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MOSAIC IMMUNOENGINEERING INC.

(CPMV)
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MOSAIC IMMUNOENGINEERING : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/03/2021 | 02:53pm EST

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 body's 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 tumors throughout the body. 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 significant 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 testing in a short time. 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 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, own approximately 90% of the issued and outstanding common stock of the Company.







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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 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 June 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 June 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 June 30, 2021 and June 30, 2020:

Research and Development Expenses

Research and development expenses of approximately $377,000 for the quarter ended June 30, 2021 are 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 $184,000 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.

There were no research and development expenses incurred during the three months ended June 30, 2020.

General and Administrative Expenses

General and administrative expenses of approximately $534,000 for the three months ended June 30, 2021 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $462,000, including approximately $236,000 in share-based compensation, fees for outside legal counsel of approximately $9,000, fees related to intellectual property rights of approximately $11,000, audit and related fees of approximately $13,000, director and officer insurance of approximately $14,000, and other fees and expenses of approximately $25,000. 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 were insignificant for the three months ended June 30, 2020.

Six Months Ended June 30, 2021 and Period March 30, 2020 (date of inception) to June 30, 2020:

Research and Development Expenses

Research and development expenses of approximately $623,000 for the six months ended June 30, 2021 are 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 $225,000 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.

There were no research and development expenses incurred during the period March 30, 2020 to June 30, 2020.

General and Administrative Expenses

General and administrative expenses of approximately $1,092,000 for the six months ended June 30, 2021 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $932,000, including approximately $470,000 in share-based compensation, fees for outside legal counsel of approximately $19,000, fees related to intellectual property rights of approximately $23,000, audit and related fees of approximately $52,000, director and officer insurance of approximately $28,000, and other fees and expenses of approximately $38,000. 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 for the period March 30, 2020 to June 30, 2020 of $511 we primarily related for corporate formation costs.





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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 June 30, 2021, we had cash and cash equivalents of $582,304. 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.

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 for the Six Months Ended June 30, 2021

The following table provides a summary of our net cash flow activity for the six months ended June 30, 2021:

Net cash used in operating activities $ (323,074 ) Net cash provided by investing activities 27,637 Net cash provided by financing activities 525,003 Net increase in cash and cash equivalents $ 229,566

Cash Flows From Operating Activities

Net cash used in operating activities for the six months ended June 30, 2021 consisted of our net loss of $1,786,267 offset by (i) share-based compensation expense of $695,022, (ii) non-cash interest on convertible notes of $6,931, (iii) accretion to redemption value on convertible notes of $41,002, (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 $699,438.

Cash Flows From Investing Activities

Net cash provided by investing activities for the six months ended June 30, 2021 consisted of net proceeds received from the dissolution of Phoenix Digital Solutions LLC ("PDS"), representing our 50% interest PDS.







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Cash Flows From Financing Activities

Net cash provided by financing activities for the six months ended June 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 June 30, 2021, the principal amount of the convertibles notes was $575,000.

Cash Flow Summary for the Period Ended June 30, 2020

During the period ended June 30, 2020, net cash provided by operating activities of $500 was related to our net loss of $511 offset by an increase in accrued payable to founders of $1,011.

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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Financials (USD)
Sales 2020 - - -
Net income 2020 -1,44 M - -
Net cash 2020 0,00 M - -
P/E ratio 2020 -1,69x
Yield 2020 -
Capitalization 10,9 M 10,9 M -
EV / Sales 2019
EV / Sales 2020 -
Nbr of Employees 5
Free-Float 11,1%
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Steven W. King President, Chief Executive Officer & Director
Paul J. Lytle Chief Financial Officer, Secretary, Director & EVP
Nicole F. Steinmetz Chief Scientific Officer & Director
Gloria H. Felcyn Independent Director
Robert L. Garnick Independent Director
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