the Company could also cause stockholders to lose all or part of their investment.

Our Ability To Continue Asauditors have expressed substantial doubt about our ability to continue as a Going Concern.going concern.

The Report of Independent Registered Public Accounting Firm on ourPrivate Mosaic’s May 31, 2019 consolidated2020 financial statements includes an explanatory paragraph stating that the recurring lossesCompany’s limited cash on hand and negative cash flows from operations, combined with our substantial reliance on cash generated by PDS, raiseits limited operating history raises substantial doubt about ourits ability to continue as a going concern. The condensed unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We Have Identified A Significant Deficiency In Internal Control Over Financial Reporting, If are early in our development efforts and have only two drug candidates in preclinical development.

We Fail To Maintain Effective Internal Controls Over Financial Reporting, The Price Ofcurrently do not have any products that have gained regulatory approval. Our Common Stock May Be Adversely Affected.ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates. As a result, our business is substantially dependent on our ability to successfully complete the development of and obtain regulatory approval for our product candidates.

We are requiredhave not yet demonstrated an ability to establishsuccessfully overcome many of the risks and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting recordsuncertainties frequently encountered by companies in new and discovering accounting errors and financial fraud. 

In the course of completing its assessment of internal control over financial reporting as of May 31, 2019, management did not identify any material weaknesses but did identify a significant deficiencyrapidly evolving fields, particularly in the number of personnel available to servenanotechnology area. If we are unsuccessful in accomplishing the Company’s accounting function. Specifically, management believes thatnumerous and complex objectives in developing our product candidates, we may not be able to adequately segregate responsibility over financial transaction processingsuccessfully develop and reporting. A significant deficiency iscommercialize our two product candidates, and our business will suffer.