The following discussion and analysis of the financial condition and results of
our operations should be read together with the financial statements and related
notes of Mosaic ImmunoEngineering, Inc. included in Part I Item 1 of this
Quarterly Report on Form 10-Q and with our audited consolidated financial
statements and the related notes thereto included in our Annual Report on Form
10-KT for the seven months ended December 31, 2020.
Unless the context otherwise requires, references to the "Company," the
"combined company," "Mosaic," "we," "our," or "us" in this Quarterly Report
refer to Mosaic ImmunoEngineering, Inc. and its subsidiaries (formerly known as
Patriot Scientific Corporation). References to "PTSC" refer to Patriot
Scientific Corporation prior to the completion of the Reverse Merger and
references to "Private Mosaic" refer to privately held Mosaic ImmunoEngineering,
Inc. prior to the completion of the Reverse Merger.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report 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 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 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. Future events or our future
financial performance involves 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 assume no obligation to update or
revise these forward-looking statements for any reason, even if new information
becomes available in the future.
We qualify all of our forward-looking statements by these cautionary statements.
In addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
About Mosaic
We are a preclinical, development-stage biotechnology company focused on
developing and eventually commercializing our proprietary technology to activate
the innate immune system. Our lead product candidate, MIE-101, is based on a
naturally occurring plant virus that is non-infectious in animals and humans but
acts as strong adjuvant that activates multiple Toll-like receptors ("TLRs")
through its natural immune recognition. When injected into a tumor, MIE-101
naturally triggers the innate immune system, thereby altering the tumor
microenvironment and directing activated anti-tumor T cells to attack both the
injected tumor as well as other non-injected tumors. Published preclinical data
in leading scientific journals from our co-founders' studies and ongoing
research support the anti-tumor activity of MIE-101 as a monotherapy and have
demonstrated its ability to improve anti-tumor effects when combined with
standard cancer treatments including chemotherapy, radiation and immunotherapy.
These studies include data from multiple preclinical tumor models, veterinary
studies in companion animals with naturally occurring cancer, as well as showing
the potential to activate human immune effector cells in vitro. Our goal is to
advance MIE-101 into human and veterinary studies in 2022 if sufficient funding
becomes available.
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We are also employing this same natural adjuvant to produce modular vaccines
under our Modular Vaccine Platform ("MVP") that can prevent diseases by linking
the virus directly to target antigens of interest. In preclinical studies,
vaccination with these agents has been able to protect animals from both cancer
and infectious diseases and has shown promise against SARS-CoV-2. Our 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 preclinical testing within a few weeks. These vaccines also have a
superior cold-chain profile that would potentially allow distribution to
vaccination centers without refrigeration or freezing. The MVP platform
combined with our proprietary trans-dermal delivery system could potentially
allow for self-administration and shipment of materials at room temperature,
which makes the platform ideal for rapid response situations.
Recent Developments
Private Mosaic, a Delaware corporation, was formed on March 30, 2020. On July 1,
2020, we signed a Material Transfer, Evaluation, and Exclusive Option Agreement
("License Option Agreement") with Case Western Reserve University ("CWRU"),
granting us the exclusive right to license technology using proprietary
nanotechnology to activate the innate immune system to treat and prevent cancer
and infectious diseases in humans and for veterinary use. On August 21, 2020, we
closed a Reverse Merger transaction by and between PTSC (now known as Mosaic
ImmunoEngineering, Inc.) and Private Mosaic ("Reverse Merger"). On November 30,
2020, we filed amended and restated articles of incorporation with the Secretary
of State of the State of Delaware to change the name of the Company to Mosaic
ImmunoEngineering, Inc., to implement a 1-for-500 reverse stock split, and to
reduce the number of authorized shares of common stock from 600 million to 100
million. The reverse stock split was effective on December 2, 2020. All share
numbers and preferred stock conversion numbers included herein have been
retroactively adjusted to reflect the 1-for-500 Reverse Stock Split. On December
30, 2020, we changed our fiscal year end from May 31 to December 31.
In addition, on June 10, 2021 and June 14, 2021, our Board of Directors and
majority shareholders, respectively, approved a discretionary reverse stock
split whereby our Board of Directors have broad authority to implement a future
reverse stock split at a ratio ranging from 1-for-2 to 1-for-4 at any time on or
before June 25, 2022 in order to potentially meet the initial listing bid price
requirement and other listing regulations of the Nasdaq Stock Market or other
national exchanges. The Board believes that listing our common stock on a
national exchange will increase the liquidity of our common stock by providing
us with a market for our common stock that is more accessible than if our common
stock were to continue to trade on the OTCQB or on the "pink sheets" maintained
by the OTC Markets Group, Inc. If the Board of Directors believes that a
discretionary reverse stock split is in the best interests of the Company and
its shareholders, it will consider certain factors in selecting the specific
reverse stock split ratio, including prevailing market conditions, the trading
price of our common stock and the steps that we will need to take in order to
meet the initial listing bid price requirement and other listing regulations of
the Nasdaq Stock Market or other national exchanges. We currently do not expect
to list our securities on the Nasdaq Stock Market or other national exchange
until after we have filed our Annual Report on Form 10-K for the year ending
December 31, 2021.
Reverse Merger
On August 19, 2020, PTSC (now known as Mosaic ImmunoEngineering, Inc.) and
Private Mosaic entered into a stock purchase agreement ("Stock Purchase
Agreement"), whereby one of the wholly owned subsidiaries of PTSC merged with
and into Private Mosaic, with Private Mosaic surviving as wholly owned
subsidiary of PTSC (the "Reverse Merger"). The transaction closed on August 21,
2020 ("Closing Date") in accordance with the terms of the Stock Purchase
Agreement.
On 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
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 January 2021,
each share of Series A Preferred converted into 10.194106 shares of common stock
of the Company, pursuant to the Series A Certificate of Designation. Each share
of Series B Preferred converts into 11.46837 shares of common stock of the
Company at the sole option of the holder, possesses full voting rights, on an
as-converted basis, as the common stock of the Company 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, owned approximately 90% of the issued and
outstanding common stock of the Company as of the Closing Date.
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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 approximately 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 replaced PTSC's
historical results of operations for all periods prior to the Closing Date of
the Reverse Merger and, for all periods following the Closing Date of 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 comparative
prior year financial information and 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.
License Option Agreement
On July 1, 2020, we signed a License Option Agreement with CWRU, granting us the
exclusive right to license technology for a novel platform technology using
proprietary nanotechnology to activate the innate immune system to treat and
prevent cancer and infectious diseases in humans and for veterinary use. Under
the License Option Agreement, CWRU granted us an 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.
Under the License Option Agreement, we issued CWRU 70,000 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 September 30, 2021, the remaining Capital Threshold was approximately
$626,000.
Critical Accounting Policies and Estimates
Our unaudited 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. During the three months ended September
30, 2021, there were no significant changes in our critical accounting policies
as previously disclosed by us in Part II, Item 7 of our Transition Report on
Form 10-KT for the seven months ended December 31, 2020, other than described
below.
The Company follows ASC 480-10, "Distinguishing Liabilities from Equity" in its
evaluation of the accounting for share-settled debt. ASC 480-10-25-14 requires
liability accounting for certain financial instruments, including shares that
embody an unconditional obligation to transfer a variable number of shares,
provided that the monetary value of the obligation is based solely or
predominantly on one of the following three characteristics:
a) A fixed monetary amount known at inception;
b) Variations in something other than the fair value of the issuer's equity
shares; or
c) Variations in the fair value of the issuer's equity shares, but the monetary
value to the counterparty moves in the opposite direction as the value of the
issuer's shares
Moreover, equity classification was not an appropriate classification for the
convertible notes because the underlying terms of the convertible notes do not
expose the investors to risks and rewards similar to those of an owner and,
therefore, do not create a shareholder relationship. Pursuant to ASC 835-30, the
convertible notes were initially recorded at their amortized cost and are being
accreted to their redemption value over the estimated conversion period using
the effective interest method.
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Results of Operation
Mosaic was incorporated on March 30, 2020 (date of inception). Therefore,
limited 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 Closing
Date of the Reverse Merger, the results of operations of the combined company
are included in the Company's financial statements.
Three Months Ended September 30, 2021 and 2020:
Research and Development Expenses
Research and development expenses of approximately $440,000 for the three months
ended September 30, 2021 are primarily related to salaries and related costs for
personnel in research and development functions and related consulting fees
associated with advancing the platform technologies, including approximately
$144,000 in share-based compensation. We believe our research and development
expenses will increase significantly over time as we raise sufficient capital to
advance our programs.
Research and development expenses of approximately $220,000 for the three months
ended September 30, 2020 are related to (i) salaries and related costs for
personnel in research and development functions and related consulting fees
associated with advancing the platform technologies of approximately $137,000
and (ii) the non-cash expense to gain access to the research and development
technology of approximately $83,000 related to the recognition of the fair
market value of the Class B common stock issued under the License Option
Agreement and the estimated fair market value of the anti-dilution issuance
rights issued under the License Option Agreement.
General and Administrative Expenses
General and administrative expenses of approximately $521,000 for the three
months ended September 30, 2021 consist principally of salaries and related
costs for personnel and consultants in executive and administrative functions of
approximately $450,000, including approximately $216,000 in share-based
compensation, fees related to intellectual property rights of approximately
$25,000, audit and related fees of approximately $9,000, director and officer
insurance of approximately $13,000, investor and public relation fees of
approximately $19,000, and other fees and expenses of approximately $5,000. We
believe our general and administrative expenses will increase over time as we
hire new employees to support key administrative functions and the planned
expansion of research and development efforts.
General and administrative expenses of approximately $162,000 for the three
months ended September 30, 2020 consist principally of salaries and related
costs for personnel and consultants in executive and administrative functions of
approximately $109,000, fees for outside legal counsel of approximately $23,000,
legal fees related to intellectual property rights of approximately $9,000,
audit and related fees of approximately $10,000, director and officer insurance
of approximately $6,000, and other fees and expenses of approximately $5,000.
Nine Months Ended September 30, 2021 and Period March 30, 2020 (date of
inception) to September 30, 2020:
Research and Development Expenses
Research and development expenses of approximately $1,063,000 for the nine
months ended September 30, 2021 are primarily related to salaries and related
costs for personnel in research and development functions and related consulting
fees associated with advancing the platform technologies, including
approximately $369,000 in share-based compensation. We believe our research and
development expenses will increase significantly over time as we raise
sufficient capital to advance our programs.
Research and development expenses of approximately $220,000 for the period March
30, 2020 to September 30, 2020 are related to (i) salaries and related costs for
personnel in research and development functions and related consulting fees
associated with advancing the platform technologies of approximately $137,000
and (ii) the non-cash expense to gain access to the research and development
technology of approximately $83,000 related to the recognition of the fair
market value of the Class B common stock issued under the License Option
Agreement and the estimated fair market value of the anti-dilution issuance
rights issued under the License Option Agreement.
27
General and Administrative Expenses
General and administrative expenses of approximately $1,613,000 for the nine
months ended September 30, 2021 consist principally of salaries and related
costs for personnel and consultants in executive and administrative functions of
approximately $1,382,000, including approximately $686,000 in share-based
compensation, fees for outside legal counsel of approximately $20,000, fees
related to intellectual property rights of approximately $48,000, audit and
related fees of approximately $61,000, director and officer insurance of
approximately $41,000, investor and public relation fees of approximately
$46,000, and other fees and expenses of approximately $15,000. We believe our
general and administrative expenses will increase over time as we hire new
employees to support key administrative functions and the planned expansion of
research and development personnel.
General and administrative expenses of approximately $163,000 for the period
March 30, 2020 to September 30, 2020 consist principally of salaries and related
costs for personnel and consultants in executive and administrative functions of
approximately $109,000, fees for outside legal counsel of approximately $23,000,
legal fees related to intellectual property rights of approximately $9,000,
audit and related fees of approximately $10,000, director and officer insurance
of approximately $6,000, and other fees and expenses of approximately $6,000.
Liquidity and Capital Resources
On August 21, 2020, we completed our Reverse Merger with PTSC, which provided us
$605,215 in cash, cash equivalents, and restricted cash. During May 2021, we
raised $575,000 from the issuance of convertible notes, which included $49,997
of accrued payable to founder that was converted into convertible notes. As of
September 30, 2021, we had cash and cash equivalents of $393,121. 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
assumptions that our cash on hand will not satisfy our operational and capital
requirements through twelve months from the filing date of this quarterly report
on Form 10-Q.
Our primary uses of capital to date are primarily related to payroll, consulting
and related costs, corporate formation expenses, fees associated with the
License Option Agreement and the Reverse Merger. On a go forward basis, we will
need significant additional capital to support our research and development
efforts, compensation and related expenses, hiring additional staff (including
clinical, scientific, operational, financial, and management personnel) and
costs associated with operating as a public company. We expect to incur
substantial expenditures in the foreseeable future for the development and
potential commercialization of our product candidates, provided we are able to
raise sufficient capital to advance our technologies.
We plan to continue to fund losses from operations and future funding needs
through our cash on hand and future equity and/or debt financings, as well as
potential collaborations or strategic partnerships with other companies.
There are a number of uncertainties associated with our ability to raise
additional capital and we have no current arrangements with respect to any
additional financing. In addition, the continuation of disruptions caused by
COVID-19 may cause investors to slow down or delay their decision to deploy
capital based on volatile market conditions which will adversely impact our
ability to fund future operations. Consequently, there can be no assurance that
any additional financing on commercially reasonable terms, or at all, will be
available when needed. The inability to obtain additional capital will delay our
ability to conduct our business operations. Any additional equity financing may
involve substantial dilution to our then existing stockholders. The above
matters raise substantial doubt regarding our ability to continue as a going
concern.
Cash Flow Summary
The following table summarizes our sources and uses of cash for each of the
periods presented.
For the
Period March
Nine Months 30, 2020
Ended (inception)
September 30, to September
2021 30, 2021
Net cash used in operating activities $ (512,257 ) $ (67,988 )
Net cash provided by investing activities 27,637 605,215
Net cash provided by financing activities 525,003 63
Net increase in cash and cash equivalents $ 40,383 $ 537,290
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Cash Flows From Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2021 consisted of our net loss of $2,834,210 offset by (i) share-based
compensation expense of $1,055,007, (ii) non-cash interest on convertible notes
of $18,526, (iii) accretion to redemption value on convertible notes of
$116,305, (iv) an increase in the fair value of the derivative liability of
$20,800, (v) and a net change in operating assets and liabilities of $1,111,315
primarily due to an increase in accrued compensation and other accrued expenses
of $1,058,142.
Net cash used in operating activities for the period March 30, 2020 (inception)
to September 30, 2020 consisted of our net loss of $387,036 offset by non-cash
expenses of (i)) equity in loss of affiliated company of $4,153, (ii) the fair
value of common stock issued under the License Option Agreement of $7, and (iii)
the fair value of derivative liability associated with anti-dilution issuance
rights of $83,500. Additionally, cash used in operating activities for the
period ended September 30, 2020 was supplemented with a net change in operating
assets and liabilities of $231,388 primarily due to an increase in accrued
compensation and other accrued expenses of $262,945.
Cash Flows From Investing Activities
Net cash provided by investing activities for the nine months ended September
30, 2021 consisted of net proceeds received from the dissolution of Phoenix
Digital Solutions LLC ("PDS"), representing our 50% interest PDS.
Net cash provided by investing activities for the period March 30, 2020
(inception) to September 30, 2020 consisted of cash, cash equivalents, and
restricted cash acquired in the Reverse Merger of $605,215.
Cash Flows From Financing Activities
Net cash provided by financing activities for the nine months ended September
30, 2021 consisted of net proceeds received from the issuance of convertible
notes of $525,003, which amount excludes $49,997 that was payable to one of our
co-founders as of December 31, 2020 and invested in the convertible notes in May
2021. As of September 30, 2021, the principal amount of the convertibles notes
was $575,000.
Net cash provided by financing activities for the period March 30, 2020
(inception) to September 30, 2020 represents the proceeds received from the
founders of Private Mosaic from the issuance of Class A Common Stock.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which simplifies
the accounting for income taxes by removing certain exceptions and improving
consistent application in certain areas of Topic 740. ASU 2019-12 is effective
for fiscal years, and interim periods within those years, beginning after
December 15, 2020, however, early adoption is permitted. The Company adopted ASU
2018-13 effective January 1, 2021. Implementation of this guidance did not have
a material impact on the Company's unaudited condensed consolidated financial
statements.
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