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).

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 following tables detailprimary 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 measurements withinof the fair value hierarchyderivative liability was determined by management with the assistance of our cash, cash equivalentsan 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 investmentsprobability of future equity financings in marketable securities:

the calculation of the anti-dilution issuance rights liability.

Patriot Scientific Corporation

We purchase certificates of deposit with varying maturity dates. The following tables summarize the purchase date maturities, gross unrealized gains or losses and fair value of the certificates of deposit as of August 31, 2019 and May 31, 2019:

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 requirements50% membership interest in the remaining net cash on hand will approximate the book value 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 months ended August 31, 2019 and 2018. Distributable cash and allocation of profits and losses have been allocated to the members in the priority defined in the LLC Agreement.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.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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 months ended August 31, 2019 and 2018 of $44,312 and $14,780, respectively, 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 August 31, 2019 and May 31, 2019 and statementsstatement of operations for the three monthsquarter ended August 31, 2019 and 2018 are2020 is as follows:

Balance Sheets

Assets:

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Liabilities and Members’ Equity:

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 August 31, 2019 and May 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 term ofCompany to establish the grant effective as of the date of the grant. The expected volatility is based on the historical volatilities of our common stock. These factors could change in the future, affecting the determination of share-based compensation expense in future periods.

A summary of option activity as ofCompany and a bank account for operations. At August 31, 20192020, accrued payable to founders of $55,777 represents advances to the Company to establish the Company and changes duringa bank account for operations, consulting services provided by a founder, plus the three months then ended,overpayment of $49,997 in common stock subscribed. Such accrued payable to founders does not earn interest and is presented below:

The aggregate intrinsic value represents the differences in market price at the close of the quarter ($0.004 per share on August 31, 2019) and the exercise price of outstanding, in-the-money options (those options with exercise prices below $0.004 per share) on August 31, 2019.

6. Commitments and Contingencies

Litigation

Patent Litigation

We, TPL, and PDS (collectively referred to as “Plaintiffs”) are Plaintiffs in ongoing proceedings in the U.S. District Court for the Northern District of California where the Plaintiffs allege infringement of the US 5,809,336 patent (the “‘336 patent”) by: Huawei Technologies Co. Ltd., LG Electronics, Nintendo Co. Ltd., Samsung Electronics Co. Ltd., and ZTE Corporation (collectively referred to as the “Defendants”). This litigation is proceeding in front of District Court Judge Vince Chhabria.not convertible into any other security.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

These ongoing proceedings relate to the proceedings filed by the Plaintiffs in February 2008 in the U.S. District Court for the Northern District of California alleging infringement of the US 5,440,749 patent (the “‘749 patent”), the US 5,530,890 patent (the “‘890 patent”) and the ‘336 patent against Amazon.com Inc., Barnes & Noble Inc., Garmin Ltd., Huawei Technologies Co. Ltd., Kyocera Corporation, LG Electronics, Nintendo Co. Ltd., Novatel Wireless Inc., Samsung Electronics Co. Ltd., Sierra Wireless Inc., and ZTE Corporation. We have settled with all defendants except those named in the first paragraph to this footnote. On September 18, 2015, a Markman hearing was held before U.S. Magistrate Judge Grewal and, on September 22, 2015, he issued a claim construction report and recommendation. On September 25, 2015, as a result of the claim construction report and recommendation, Plaintiffs and defendants, with the exception of Huawei Technologies Co. Ltd., (“Huawei”) agreed to stay all proceedings pending resolution of Plaintiffs’ objections to the claim construction report and recommendation. Plaintiffs further stipulated that, under the claim construction provided by the report and recommendation, defendants’ products do not infringe the ‘336 patent, and, in the event that the Court does not materially modify the claim construction, Plaintiffs and defendants ask that the Court enter a final judgment of non-infringement. After Plaintiffs and Huawei filed opposing letter briefs with the Court, U.S. Magistrate Judge Grewal stayed the action against Huawei pending resolution of Plaintiffs’ objections to the claim construction. On October 6, 2015, Plaintiffs filed objections to the claim construction with District Court Judge Chhabria. Judge Chhabria rejected those objections on November 9, 2015. Based on that order, the parties stipulated to a judgment of non-infringement as to the ‘336 patent and such judgment was entered on November 13, 2015.

On December 7, 2015, Plaintiffs filed notices of appeal with the U.S. Federal Circuit appealing the district court’s claim construction. Plaintiffs filed their opening appellate brief on March 10, 2016. Defendants filed their response brief on May 23, 2016, with Plaintiffs filing their reply brief on June 23, 2016. On March 3, 2017, the U.S. Court of Appeals for the Federal Circuit rendered its decision modifying the claim construction that was issued in September 2016 by the U.S. District Court for the Northern District of California and has remanded the matter to the District Court for further proceedings.

On May 23, 2017, a case management conference was held in front of District Court Judge Chhabria, who ordered that Plaintiffs amend their infringement contentions on or before June 16, 2017. Judge Chhabria further ordered that Defendants submit any motion for summary judgment based on the amended infringement contentions and the modified claim construction by August 1, 2017. On June 5, 2017, the law firm of Banys, P.C., who had served as local counsel for PDS, withdrew as counsel. PDS continued to be represented by the law firm of Nelson Bumgardner, P.C. On June 16, 2017, Plaintiffs timely amended their infringement contentions. On July 13, 2017, all remaining counsel for each of Patriot, TPL, and PDS moved to withdraw as counsel and further moved to extend all currently pending case deadlines by 60 days for Plaintiffs to seek new counsel.

On September 13, 2017, the law firm of Bunsow De Mory LLP was entered before the U.S. District Court for the Northern District of California as successor counsel in representation of Patriot, PDS, and TPL.

The Defendants moved for summary judgment of non-infringement on September 29, 2017, and the Court held a hearing on Defendants’ motion on November 30, 2017. The Court granted Defendants’ motion and entered judgment of non-infringement on December 13, 2017.

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 Clerk of the District Court taxed costs in the amount $829.

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.

On September 6, 2019, Plaintiffs filed a petition for a writ of certiorari with the Supreme Court of the United States as a result of the United States Court of Appeals outcome.

Patriot Scientific Corporation

6. License Option Agreement

On July 1, 2020, we signed a Material Transfer, Evaluation, and Exclusive 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, Employment ContractsDerivatives and Hedging (see Note 3).

In connectionaddition, if we enter into a license agreement with Mr. Flowers’ appointmentCWRU, 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.

7. Stockholders’ Equity

On the Closing Date of the Reverse Merger, 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 the Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of the Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”).

In addition, holders of the Series A Preferred and Series B Preferred have certain investor registration rights. At any time after 180 days following the Closing Date of the Reverse Merger, holders of at least 75% of the Series A Preferred and Series B Preferred can demand that the Company file a registration statement on Form S-1 within 60 days of the holders request. Furthermore, in the event the Company is eligible to file a registration statement on Form S-3, the holders can request the Company file the registration at any time, and the Company 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 holders request.

Moreover, the holders of Series A Preferred and Series B Preferred agreed to vote all shares owned in favor of an increase in the authorized number of shares of common stock or to vote for a reverse stock split, at a ratio determined by the Board of Directors of the Company, to ensure that the Company has sufficient authorized shares of common stock upon the conversion of Series A Preferred and Series B Preferred into shares of common stock.

Series A Preferred

On August 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 par value of $0.00001 per share, no dividend rate, a stated value of $6.50 per share, and each share of Series A Preferred converts into 5,097.053 shares of common stock of the Company (“Series A Conversion Number”). In addition, the Series A Preferred possesses full voting rights, on an as-converted basis, as the Chief Financial Officer,common stock of the Company, as defined in the Series A Certificate of Designation. Furthermore, the Series A Preferred will automatically convert into common stock of the Company upon (i) the Company filing an Amended and commencingRestated 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 August 21, 2020, the Company 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 Company (“Series B Conversion Number”). In addition, the Series B Preferred possesses full voting rights, on September 17, 2007,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 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 entered into an employment agreement with Mr. Flowers for an initial 120-day term if not terminatedraise at least $1 million from the sale of either preferred or common stock, or a combination thereof (“Capital Threshold”). In addition, pursuant to the agreement, with an extension periodLicense 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 one yearPTSC 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 on a continuing basis thereafter. On December 30, 2016, we entered into an amended and restated employment agreement with Mr. Flowers. Pursuant toHedging (see Note 3).

In the amended December 30, 2016 agreement, if Mr. Flowers is terminated without causeevent of any liquidation, dissolution or resigns with good reason any time after two yearswinding up of continuous employment, he isthe Company, either voluntary or involuntary (a “Liquidation Event”), the Holders of Series B Preferred shall be entitled to receive, an amount equalprior and in preference to 1.25 times his annual base salary. Mr. Flowers is also entitled to certain payments upon a changeany distribution of controlany 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 surviving corporation doesLiquidation Event.

8. Commitments and Contingencies

Legal Matters

While the Company is not retain him. All such payments are conditional uponinvolved in any litigation as of August 31, 2020, the executionCompany may be involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. Any litigation could have a general release. Mr. Flowers resigned effective October 1, 2019 (see Note 7).material adverse effect on the Company’s business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

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.

7.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

Mr. Clifford L. Flowers, Chief Financial Officer, Secretary, TreasurerWe have evaluated subsequent events after the consolidated balance sheet date and memberthrough 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 Company’s Board of Directors, resigned his positions effective October 1, 2019. On October 3, 2019, our Board appointed Mr. Carlton Johnson Jr.accompanying consolidated financial statements or disclosure in the notes thereto other than as disclosed in the Interim Chief Financial Officer on an interim basis. There were no known disagreements with Mr. Flowers regarding our operations, policies or practices.

In connection with his departure, Mr. Flowers entered into a Separation Agreement and General Release of All Claims as of with the Company (the “Release”). Pursuant to the Release, Mr. Flowers is entitled to receive severance payments equal to $327,750, less all appropriate federal and state tax withholding, which will be made in seven equal installments on the 30th of each month commencing on October 30, 2019 and ending April 30, 2020. The payments under the Release are in lieu of any rights under the employment agreement between Mr. Flowers and the Company. The Release also contains a mutual general release, confidentiality, non-disparagement and other covenants and agreements.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.

THE FOLLOWING DISCUSSION AND THE REST OF THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS"

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.. SEE ALSO OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 2019.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.

OverviewCautionary Note Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements 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 June 2005,addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please see Part II, Item 1A. Risk Factors for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur for the full fiscal year or any other future period.

Any forward-looking statements in this Quarterly Report reflect our 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 involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we entered into a series of agreements with TPL and othersassume no obligation to facilitateupdate or revise these forward-looking statements for any reason, even if new information becomes available in the pursuit of unlicensed usersfuture.

We qualify all of our intellectual property. Over the yearsforward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we TPL and TPL’s affiliate, Alliacense, have entered into various agreements regarding licensing and litigation of the MMP portfolio. Pursuant to a July 2014 Novation Agreement with Alliacense PDS engaged a second licensing agent for the MMP portfolio in October 2014 and on May 11, 2015, PDS terminated Alliacense as licensing agent due to the inability of Alliacense to fulfill its obligations under the Novation Agreement. In August 2016, PDS and Alliacense entered into an agreement which requires Alliacense to: cooperate with reasonable discovery requests, provide support to litigation counsel, and deliver certain materials to PDS’s second licensing agent. Pursuant to the August 2016 agreement, MMP Licensing, LLC will provide MMP portfolio commercialization services to PDS for certain companies. PDS is currently pursuing a litigation strategy, which includes the filing of 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 forclaim the protection of our intereststhe safe harbor for forward-looking statements contained in the MMP portfolio.Private Securities Litigation Reform Act of 1995.

Management expectsAbout Mosaic

Mosaic, a Delaware 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 continuetreat and prevent cancer and infectious diseases in humans and for veterinary use.  Mosaic’s founders came together to incur significant legal expenses foradvance the continued operationdevelopment of PDS. PDS has been incurring significant costs pursuanta novel nanoparticle-based intra-tumoral immunotherapy with broad potential to its litigation activity. We could be requiredtreat 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 name change 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.Mosaic ImmunoEngineering Inc. is approved and effective.

On April 12, 2019, we entered into an agreementJuly 1, 2020, Mosaic signed a License Option Agreement with Artius Bioconsulting LLC (“Artius”),Case Western Reserve University, granting Private Mosaic the exclusive right to evaluatelicense certain technology for a period of two years.  Under the potential of establishing a systems integration company that develops a blockchain based technology platform that could be implemented throughoutLicense Option Agreement, Mosaic has exclusive right to develop and license the drug development process. We believe there is an opportunity to improve drug development through the use of blockchain, and believe blockchain technologies have the potential to be uniquely suited for creating efficiencies to improve how drugs are tested and developed, while ultimately leading to reduced costs. Pursuant to the agreement, Artius is performing research, analysis and reporting its findings in exchange for $151,000. We are anticipating receiving shortly a feasibility report with its analysis.

In the event we are required to provide funding to PDS that is not reciprocated by our joint venture partner 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.

To the extent MMP portfolio license proceeds are insufficient; we expect working capital contributions may need to be made to PDS in the future. 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 MMP licensing program that we contribute our 50% share of additional capital to PDS in the event license revenues received by PDS are insufficient.

On October 10, 2019, PDS’s cash balance was $71,009. Management’s plans for the continued operation of PDS rely on the ability of PDS to obtain license agreements to cover its operational costs. PDS has experienced a decline in licensing revenues and has not obtained significant license revenues since September 2013 and it is unclear when any additional licensing revenues may be generated.following novel platforms technologies:

Nanoparticle-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 interest to direct a protective or potentially a therapeutic immune response. This technology platform has 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 stockpiled and ready for the rapid identification of targets of interest which can be linked for testing in a shorter timeline. The MVP platform combined with the Company's proprietary delivery system which allows for self-administration and shipment of materials at room temperature makes the platform ideal for rapid response situations.

Mosaic and its research partners are actively working towards a possible lead candidate for COVID-19 while simultaneously advancing the system 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 fully 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 considered 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 included in the Company’s financial statements.

Based on the inception of Private Mosaic on March 30, 2020, the financial condition and results of operations of the Company for the periods presented in this Quarterly Report bear no relationship to the future business, financial condition and results of operations of the Company, and are not indicative of the business, financial condition and results of operations of the 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.

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:

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 100%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 preferred stockClosing Date and as of Holocom. PriorAugust 31, 2020, our investment in Holocom was valued at $0 based on various indicators of impairment, including Holocom’s inability to impairment, this investment was accounted for at cost since we did not havemeet its business plan and raise sufficient capital, in addition to the ability to exercise significant influence over the operating and financial policies of Holocom.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 are assessingassess 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.

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 August 31, 2019 and Three Months Ended August 31, 2018.

Selling, general and administrative expenses increased from approximately $203,000 for the three months ended August 31, 2018 to approximately $303,000 for the three months ended August 31, 2019. The increase consisted primarily of approximately $93,000 attributable to the Artius feasibility study.

Other income and expense for the three months ended August 31, 2019 and 2018, which includes equitycombined company will be included in the loss of affiliated company, PDS, was approximately $(39,000) and $(8,000), respectively. Our investment in PDS is accounted for in accordance with the equity method of accounting for investments. The increase in the equity in the loss of PDS is due to the increase in PDS legal costs associated with the filing of the writ of certiorari with the Supreme Court of the United States.

Loss before income taxes increased from approximately $(211,000) for the three months ended August 31, 2018 to approximately $(342,000) for the three months ended August 31, 2019 due to increases in both “Selling, general and administrative” and “Total other expense, net” as discussed above.Company’s financial statements.

Provision for income taxesThree Months Ended August 31, 2020:

DuringResearch and development expenses. Research and development expenses of $83,507 for the each of the three monthsquarter ended August 31, 2019 and August 31, 2018, we recorded a provision for income taxes2020 are related to California taxesthe recognition of $1,600.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 research information to evaluate the technology for a period of two years with an option to license the technology, provided we achieve certain research and development milestones and financial milestones, as defined in the agreement (see Note 6 to the accompanying unaudited condensed consolidated financial statements).

Net loss

Net loss increased from approximately $(213,000)General and administrative expenses. General and administrative expenses of $28,293 for the three monthsquarter ended August 31, 20182020 are primarily related to legal fees of $15,000 associated with the License Option Agreement combined with payroll and consulting fees of approximately $(343,000)$8,000 and other expenses of approximately $5,000.

Equity in loss of affiliated company. Equity in loss of affiliated company of $4,107 for the three monthsquarter ended August 31, 2019 due2020 primarily represents expenses accrued in conjunction with the winding up and dissolving of Phoenix Digital Solutions LLC. The Company has determined that the underlying patents were no longer enforceable and therefore, deemed it to increasesbe in “Selling, generalthe best interest of shareholders to dissolve the LLC and administrative” and “Total other expense, net”, as discussed above.distribute the remaining assets. In October, the Certificate of Cancellation was filed with Secretary of State of the state of Delaware.

Liquidity and Capital Resources

Liquidity

OurOn August 21, 2020, we completed our Reverse Merger with PTSC, which provided $427,971 in cash and cash equivalents and marketable security balances decreased from approximately $1,537,000 asrestricted cash and cash equivalents of May 31, 2019 to approximately $1,239,000 as$177,244. Since our inception on March 30, 2020, we have not raised any other capital. As of August 31, 2019. We also have2020, we had cash and cash equivalents of $373,378 and restricted cash and cash equivalents of approximately $199,000$177,244. Our ability to continue our operations is highly dependent on our ability to raise capital to fund future operations. We anticipate, based on currently proposed plans and $177,000 asassumptions that our cash on hand will not satisfy our operational and capital requirements through twelve months from the filing date of May 31, 2019 and August 31, 2019, respectively. Total current assets decreased from approximately $1,764,000 as of May 31, 2019 to approximately $1,502,000 as of August 31, 2019. Total current liabilities were approximately $228,000 and $265,000 as of May 31, 2019 and August 31, 2019, respectively. The change in our working capital position as of August 31, 2019 as compared with May 31, 2019 is primarily due to the inability of PDS to generate revenues and provide partnership distributions sufficient to cover our operating expenses.this quarterly report on 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% shareOur primary uses of capital to provide for PDSdate 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, including legal retainershiring additional staff (including clinical, scientific, operational, financial, and litigation related paymentsmanagement personnel) and costs associated with operating as a public company. We expect to incur substantial expenditures in the event license revenues received by PDS are insufficientforeseeable future for the development and potential commercialization of our product candidates.

We plan to meet these needs. We believe contributions to PDScontinue to fund workinglosses from operations and capital may be required.

PDS had been incurring significant third-party costs for legal fees, expert testimony, depositionsfunding needs through cash on hand and future equity and/or debt financings, as well as potential additional collaborations or strategic partnerships with 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.companies.

There are a number of uncertainties associated with our financial projections that could increase our projected expenses, which would further accelerate cash usage. Additionally, ifability to raise additional capital and 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. 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 may reducewill delay our ability to continue 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

CashNet cash used in operating activities was approximately $320,000 and $260,000 for the three monthsquarter ended August 31, 2019 and 2018, respectively. The principal components2020 consisted of the current period amount were aour net loss of approximately $343,000, and an increase in prepaid expenses and other current assets of approximately $58,000,$115,883, offset by thenon-cash items consisting of (i) equity in loss of affiliated company of approximately $44,000$4,107, (ii) the fair value of common stock issued under the License Option Agreement of $7, and an increase(iii) the fair value of derivative liability associated with anti-dilution issuance rights of $83,500. Additionally, cash used in accounts payable and accrued expenses of approximately $35,000. The principal components ofoperating activities for the prior period werequarter ended August 31, 2020 was supplemented with a net losschange in operating assets and liability of approximately $213,000, and an increase in prepaid expenses and other current assets of approximately $56,000 and a decrease in accounts payable and accrued expenses of approximately $8,000, offset by the equity in loss of affiliated company of approximately $15,000.$26,887.

Cash Flows From Investing Activities

CashNet cash provided by investing activities for the three monthsquarter ended August 31, 2019 was $250,000, attributable to2020 consisted of cash, cash equivalents, and restricted cash acquired in the net saleReverse Merger of marketable securities. No$605,215.

Cash Flows From Financing Activities

Net cash was provided or used in investingby financing activities for the three monthsquarter ended August 31, 2018.

Capital Resources2020 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 condensedissue 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 have been prepared assumingstatements.

In November 2016, the Company will continue asFASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. ASU 2016-18 requires that 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 amountsstatement of cash flows explain the change during the period in its operations. Asthe total of August 31, 2019, the Company hadcash, 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 marketable securities of approximately $1,239,000 and working capital of approximately $1,237,000. Our only significant potential sourceend-of-period total amounts shown on the statement of cash is PDS. PDS hasflows. The Company adopted this standard on March 30, 2020 (date of inception). Implementation of this guidance did not generated significant license revenues since September 2013. Therefore, our ability to continue and expand our operations is highly dependenthave a material impact 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.Company’s consolidated financial statements.

Recent Accounting PronouncementsIn 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. 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.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 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 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

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 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. This evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our EVP, 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 Securities 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 under the Exchange Act is accumulated and communicated to management, including the President and Chief Executive Officer and the 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 August 31, 2020, our management, with the participation of our President and Chief Executive Officer 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.

Risk FactorsPART II- OTHER INFORMATION

We urge youInformation pertaining to carefully considerlegal proceedings is provided in Note 8, Commitments and Contingencies, to the following discussion of risks as well as other information regardingcondensed unaudited consolidated financial statements and is incorporated by reference herein.

Investing in our common stock. We believestock involves a high degree of risk. You should consider carefully the following to berisks described below, together with our most significant risk factorsunaudited 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 the date this report is being filed. The risks and uncertainties described below are not the only ones we face. Please refer to our risk factors contained in our Form 10-K for the year ended May 31, 2019 for additional risk factors.2020 included in our Current Report on Form 8-K/A, filed with the Securities and Exchange Commission, or SEC, on October 14, 2020.

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.

Risks Related to Our Operations

We expect that we will incur significant losses over the next several 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 next several years, if and as we:

We May Be Required To Fund Our Joint Venture’s Legal Costs.

PDS has incurred significant legal costs in ongoing mattersexpect that it will be several years, if ever, before the U.S. District Courtwe have a product candidate ready for commercialization. If we are unable to advance our product candidates and the U.S. Court of Appeals for the Federal Circuit, and may ultimately be involved in proceedings before the Supreme Court of the United States. If PDS does not receive sufficient licensing revenuesbegin to pay these expenses,generate clinical data, we may be required to pay these expenses. In the event the cost of legal actions exceeds our ability to fund these efforts, our options forhave greater difficulty raising additional sources of financing may be limited.

We Have Reported Licensing Income In Prior Fiscal Years Which May Not Be Indicative Of Our Future Income.

We have entered into license agreements through our joint venture with TPL and have reported income from the joint venture for the fiscal years 2006 to 2011, 2013 to 2014 and 2016 to 2017. However, the joint venture has not generated significant licensing revenues since September 2013. Because of the uncertain nature of the negotiations that lead to license revenues, pending litigation with companies which we allege have infringedcapital on our patent portfolio, the possibility of legislative action regarding patent rights, the possible effect of new judicial interpretations of patent laws, and delays in obtaining information necessary for the successful deployment of licensing companies to represent the MMP Portfolio, we may not receive revenues from such agreements in the future consistent with amounts received in the past, and we may not receive future revenues from license agreementsfavorable terms, or at all.

We Are Dependent Upon A Joint Venture For Substantially All Of Our Income.

In June 2005, we entered into the PDS joint venture with TPL, which as a result of agreements entered into in June 2005, July 2012 and July 2014, TPL and its licensing company affiliate Alliacense had been responsible for the licensing and enforcement of our microprocessor patent portfolio. This joint venture has been the source of substantially all of our income since June 2005. Therefore, in light of the absence of significant revenue from other sources we should be regarded as highly dependent on the success or failure of licensing and settlements occurring in conjunction with existing litigation efforts.

We Have Been Involved In Multiple Disputes With Our Joint Venture Partner.

We have been involved in multiple disputes with our joint venture partner TPL and its affiliate Alliacense. During times when there are only two appointed managers of the joint venture, a deadlock can exist on important issues that may not be resolved quickly. In the event of a protracted deadlock, the joint venture may not be able to take actions when appropriate or necessary. Previously we have had to initiate formal arbitration proceedings seeking the appointment of an independent manager to the management committee of the joint venture. An independent manager is currently not in place, which may have a negative impact on the licensing program and PDS’s business.

We May Be Unsuccessful In Our Search For New Business Opportunities

We are currently in the process of evaluating the potential of establishing a systems integration company that develops a blockchain based technology platform, as well as also reviewing collaboration discussions in the arena of artificial intelligence, with early indications of potential strong synergies between these two technologies. At this stage there is no assurance this opportunity will become fully developed or be beneficial to the Company and its results of operations.

Our Joint Venture Is At Risk For Going Concern And An Inability To Meet Certain Obligations.

PDS, our joint venture with TPL, which received a going concern opinion since its May 31, 2011 financial statements, has experienced significant declines in revenues while at the same time incurring significant legal costs associated with pending litigation with companies which we allege have infringed on our patent portfolio.

PDS’s licensingWe 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 have declined over recentthat 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 development efforts will take several years to a point where PDS’s ability to make future payments is in substantial doubt unless licensing revenues substantially increaseand will require significant capital, that will dilute the ownership interest of common stockholders. A decline in the near term. In the event that PDS does not have the funds to pay one or morevalue of the aforementioned costs, we and TPL must decide whetherCompany could also cause stockholders to contribute additional capital to PDS to fund such payments. In the event TPL is unwillinglose all or unable to contribute additional capital, we may be required to pay these expenses without any contribution from TPL. 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 statementspart of their investment.

Our auditors have expressed substantial doubt about our ability to continue as a 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 are early in our development efforts and have only two drug candidates in preclinical development.

IfWe currently do not have any products that have gained regulatory approval. Our ability to generate product revenues, which we are unable to obtain additional funding, we may have to reduce or discontinuedo 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 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. Therefore,is substantially dependent on our ability to continuesuccessfully complete the development of and expandobtain regulatory approval for 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. 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 uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.product candidates.

We Have Identified A Significant Deficiency In Internal Control Over Financial Reporting, If We Fail To Maintain Effective Internal Controls Over Financial Reporting, The Price Of Our Common Stock May Be Adversely Affected.

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 is a deficiency, or a combination of deficiencies, in internal control over financial reporting, that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting. Although we are unable to remediate the significant deficiency with current personnel, we are mitigating its potential impact, primarily through greater involvement ofcommercialize our Board of Directors in the reviewtwo product candidates, and monitoring of financial transaction processing and reporting.our business will suffer.

Our Microprocessor Patents Have Expired.short operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

We are an early development stage biotechnology company formed on March 30, 2020. Our ongoing operations to date have been limited to organizing the Company, business planning, acquiring rights to license the technology, identifying potential product candidates, and undertaking preclinical studies in collaboration with our external researchers under approved grants. In addition, we have limited human resources to help us achieve our goals. Consequently, any predictions made about our future success or viability based on our short operating history to date may not be as accurate as they could be if we had a longer and more established operating history.

In addition, as an early stage business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. To successfully market any of our product candidates, we will need to transition from a company with a clinical development focus to a company capable of supporting commercial activities. We have seven U.S., nine European, and three Japanese patents that expired between August 2009 and October 2016. While expired patents may have certain retrospective statutory benefits, their value as assets for licensing and cash generation is significantly diminished. Licensing revenues from these patents are our sole source of income.not be successful in such a transition.

A Successful Challenge To Our Intellectual Property Rights Could Have A Significant And Adverse Effect On Us.

A successful challenge to our ownershipBusiness interruptions resulting from the coronavirus disease (COVID-19) outbreak or similar public health crises could cause a disruption of the development of our technology or the proprietary nature of our intellectual property could materially damage our business prospects. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality proceduresproduct candidates and licensing arrangements to protect our intellectual property rights. With respect to our core technologies, our patents have expired. Any issued patent may be challenged and invalidated. Any claims allowed from existing patents may not be of sufficient scope or strength to provide significant protection. Our competitors may also be able to design around our patents.

Vigorous protection and pursuit of intellectual property rights or positions characterize the fiercely competitive semiconductor industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors and others may assert that our technologies infringe on their patents or proprietary rights. Persons we believe are infringing our patents are likely to vigorously defend their actions and assert that our patents are invalid. Problems with patents or other rights could result in significant costs, and limit future license revenue. If infringement claims against us are deemed valid or if our infringement claims are successfully opposed, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims. From time to time parties have petitioned the USPTO to re-examine certain of our patents. An adverse decision in litigation or in the re-examination process could have a very significant and adverse effect onadversely impact our business.

We are partyPublic health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a new strain of coronavirus surfaced in Wuhan, China and has reached multiple other regions and countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic continues to a lawsuit regardingevolve, and to date has led to the MMP portfolioimplementation of various mitigation responses, including government-imposed quarantines, travel restrictions and have had mixed resultsother public health safety measures, as well as leading to reported adverse impacts on healthcare resources, facilities and providers across the United States and in other countries. COVID-19 may cause delays in our litigation effortsresearch activities, and while COVID-19 has not materially affected our operations to date. See Note 6date, the extent to which COVID-19 could impact our condensed consolidated financial statementsoperations or those of our third-party partners will depend on future developments, which are highly uncertain and Part II, Item 1. “Legal Proceedings”cannot be predicted with confidence, including the duration of the outbreak, a potential vaccine, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions to contain COVID-19 or address its impact in this Report on Form 10-Kthe short and long term, among others. Timely initiation and completion of planned preclinical studies is dependent upon the availability of, for more information.

In the event that the lawsuit regarding the MMP portfolio is not resolved in our favor, PDSexample, preclinical study sites, universities researchers and investigators, regulatory agency personnel, and materials, which may be liable foradversely affected by global health matters, such as pandemics. We plan to conduct preclinical studies in geographies that are currently being affected by COVID-19. Additionally, concerns over the opposing party’s attorneys’ feeseconomic impact of COVID-19 pandemic have caused extreme volatility in financial and such outcome (or lack of an outcome) could weaken the MMP portfolioother capital markets which would have a negative effect on PDS'shas and may continue to adversely impact our stock price and our ability to procure future license revenues and, therefore, adversely affect PDS’s and our cash flows.

Changes In U.S. Patent Law Could Diminish The Value Of Patents In General, Thereby Impairing Our Ability To Protect And Assert Our Patents.access capital markets.

The Company and its subsidiaries have limited insurance for their operations and are subject to various risks of loss.

The Company and its subsidiaries carry limited directors’ and officers’ insurance with a high deductible. In addition, we do not carry general business liability insurance or other insurance applicable to our business. Successful claims against the Company would likely render us insolvent. The Company has not reserved any amounts in connection with self-insuring against any claims against the Company or its subsidiaries.

Drug development involves a lengthy and expensive process with an uncertain outcome, including failure to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States has enactedStates. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the America Invents Actproduct manufacturing of 2011, wide-ranging patent reform legislation.our product candidates.

Given the early stage of development for both product candidates, the risk of failure for both of our product candidates is high. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete formulation development for our products, conduct nonclinical trials, and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. In addition, product manufacturing and process development along with preclinical and clinical testing are all expensive activities, difficult to design and implement, and can take years to complete. The United States Supreme Court has ruledoutcome of preclinical and clinical trials is inherently uncertain. Failure can occur at any time during the development program, including during the clinical trial process. Further, the results of preclinical studies and early clinical trials of our product candidates, may not be predictive of the results of later-stage clinical trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical and clinical trials have nonetheless failed to obtain marketing approval of their products. It is impossible to predict when or if any of our product candidates will prove effective and safe in humans or will receive regulatory approval.

We may experience delays in our clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on several patent casestime, need to be redesigned or be completed on schedule, if at all. There can be no assurance that the FDA or any other foreign regulatory body will not put any of our product candidates on clinical hold in recent years, either narrowing the scopefuture. We may experience numerous unforeseen events during, or as a result of, patent protection availableclinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive, or if there are safety concerns, we may:

Product development costs will also increase if we experience delays in certain circumstancestesting or weakeningmarketing approvals. We do not know whether any of our preclinical studies or clinical trials will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the rightsexclusive right to commercialize our product candidates or may allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of patent ownersoperations. In addition, enrollment delays in certain situations. This combination of events has created uncertainty with respect toour clinical trials may result in increased development costs for our product candidates, which would cause the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts,Company to decline and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weakenlimit our ability to enforceobtain additional financing.

If serious adverse events or unacceptable side effects are identified during the development of our existing patentsproduct candidates, we may need to abandon or limit our development of some of our product candidates.

If our product candidates are associated with undesirable effects in preclinical or clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Currently unknown, drug-related side effects may be identified through further clinical studies and, patents that we might obtainas such, these possible drug-related side effects could affect patient recruitment, the ability of enrolled subjects to complete the trial, or result in potential product liability claims. Reported serious adverse events may arise and the occurrence, whatever the cause, may impact the conduct of any ongoing or future clinical trial. To date, our product candidates have not been evaluated in any human clinical studies. Any occurrences of clinically significant adverse events may harm our business, financial condition and prospects significantly.

Our business and operations would suffer in the future.event of computer system failures, cyber-attacks or deficiencies in our or related parties’ cyber security.

Given our limited operating history, we are still in the process of implementing our internal security measures. Our internal computer systems and those of current and future third parties on which we rely may fail and are vulnerable to damage from computer viruses and unauthorized access. Our information technology and other planned internal infrastructure systems, including corporate firewalls, servers, connection to the Internet, face the risk of systemic failure that could disrupt our operations. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidates or any future product candidates could be hindered or delayed. In addition, due to limited corporate infrastructure, our entire workforce is currently working remotely. This could increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication disruptions. 

We Are Dependent On A Single Law Firm To Defend And Enforce Our Intellectual Property Rights.

A single law firm has been engageddo not presently maintain insurance coverage to defend and enforce our intellectual property rights.protect against cybersecurity risks. If we procure such coverage in the future, we cannot ensure that it will be sufficient to cover any loss we may experience as a result of such cyberattacks. Any significant interruption in their services, or the loss of their services for any reason, would have a material adverse effect on our ability to defend and prosecute such lawsuits and, therefore,cyber incident could have a material adverse effect on our business, financial condition, and resultresults of operations. The law firm’s services could be disrupted for a variety of reasons, and any disruption would have a material adverse effect on our business. Our inability to engage the services of a new law firm in a timely manner could have a substantial negative effect on our business.

A Change InRisks Related to Our Relationship With PDS Could Change The Way We Account For Our Interest In The Future.Financial Position and Need for Additional Capital

Our investmentWe will need substantial additional funding. If we are unable to raise capital when needed, we would be compelled to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect our expenses to significantly increase in PDS is accountedparallel with our ongoing activities, particularly as we initiate product manufacturing to support preclinical and clinical testing, preclinical and clinical development, and eventually, if successful, seek marketing approval for, under the equity method,our product candidates. In addition, if we record as partobtain marketing approval for any of other incomeour product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. If we are unable to raise capital when needed or expenseon attractive terms, we would be forced to delay, reduce, or eliminate our share of the increasepreclinical and clinical development programs or decrease in the equity of this company in which we have invested. It is possible that, in theany future our relationships and/or our interests in or with this equity method investee could change. Such potential future changes could result in consolidation of such entity which could result in changes in our reported results.commercialization efforts.

Based upon current operating plans, our current working capital is insufficient to fund our operations for the next twelve months. We May Issue Preferred Stock, And The Terms Of Such Preferred Stock May Reduce The Value Ofwill require additional capital to support our development plans and eventually the commercialization of our product candidates, if approved, and may also need to raise additional funds to pursue other development activities related to additional product candidates. Our Common Stock.funding needs may fluctuate significantly based on several factors, including, but not limited to:

Identifying potential product candidates and conducting manufacturing and process development, preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital will cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings and/or debt financings. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity and/or debt securities, the ownership interest of common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or restricting the use of proceeds for only certain operational activities.

We are authorized to issue up to a total of 5,000,000 shares of preferred stock in onecannot be certain that additional funding will be available on acceptable terms, or more series. Our Board of Directors may determine whether to issue shares of preferred stock without further action by holders of our Common Stock.at all. If we issue shares of preferred stock, it could affect the rights or reduce the value of our Common Stock. In particular, specific rights grantedare unable to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. Ifraise additional funds when needed, we seek capital for our business, such capital may be raised through the issuance of preferred stock.

If A Large Number Of Our Shares Are Sold All At Once Or In Blocks, The Market Price Of Our Shares Would Most Likely Decline.

Most ofrequired to delay, limit, reduce or terminate our shareholders are not restricted in the price at which they can sell their shares. Shares sold at a price below the current market price at which our Common Stock is trading may cause the market price of our Common Stock to decline.product development or future commercialization efforts.

Our Common Stock Is Quoted On Thecommon stock is quoted on the OTC Pink Current Information, Which Could Adversely Affect The Market Price And Liquidity Of Our Common Stock.which could adversely affect the market price and liquidity of our common stock.

Our common stock is quoted on OTC Pink Current Information. The quotation of our shares on such marketplace may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

There can be no assurance that there will be an active market for our shares of common stock either now or in the future or that stockholders will be able to liquidate their investment or liquidate it at a price that reflects the value of the business. As a result, our stockholders may not find purchasers for our securities should they to desire to sell them.

The Market For Our Stock Is Subject To Rules Relating To Low-Priced Stockmarket for our common stock is subject to rules relating to low-priced stock (“Penny Stock”) Which May Limit Our Ability To Raise Capital.which may limit our ability to raise capital.

Our Common Stockcommon stock is currently subject to the “penny stock rules” adopted pursuant to Section 15(g) of the Exchange Act. In general, the penny stock rules apply to non-NASDAQ or non-national stock exchange companies whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade “penny stock” on behalf of persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document, quote information, broker’s commission information and rights and remedies available to investors in penny stocks. Many brokers have decided not to trade “penny stock” because of the requirements of the penny stock rules, and as a result, the number of broker-dealers willing to act as market makers in such securities is limited. The “penny stock rules,” therefore, may have an adverse impact on the market for our Common Stockcommon stock and may affect our ability to raise additional capitalcapital.

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our common stock.

The Financial Industry Regulatory Authority, or FINRA, has adopted rules requiring that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative or low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative or low-priced securities will not be suitable for at least some customers. If these FINRA requirements are applicable to us or our securities, they may make it more difficult for broker-dealers to recommend that at least some of their customers buy our common stock, which may limit the ability of our stockholders to buy and sell our common stock and could have an adverse effect on the market for and price of our common stock.

Future sales of shares by existing stockholders could cause the Company’s stock price to decline.

If existing stockholders of the Company sell, or indicate an intention to sell, substantial amounts of the Company’s common stock in the public market after the Reverse Merger, the trading price of the common stock of the combined company could decline. Pursuant to the Reverse Merger, shareholders of Private Mosaic own 90% of the fully diluted shares of common stock outstanding, on an as-converted basis. In addition, our shareholders are not restricted in the price at which they can sell their shares. Shares sold at a price below the current market price at which our common stock is trading may cause the market price of our common stock to decline.

Because the Reverse Merger resulted in an ownership change under Section 382 of the Internal Revenue Code for PTSC, PTSC’s pre-merger net operating loss carryforwards and certain other tax attributes may be subject to limitations.

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The Reverse Merger resulted in an ownership change for PTSC and, accordingly, PTSC’s net operating loss carryforwards and certain other tax attributes may be subject to limitations (or disallowance) on their use after the Reverse Merger. Additional ownership changes in the future could result in additional limitations on the Company’s post-merger net operating loss carryforwards. Consequently, even if the Company achieves profitability, it may not be able to utilize a material portion of PTSC’s, or the post-merger Company’s net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.

If we decide to do so.implement a reverse stock split, a reverse stock split could further decrease the liquidity of the shares of our common stock.

The liquidity of the shares of our common stock may be affected adversely by a reverse stock split given the reduced number of shares that will be outstanding following a reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split.

Risks Related to the Commercialization of Our Product Candidates

We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

Our Share Price Could Declinecommercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. In addition, our ability to compete may be affected in many cases by insurers or other third-party payers seeking to encourage the use of biosimilar or generic products.

Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, conducting preclinical studies, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.

We will face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

We currently have no product liability insurance coverage as our product candidates are not ready for clinical testing in patients. When we secure product liability insurance, it may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence commercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

Risks Related to Our Dependence on Third Parties

Future development collaborations may be important to us. If we are unable to enter into or maintain these collaborations, or if these collaborations are not successful, our business could be adversely affected.

For any of our product candidates, we may in the future determine to seek to collaborate with pharmaceutical and biotechnology companies for development of our product candidates. We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for any collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential development schedule or reduce the scope of research activities, or increase our expenditures and undertake discovery or nonclinical development activities at our own expense. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development activities, we may not be able to further develop our product candidates or continue to develop our product candidates, and our business may be materially and adversely affected.

If any future collaboration does not result in the successful development of products or product candidates, product candidates could be delayed, and we may need additional resources to develop product candidates. All of the risks relating to product development, regulatory approval and commercialization described in this periodic report also apply to the activities of our collaborators.

We may contract with third parties for the manufacture of our product candidates for preclinical and clinical studies and may expect to continue to do so for commercialization. This potential reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products at an acceptable cost and quality, which could delay, prevent or impair our development or commercialization efforts.

Due to our limited operations and no manufacturing facilities, we will likely utilize third parties to formulate, manufacture, package, and distribute preclinical and clinical supplies of our drug candidates. In addition, these materials are custom-made and available from only a limited number of sources. Despite drug substance and product risk management, this reliance on third parties presents a risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts. Any performance failure on the part of our future manufacturers of drug substance or drug products could delay clinical development or marketing approval.

We also expect to rely on other third parties to label, store, and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we can establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

The third parties we plan to rely on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt our clinical or commercialization activities. Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products. Additionally, macro-economic conditions may adversely affect these third parties, causing them to suffer liquidity or operational problems. If a key third-party vendor becomes insolvent or is forced to lay off workers assisting with our projects, our results and development timing could suffer.

In addition, our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. Our anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Risks Related to Our Intellectual Property

If we or Case Western Reserve University (“CWRU”) are unable to obtain and maintain intellectual property protection for technology and products under the License Option Agreement or if the scope of the intellectual property protection obtained by CWRU is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be impaired.

Our success depends in large part on our ability and CWRU’s ability to obtain and maintain patent protection in the United States, the European Union, and other countries with respect to our proprietary technology and products. We or CWRU will seek to protect our proprietary position by filing patent applications in the United States and internationally that are related to our novel technologies and product candidates. We currently heavily rely on CWRU to assist with protecting the underlying patents and patent applications under the License Option Agreement.

The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We or CWRU may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions, and under the laws of certain jurisdictions, patents or other intellectual property rights may be unavailable or limited in scope. It is also possible that we or CWRU will fail to identify patentable aspects of our discovery and preclinical development output before it is too late to obtain patent protection. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, India and China do not allow patents for methods of treating the human body. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States, the European Union, and other countries may diminish the value of the underlying patents under our License Option Agreement or narrow the scope of our patent protection.

Any inability by us or CWRU to protect adequately the underlying intellectual property covered by the License Option Agreement may have a material adverse effect on our business, operating results and financial position.

If we fail to comply with our obligations in the License Option Agreement with CWRU or other agreements under which we may license intellectual property and other rights from third parties or otherwise experience disruptions to our business relationships with our future licensors, we could lose the option to license those rights or other rights that are important to our business.

On July 1, 2020, we signed a Material Transfer, Evaluation, and Exclusive Option Agreement (“License Option Agreement”) with CWRU, granting us 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 us 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, 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.

If we fail to comply with our obligations under the License Option Agreement, or any other future agreement, we may lose the exclusivity of our License Option Agreement, and CWRU may have the right to terminate the License Option Agreement or restrict our rights, in which event we would not be able to develop or market products covered by the License Option Agreement. Additionally, any milestones and other payments associated with these future licenses will make it less profitable for us to develop our drug candidates than if we had developed the licensed technology internally.

Also, patent prosecution under the License Option Agreement is controlled by CWRU. If CWRU fails to obtain and maintain patent or other protection for the proprietary intellectual property we plan to license from them, we could lose our rights to the intellectual property or our exclusivity with respect to those rights, and our competitors could market competing products using the intellectual property. If disputes over intellectual property and other rights that we have licensed or plan to license prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.

Because competition in our industry is intense, competitors may infringe or otherwise violate our rights to patents of our licensors or other intellectual property. To counter infringement or unauthorized use, we or CWRU may be required to file infringement claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours or CWRU is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly, or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. We may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation, and any such license agreements may require us to pay royalties and other fees that could be significant. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure.

We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

A Result Of Short Sales.third party may hold intellectual property, including patent rights, that are important or necessary to the development of our products. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license from these third parties on commercially reasonable terms, or our business could be harmed, possibly materially. If we were not able to obtain a license, or we are not able to obtain a license on commercially reasonable terms, our business could be harmed, possibly materially.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability, and the ability of our collaborators, to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference or derivation proceedings before the USPTO. Third parties may assert infringement claims against us or CWRU based on existing patents or patents that may be granted in the future.

If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. Any NDAs or similar agreements entered into by the Company may not be with all relevant parties, or adequately protect the confidentiality of our trade secrets. Moreover, to the extent we enter into such agreements, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate them, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.