| Basis of Presentation and Summary of Significant Accounting Policies | 1. Basis of Presentation and Summary of Significant Accounting
Policies The unaudited condensed consolidated financial
statements of Patriot Scientific Corporation (the “Company”, “PTSC”, “Patriot”, “we”,
“us” or “our”) presented herein have been prepared pursuant to the rules of the Securities and Exchange
Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements
should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Report on Form
10-K for our fiscal year ended May 31, 2019. The accompanying condensed consolidated
financial statements have been prepared assuming the Company will continue as a going concern. In the opinion of management, the
interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation
of the results for the interim period presented. Operating results for the three month period ended August 31, 2019 are not necessarily
indicative of the results that may be expected for the year ending May 31, 2020. Basis of Consolidation The condensed consolidated balance sheets
at August 31, 2019 and May 31, 2019 include our accounts and those of our inactive subsidiary Patriot Data Solutions Group, Inc.
(“PDSG”) which includes Crossflo Systems, Inc. (“Crossflo”). The condensed consolidated statements of operations,
cash flows and stockholders’ equity for the three months ended August 31, 2019 and 2018 include our accounts and those of
our inactive subsidiaries: PDSG and Plasma Scientific Corporation (“Plasma”). We dissolved Plasma in March 2018. All
significant intercompany accounts and transactions have been eliminated. Liquidity and Management’s Plans The accompanying condensed consolidated
financial statements have been prepared assuming the Company will continue as a going concern. At August 31, 2019, the Company
has an accumulated deficit of $61,469,283, and has incurred recurring losses and used significant amounts of cash in its operations.
As of August 31, 2019, the Company had cash and cash equivalents and marketable securities of approximately $1,239,000 and working
capital of approximately $1,237,000. Our only significant potential source of cash is PDS. PDS has not generated significant license
revenues since September 2013. Therefore, our ability to continue and expand our operations is highly dependent on the amount of
cash and cash equivalents and marketable securities on hand combined with our ability to raise additional capital to fund 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 date of filing on this Form 10-Q. Cash shortfalls currently experienced by
PDS will have an adverse effect on our liquidity. To date, we have determined that it is in the best interests of the Moore Microprocessor
Patent (“MMP”) licensing program that we provide our 50% share of capital to provide for PDS expenses including legal
retainers and litigation related payments in the event license revenues received by PDS are insufficient to meet these needs. We
believe contributions to PDS to fund working capital may be required. PDS had been incurring significant third-party
costs for legal fees, expert testimony, depositions and other related litigation costs. We could be required to make capital contributions
to PDS for any future litigation related costs in the event that PDS does not receive sufficient licensing revenues to pay these
expenses. PDS is currently pursuing a litigation
strategy, which includes the filing, on September 6, 2019, a petition for a writ of certiorari with the Supreme Court of the United
States in regards to a decision by the United States Court of Appeals for the Federal Circuit, stemming from litigation in U.S.
District Court against multiple companies alleged to be infringers of the MMP portfolio. We continue to believe that the significant
investment in legal effort and costs incurred to date at PDS is necessary for the protection of our interests in the MMP portfolio
and its future success, although to date it has generated mixed results. 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 consolidated
financial statements. On April 12, 2019, we entered into an agreement
with Artius Bioconsulting LLC, (“Artius”), to evaluate the potential of establishing a company that develops a platform
that could be implemented throughout the drug development process utilizing blockchain technologies. We are anticipating receiving
shortly a feasibility report with its analysis. In the event the next steps in the development of a blockchain based business are
undertaken, it is expected that funding from external sources will be required. There are a number of uncertainties associated
with our financial projections that could increase our projected expenses, which would further accelerate cash usage. Additionally,
if we are unable to realize satisfactory cash from operations in the near future, 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. The inability to obtain additional capital may reduce
our ability to continue to conduct 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. Investment in Affiliated Companies We have a 50% interest in PDS. We account
for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence,
but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the
voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board
of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of
accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee
and is recognized in the condensed consolidated statements of operations in the caption “Equity in earnings (loss) of affiliated
company” and also is adjusted by contributions to and distributions from PDS. PDS, as an unconsolidated equity investee,
recognizes revenue from technology license agreements at the time a contract is entered into, the license method is determined
(paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of
revenue is assured which is generally upon the receipt of the license proceeds. PDS may at times enter into license agreements
whereby contingent revenues are recognized as one or more contractual milestones are met. We review our investment in PDS to determine
whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider
in our determination are the financial condition, operating performance and near term prospects of PDS. If the decline in value
is deemed to be other than temporary, we would recognize an impairment loss. We own 100% of the preferred stock of Holocom
(see Note 3). Prior to impairment, this investment was accounted for at cost since we do not have the ability to exercise significant
influence over the operating and financial policies of Holocom. 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. At August 31, 2019 and 2018, potential
common shares of 1,600,000 related to our outstanding options were not included in the calculation of diluted loss per share as
we recorded a loss. Had we reported net income for the three months ended August 31, 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 our acquisition of Crossflo,
which became a part of PDSG, we issued 2,844,630 escrow shares that are contingent upon certain representations and warranties
made by Crossflo at the time of the merger agreement (see Note 6). We exclude these escrow shares from the basic income (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. With the exception for refundable alternative
minimum tax (“AMT”) credits, we have determined that it was more likely than not that all of our deferred tax assets
will not be realized in the future due to our continuing pre-tax and taxable losses. As a result of this determination, and with
the exception for the aforementioned refundable tax credits, we have recorded a full valuation allowance against our deferred tax
assets. On December 22, 2017, the United States
Government passed 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 are involved in various legal matters,
disputes, and patent infringement claims which arise in the ordinary course of our business. We accrue for any estimated losses
at the time when we can make a reliable estimate of such loss and it is probable that it has been incurred. By their very nature,
contingencies are difficult to estimate. We continually evaluate information related to all contingencies to determine that the
basis on which we have recorded our estimated exposure is appropriate. Intellectual Property Rights PDS, our investment in affiliated company,
relies on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements
to protect our intellectual property rights. We have seven U.S., nine European, and three Japanese patents all of which expired
between August 2009 and October 2016. These patents, while expired, may have certain retrospective statutory benefits that will
fully diminish six years after the patent expiration dates. The patent useful life for purposes of negotiating licenses is finite
and these patents are subject to legal challenges, which in combination with the limited life, could adversely impact the stream
of revenues. A successful challenge to the ownership of the technology or the proprietary nature of the intellectual property would
materially damage business prospects. Any issued patent may be challenged and invalidated. Recent Accounting Pronouncements In 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. ASU 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. 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 leases include only those leases with a term greater than one month and
twelve months or less. Short-term leases are not recorded on the consolidated balance sheet, and lease expense on short-term leases
is recognized on a straight-line basis over the lease term. The Company elected the “practical expedient package” as
permitted under ASC 842. Therefore, the Company has not reassessed whether any expired or existing contracts are, or contain, leases;
the Company has not reassessed the lease classification for any expired or existing leases; and the Company has not reassessed
initial direct costs for any expired or existing leases. The Company currently leases office space on a month-to-month basis. In August 2018, the FASB issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement” (“ASU 2018-13”), which removes, modifies, and adds various disclosure requirements on fair value
measurements in Topic 820. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after
December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments
should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance
of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay
adoption of the additional disclosures until their effective date. The Company does not expect a significant impact from adopting
this update on its consolidated financial statements. |
