UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended NovemberSeptember 30, 20202021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ________________________
Commission File Number 0-22182
MOSAIC IMMUNOENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-1070278 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1537 South Novato Blvd, #5, Novato, California | 94947 | |
| (Address of principal executive offices) |
| (Zip Code) |
(Registrant’s telephone number, including area code): (657) (657) 208-0890
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]Yes ☒ NO [_]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X]Yes ☒ NO [_]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated | Accelerated | |
| Non-accelerated | Smaller reporting company | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [_] ☐ NO [X] ☒
On December 29, 2020, 805,803November 1, 2021, shares of common stock, par value $0.00001 per share, were outstanding.
EXPLANATORY NOTE REGARDING THE REVERSE MERGER
Unless the context otherwise requires, references to the “Company,” the “combined company,” “Mosaic,” “we,” “our,” or “us” in this quarterly reportQuarterly Report on Form 10-Q 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 (as discussed below) and references to “Private Mosaic” refer to privately held Mosaic ImmunoEngineering, Inc. prior to the completion of the Reverse Merger.
Reverse Stock Split
Unless stated otherwise, the information contained in these consolidated financial statements gives retroactive effect to a 1-for-500 reverse stock split of the Company’s common shares effected on December 2, 2020. See Note 1 of the unaudited condensed consolidated financial statements for further information.
Reverse Merger
As reported in itsour Current Report on Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on August 24, 2020 (“Original Form 8-K”), PTSC and Private Mosaic, a Delaware corporation organized on March 30, 2020 (date of inception), entered into a stock purchase agreement (“Stock Purchase Agreement”) on August 19, 2020, whereby one of PTSC’s wholly-owned subsidiaries merged with and into Private Mosaic, with Private Mosaic surviving as the Company’s wholly owned subsidiary (the “Reverse Merger”). On August 21, 2020, the transaction closed (“Closing Date”) in accordance with the terms of the Stock Purchase Agreement. On October 14, 2020, the Company filed Amendment No. 1 to its Current Report on Form 8-K, which amends the Original Form 8-K to include the historical audited financial statements of Private Mosaic and unaudited pro forma financial statements of the combined company.
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 PTSC’sthe Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of PTSC’sthe Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). Each share of Series A Preferred convertsconverted into 10.194106 shares of Common Stock (as adjusted for the Reverse Stock Split)common stock of the Company and possesses full voting rights, on an as-converted basis, as the Common Stock of the Company, as defined inpursuant to the Series A Certificate of Designation. Each share of Series B Preferred converts into 11.46837 shares of Common Stock (as adjusted for the Reverse Stock Split)common stock of the Company, possesses full voting rights, on an as-converted basis, as the Common Stockcommon 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, ownowned 90% of the issued and outstanding Common Stockcommon stock of the combined 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 of director 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 replacereplaced 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 beare included in the Company’s financial statements. The Reverse Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.
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 on Form 10-Q 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. The Company’s future business, financial condition and results of operations will reflect the business, financial condition and results of operations of the Company and its consolidated subsidiaries.
| 1 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly reportQuarterly Report on Form 10-Q, containsincluding all documents incorporated by reference herein, includes certain forward-lookingstatements constituting “forward-looking” statements within the meaning of Section 27A of the Securities Act, of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1934,1995, including statements concerning our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results and prospects, and we rely on the “safe harbor” provisions in those laws. We are including this statement for the express purpose of availing ourselves of the protections of such safe harbors with respect to all such forward-looking statements. The forward-looking statements in this report reflect our current views with respect to future events and financial performance. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “estimates,” “may,” “could,” “should,” “would,” “will,” “shall,” “propose,” “continue,” “predict,” “plan” and similar expressions are generally intended to identify certain of the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as amended (the “Exchange Act”), andof the date made. Any forward-looking statement is not a guarantee of future performance.
These forward-looking statements are subject to certain risks and uncertainties, and actual results may differ materially from those in the safe harbor created byforward-looking statements as a result of various factors, including, but not limited to those sections. For more information, see “Partitems shown under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements.”Statements”. You should read this report completely with the understanding that our actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to publicly disclose the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
| Item 1. | Financial Statements |
Mosaic ImmunoEngineering, Inc.
Condensed Consolidated Balance Sheets
| November 30, 2020 | May 31, 2020 (1) | |||||||
| unaudited | audited | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 412,526 | $ | 500 | ||||
| Receivable from founders | – | 63 | ||||||
| Prepaid expenses and other current assets | 16,294 | – | ||||||
| Investment in affiliated company | 27,590 | – | ||||||
| Refundable income taxes | 26,078 | – | ||||||
| Total current assets | 482,488 | 563 | ||||||
| Total assets | $ | 482,488 | $ | 563 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 52,197 | $ | – | ||||
| Accrued payable to founders | 51,152 | 1,011 | ||||||
| Derivative liability | 83,500 | – | ||||||
| Accrued expenses and other | 668,571 | – | ||||||
| Total current liabilities | 855,420 | 1,011 | ||||||
| Total liabilities | 855,420 | 1,011 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $0.00001 par value; 5,000,000 shares authorized: no shares outstanding as of November 30, 2020 and May 31, 2020 | – | – | ||||||
| Series A Convertible Voting Preferred Stock; $0.00001 par value; 630,000 and no shares issued and outstanding as of November 30, 2020 and May 31, 2020, respectively | 6 | – | ||||||
| Series B Convertible Voting Preferred Stock; $0.00001 par value; 70,000 and no shares issued and outstanding as of November 30, 2020 and May 31, 2020, respectively | 1 | – | ||||||
| Class A common stock, $0.0001 par value; 900,000 shares authorized: no shares issued and outstanding as of November 30, 2020 and May 31, 2020 | – | – | ||||||
| Class B common stock, $0.0001 par value; 100,000 shares authorized: no shares issued and outstanding as of November 30, 2020 and May 31, 2020 | – | – | ||||||
| Common stock, $0.00001 par value: 100,000,000 shares authorized: 805,803 and no shares issued and outstanding at November 30, 2020 and May 31, 2020, respectively | 8 | – | ||||||
| Common stock subscribed and not yet issued | – | 63 | ||||||
| Additional paid-in capital | 374,490 | – | ||||||
| Accumulated deficit | (747,437 | ) | (511 | ) | ||||
| Total stockholders’ equity (deficit) | (372,932 | ) | (448 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 482,488 | $ | 563 | ||||
(1) Private Mosaic was incorporated on March 30, 2020.
September 30, 2021 | December 31, 2020 | |||||||
| unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 393,121 | $ | 352,738 | ||||
| Prepaid expenses and other current assets | 52,536 | 51,349 | ||||||
| Investment in affiliated company | 0 | 27,637 | ||||||
| Refundable income taxes | 0 | 26,078 | ||||||
| Total current assets | 445,657 | 457,802 | ||||||
| Total assets | $ | 445,657 | $ | 457,802 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 114,296 | $ | 86,014 | ||||
| Accrued payable to founders | 0 | 49,997 | ||||||
| Derivative liability | 104,300 | 83,500 | ||||||
| Accrued expenses and other | 1,718,974 | 660,832 | ||||||
| Total current liabilities | 1,937,570 | 880,343 | ||||||
| Convertible notes | 709,831 | 0 | ||||||
| Total liabilities | 2,647,401 | 880,343 | ||||||
| Commitments and contingencies | – | – | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $ par value; shares authorized: | ||||||||
| Series A Convertible Voting Preferred Stock; shares designated; shares and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 0 | 6 | ||||||
| Series B Convertible Voting Preferred Stock; shares designated; shares issued and outstanding as of September 30, 2021 and December 31, 2020 | 1 | 1 | ||||||
| Common stock, $par value: shares authorized: and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 72 | 8 | ||||||
| Additional paid-in capital | 1,475,147 | 420,198 | ||||||
| Accumulated deficit | (3,676,964 | ) | (842,754 | ) | ||||
| Total stockholders’ deficit | (2,201,744 | ) | (422,541 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 445,657 | $ | 457,802 | ||||
See accompanying notes to unaudited condensed consolidated financial statements
Mosaic ImmunoEngineering, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | For the Period March 30, 2020(1) to September 30, 2020 | |||||||||||||||||||||
| Three Months Ended November 30, 2020 (1) | Six Months Ended November 30, 2020 (1) | |||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Research and development | $ | 252,147 | $ | 335,654 | $ | 439,926 | $ | 220,083 | $ | 1,062,841 | $ | 220,083 | ||||||||||||
| General and administrative | 376,313 | 404,613 | 521,131 | 162,344 | 1,613,366 | 162,855 | ||||||||||||||||||
| Total operating expenses | 628,460 | 740,267 | 961,057 | 382,427 | 2,676,207 | 382,938 | ||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest income | 59 | 90 | 12 | 55 | 28 | 55 | ||||||||||||||||||
| Change in valuation of derivative liability | 0 | 0 | (20,800 | ) | 0 | |||||||||||||||||||
| Non-cash interest expense on convertible notes | (11,595 | ) | 0 | (18,526 | ) | 0 | ||||||||||||||||||
| Equity in loss of affiliated company | (1,042 | ) | (5,149 | ) | 0 | (4,153 | ) | 0 | (4,153 | ) | ||||||||||||||
| Accretion to redemption value on convertible notes | (75,303 | ) | 0 | (116,305 | ) | 0 | ||||||||||||||||||
| Total other expense, net | (983 | ) | (5,059 | ) | (86,886 | ) | (4,098 | ) | (155,603 | ) | (4,098 | ) | ||||||||||||
| Loss before provision for income taxes | (629,443 | ) | (745,326 | ) | ||||||||||||||||||||
| Loss before income taxes | (1,047,943 | ) | (386,525 | ) | (2,831,810 | ) | (387,036 | ) | ||||||||||||||||
| Provision for income taxes | 1,600 | 1,600 | 0 | 0 | 2,400 | 0 | ||||||||||||||||||
| Net loss | $ | (631,043 | ) | $ | (746,926 | ) | $ | (1,047,943 | ) | $ | (386,525 | ) | $ | (2,834,210 | ) | $ | (387,036 | ) | ||||||
| Basic loss per common share | $ | (0.79 | ) | $ | (1.00 | ) | ||||||||||||||||||
| Diluted loss per common share | $ | (0.79 | ) | $ | (1.00 | ) | ||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.15 | ) | $ | (0.52 | ) | $ | (0.43 | ) | $ | (1.05 | ) | ||||||||||||
| Weighted average number of common shares outstanding – basic | 800,113 | 744,325 | ||||||||||||||||||||||
| Weighted average number of common shares outstanding – diluted | 800,113 | 744,325 | ||||||||||||||||||||||
| Weighted average number of common shares outstanding – basic and diluted | 7,222,403 | 743,271 | 6,540,182 | 369,627 | ||||||||||||||||||||
(1) No comparative prior year financial information included as Private Mosaic was incorporated on March 30, 2020.
| (1) | Private Mosaic was incorporated on March 30, 2020. |
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
Mosaic ImmunoEngineering, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
For the Three Months Ended September 30, 2021
| Series A Convertible | Series B Convertible Voting Preferred | Class A | Class B | Common Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
| Voting Preferred | Common Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Subscribed | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2021 | – | $ | – | 70,000 | $ | 1 | – | – | 7,228,093 | $ | 72 | $ | – | $ | 1,115,162 | $ | (2,629,021 | ) | $ | (1,513,786 | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | – | – | – | – | – | – | – | – | – | 359,985 | – | 359,985 | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | – | (1,047,943 | ) | (1,047,943 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2021 | – | $ | – | 70,000 | $ | 1 | – | – | 7,228,093 | $ | 72 | $ | – | $ | 1,475,147 | $ | (3,676,964 | ) | $ | (2,201,744 | ) | ||||||||||||||||||||||||||||||||||
| 5 |
Mosaic ImmunoEngineering Inc.For the Three Months Ended September 30, 2020
Condensed Consolidated Statement of Cash Flows
(Unaudited)
| Six Months Ended November 30, 2020 (1) | ||||
| Operating activities: | ||||
| Net loss | $ | (746,926 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||
| Equity in loss of affiliated company | 5,149 | |||
| Fair value of common stock issued under License Option Agreement | 7 | |||
| Anti-dilution rights derivative liability expense | 83,500 | |||
| Changes in operating assets and liabilities: | ||||
| Prepaid expenses and other current assets | (5,892 | ) | ||
| Accounts payable | (68,529 | ) | ||
| Accrued payable to founders | 50,141 | |||
| Accrued expenses and other | 489,298 | |||
| Net cash used in operating activities | (193,252 | ) | ||
| Investing activities: | ||||
| Net cash, cash equivalents and restricted cash acquired in Reverse Merger | 605,215 | |||
| Net cash provided by investing activities | 605,215 | |||
| Financing activities: | ||||
| Proceeds from the issuance of Class A common stock | 63 | |||
| Net cash provided by financing activities | 63 | |||
| Net increase in cash and cash equivalents | 412,026 | |||
| Cash and cash equivalents, beginning of period | 500 | |||
| Cash and cash equivalents, end of period | $ | 412,526 | ||
| Supplemental disclosure of non-cash investing activities: | ||||
| Net liabilities assumed in Reverse Merger, net of cash and restricted cash acquired | $ | (230,780 | ) | |
| Supplemental disclosure of cash flow information: | ||||
| Cash paid for income taxes | $ | – | ||
| Series A Convertible Voting Preferred | Series B Convertible Voting Preferred | Common Stock Subscribed | Class A Common Stock | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | ||||||||||||||||||||||
| Balances, June 30, 2020 (1) | – | $ | – | – | $ | – | $ | 63 | – | $ | – | |||||||||||||||||
| Issuance of Class A Common Stock to founders | – | – | – | – | (63 | ) | 630,000 | 63 | ||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | – | – | – | – | – | – | – | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | 630,000 | 6 | 70,000 | 1 | – | (630,000 | ) | (63 | ) | |||||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | |||||||||||||||||||||
| Balances, September 30, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | $ | – | – | $ | – | |||||||||||||||||
(1) No comparative prior year financial information included as Private Mosaic was incorporated on March 30, 2020.
See accompanying notes to unaudited condensed consolidated financial statements.
Class B Common Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balances, June 30, 2020 (1) | – | $ | – | – | $ | – | $ | – | $ | (511 | ) | $ | (448 | ) | ||||||||||||||
| Issuance of Class A Common Stock to founders | – | – | – | – | – | – | – | |||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | 70,000 | 7 | – | – | – | – | 7 | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | (70,000 | ) | (7 | ) | – | – | 63 | – | – | |||||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | 802,786 | 8 | 374,427 | – | 374,435 | |||||||||||||||||||||
| �� | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | (386,525 | ) | (386,525 | ) | |||||||||||||||||||
| Balances, September 30, 2020 | – | $ | – | 802,786 | $ | 8 | $ | 374,490 | $ | (387,036 | ) | $ | (12,531 | ) | ||||||||||||||
| 6 |
Mosaic ImmunoEngineering, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)Deficit
(Unaudited) (1)(Continued)
For the three months ended NovemberNine Months Ended September 30, 20202021
| Common Stock Subscribed | Class A Common Stock | Class B Common Stock | Common Stock | |||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||
| Balances, August 31, 2020 | $ | – | – | $ | – | – | $ | – | 802,786 | $ | 8 | |||||||||||||||||
| Issuance of whole shares in lieu of fractional shares from Reverse Stock Split | – | – | – | – | – | 3,017 | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | |||||||||||||||||||||
| Balances, November 30, 2020 | $ | – | – | $ | – | – | $ | – | 805,803 | $ | 8 | |||||||||||||||||
| Series A Convertible Voting Preferred | Series B Convertible Voting Preferred | Additional Paid-in | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balances, August 31, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | $ | 374,490 | $ | (116,394 | ) | $ | 258,111 | |||||||||||||||
| Issuance of whole shares in lieu of fractional shares from Reverse Stock Split | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (631,043 | ) | (631,043 | ) | |||||||||||||||||||
| Balances, November 30, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | $ | 374,490 | $ | (747,437 | ) | $ | (372,932 | ) | ||||||||||||||
| Series A Convertible Voting Preferred Stock | Series B Convertible Voting Preferred Stock | Class A Common Stock | Class B Common Stock | Common Stock | Common Stock Subscribed | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Amount | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | – | – | 805,803 | $ | 8 | – | $ | 420,198 | $ | (842,754 | ) | $ | (422,541 | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of Series A Convertible Voting Preferred Stock | (630,000 | ) | (6 | ) | – | – | – | – | 6,422,290 | 64 | – | (58 | ) | – | – | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | – | – | – | – | – | – | – | – | – | 1,055,007 | – | 1,055,007 | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | – | (2,834,210 | ) | (2,834,210 | |||||||||||||||||||||||||||||||||||||||||||
| Balances, September 30, 2021 | – | $ | – | 70,000 | $ | 1 | – | – | – | 7,228,093 | $ | 72 | – | $ | 1,475,147 | $ | (3,676,964 | ) | $ | (2,201,744 | ) | |||||||||||||||||||||||||||||||||||
| 7 |
For the Period March 30, 2020 (date of inception) to September 30, 2020
Mosaic ImmunoEngineering Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
| Series A Convertible Voting Preferred Stock | Series B Convertible Voting Preferred Stock | Common Stock Subscribed | Class A Common Stock | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | ||||||||||||||||||||||
| Balances, March 30, 2020 (1) | – | $ | – | – | $ | – | $ | – | – | $ | – | |||||||||||||||||
| Common stock subscribed and not yet issued to founders | – | – | – | – | 63 | – | – | |||||||||||||||||||||
| Issuance of Class A Common Stock to founders | – | – | – | – | (63 | ) | 630,000 | 63 | ||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | – | – | – | – | – | – | – | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | 630,000 | 6 | 70,000 | 1 | – | (630,000 | ) | (63 | ) | |||||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | |||||||||||||||||||||
| Balances, September 30, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | $ | – | – | $ | – | |||||||||||||||||
(Unaudited) (1)(Continued)
For the six months ended November 30, 2020
Class B Common Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balances, March 30, 2020 (1) | – | $ | – | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||||
| Common stock subscribed and not yet issued to founders | – | – | – | – | – | – | 63 | |||||||||||||||||||||
| Issuance of Class A Common Stock to founders | – | – | – | – | – | – | – | |||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | 70,000 | 7 | – | – | – | – | 7 | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | (70,000 | ) | (7 | ) | – | – | 63 | – | – | |||||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | 802,786 | 8 | 374,427 | – | 374,435 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (387,036 | ) | (387,036 | ) | |||||||||||||||||||
| Balances, September 30, 2020 | – | $ | – | 802,786 | $ | 8 | $ | 374,490 | $ | (387,036 | ) | $ | (12,531 | ) | ||||||||||||||
| Common Stock Subscribed | Class A Common Stock | Class B Common Stock | Common Stock | |||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||
| Balances, May 31, 2020 | $ | 63 | – | $ | – | – | $ | – | – | $ | – | |||||||||||||||||
| Issuance of Class A Common Stock to founders | (63 | ) | 630,000 | 63 | – | – | – | – | ||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | – | – | – | 70,000 | 7 | – | – | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | – | (630,000 | ) | (63 | ) | (70,000 | ) | (7 | ) | – | – | |||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | – | – | – | 802,786 | 8 | |||||||||||||||||||||
| Issuance of whole shares in lieu of fractional shares from Reverse Stock Split | – | – | – | – | – | 3,017 | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | |||||||||||||||||||||
| Balances, November 30, 2020 | $ | – | – | $ | – | – | $ | – | 805,803 | $ | 8 | |||||||||||||||||
| Series A Convertible Voting Preferred | Series B Convertible Voting Preferred | Additional Paid-in | Accumulated | Total Stockholders' Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balances, May 31, 2020 | – | $ | – | – | $ | – | $ | – | $ | (511 | ) | $ | (448 | ) | ||||||||||||||
| Issuance of Class A Common Stock to founders | – | – | – | – | – | – | – | |||||||||||||||||||||
| Issuance of Class B Common Stock under License Option Agreement | – | – | – | – | – | – | 7 | |||||||||||||||||||||
| Exchange of Class A and Class B Common Stock for Series A and Series B Convertible Voting Preferred Stock under Reverse Merger | 630,000 | 6 | 70,000 | 1 | 63 | – | – | |||||||||||||||||||||
| Net assets acquired under Reverse Merger | – | – | – | – | 374,427 | – | 374,435 | |||||||||||||||||||||
| Issuance of whole shares in lieu of fractional shares from Reverse Stock Split | – | – | – | – | – | – | – | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (746,926 | ) | (746,926 | ) | |||||||||||||||||||
| Balances, November 30, 2020 | 630,000 | $ | 6 | 70,000 | $ | 1 | $ | 374,490 | $ | (747,437 | ) | $ | (372,932 | ) | ||||||||||||||
(1) No comparative prior year financial information included as Private Mosaic was incorporated on March 30, 2020.
| (1) | Private Mosaic was incorporated on March 30, 2020. |
See accompanying notes to unaudited condensed consolidated financial statements.
| 8 |
Mosaic ImmunoEngineering, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30, 2021 | For the Period March 30, 2020(1) to September 30, 2020 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (2,834,210 | ) | $ | (387,036 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-based compensation | 1,055,007 | 0 | ||||||
| Equity in loss of affiliated company | 0 | 4,153 | ||||||
| Fair value of common stock issued under License Option Agreement | 0 | 7 | ||||||
| Anti-dilution rights derivative liability expense | 0 | 83,500 | ||||||
| Change in fair value of derivative liability | 20,800 | 0 | ||||||
| Non-cash interest on convertible notes | 18,526 | 0 | ||||||
| Accretion to redemption value on convertible notes | 116,305 | 0 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (1,187 | ) | (4,753 | ) | ||||
| Refundable income taxes | 26,078 | 0 | ||||||
| Accounts payable | 28,282 | (77,956 | ) | |||||
| Accrued payable to founders | 0 | 51,152 | ||||||
| Accrued expenses and other | 1,058,142 | 262,945 | ||||||
| Net cash used in operating activities | (512,257 | ) | (67,988 | ) | ||||
| Investing activities: | ||||||||
| Proceeds from dissolution of affiliate | 27,637 | 0 | ||||||
| Net cash, cash equivalents and restricted cash acquired in Reverse Merger | 0 | 605,215 | ||||||
| Net cash provided by investing activities | 27,637 | 605,215 | ||||||
| Financing activities: | ||||||||
| Proceeds from the issuance of convertible notes | 525,003 | 0 | ||||||
| Proceeds from the issuance of Class A common stock | 0 | 63 | ||||||
| Net cash provided by financing activities | 525,003 | 63 | ||||||
| Net increase in cash and cash equivalents | 40,383 | 537,290 | ||||||
| Cash and cash equivalents, beginning of period | 352,738 | 0 | ||||||
| Cash and cash equivalents, end of period | $ | 393,121 | $ | 537,290 | ||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Conversion of Series A Convertible Voting Preferred Stock to common stock | $ | 64 | $ | 0 | ||||
| Conversion of accrued payable to founder to convertible note | $ | 49,997 | $ | 0 | ||||
| Net liabilities assumed in Reverse Merger, net of cash and restricted cash acquired | $ | 0 | $ | 230,780 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 2,400 | $ | 0 | ||||
| (1) | Private Mosaic was incorporated on March 30, 2020. |
See accompanying notes to unaudited condensed consolidated financial statements.
| 9 |
| Mosaic ImmunoEngineering, Inc. |
Notes to Unaudited Condensed Consolidated Financial Statements
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Unless the context otherwise requires, references to the “Company,” the “combined company,” “Mosaic,” “we,” “our,” or “us” in this quarterly report on Form 10-Q 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 (as discussed below) and references to “Private Mosaic” refer to privately held Mosaic ImmunoEngineering, Inc. prior to the completion of the Reverse Merger.
1. Organization and Business
Organization
Mosaic ImmunoEngineering, Inc. (the “Company,” “combined company,” “Mosaic,” “we,” “us,” or “our”), formerly known as Patriot Scientific Corporation, is a corporation organized under Delaware law on March 24, 1992. The Company is an early-stageWe are a preclinical, development-stage biotechnology company focused on a novel platformdeveloping and eventually commercializing our proprietary technology using immunostimulatory nanotechnology-based therapeutics and vaccinesdesigned to activate the innate immune system to treat and prevent cancer and infectious diseasesdiseases. Our lead product candidate, MIE-101, is based on a naturally occurring plant virus that is non-infectious in animals and humans but has been shown to act 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 fordirecting activated anti-tumor T cells to attack both the injected tumor as well as other tumors throughout the body. Our goal is to advance MIE-101 into human and veterinary use.
On August 21, 2020, we closed a Reverse Merger transaction (as discussed below) by and between Patriot Scientific Corporation (now known as Mosaic ImmunoEngineering Inc.) and privately held Mosaic ImmunoEngineering Inc. (“Private Mosaic”). On November 30, 2020, we filed our amended and restated articles of incorporation with the Secretary of State of the State of Delaware (“Amended and Restated Certificate”) to change the name of the Company to Mosaic ImmunoEngineering Inc. (“Name Change”), to implement a 1-for-500 reverse stock split (“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.studies in 2022 if sufficient funding becomes available.
The Company has two wholly owned subsidiaries: Mosaic ImmunoEngineering Development Company (formerly referred to as Private Mosaic in connection with the Reverse Merger), a corporation organized under Delaware law on March 30, 2020 (date of inception) and Patriot Data Solutions Group, Inc., an inactive subsidiary of PTSC.
Name Change Patriot Data Solutions Group (formerly known as Crossflo Systems, Inc.) was acquired in September 2008 and was previously engaged in data-sharing services and products primarily in the public safety and government sector. During April 2012, PTSC sold substantially all of the assets in Patriot Data Solutions Group.
On November 30,August 21, 2020, upon filing our Amendedwe completed a reverse merger transaction pursuant to a stock purchase agreement by and Restated Certificate, we changed our name from Patriot Scientific Corporation tobetween PTSC (now known as Mosaic ImmunoEngineering Inc. (“Name Change”) to align our corporate name with our new strategic direction.and Private Mosaic as further described below.
Stock Purchase Agreement
On August 19, 2020, Patriot Scientific Corporation (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 Patriot Scientific Corporation merged with and into Private Mosaic, with Private Mosaic surviving as a wholly owned subsidiary of Patriot Scientific Corporation (the “Reverse Merger”) (see Note 2). The transaction closed on August 21, 2020 (“Closing Date”) in accordance with the terms of the Stock Purchase Agreement.
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On the Closing Date, Patriot Scientific Corporation acquired 100% of the issued and outstanding common stock of Private Mosaic, representingshares of its Class A common stock (“Class A Stock”) and 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 shares of Patriot Scientific Corporation’s (now known as Mosaic ImmunoEngineering, Inc.) Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received shares of Patriot Scientific Corporation’s (now known as Mosaic ImmunoEngineering, Inc.) Series B Convertible Voting Preferred Stock (“Series B Preferred”). Each share of Series A Preferred convertsconverted into shares of common stock (as adjusted for the Reverse Stock Split) of the Company and possesses full voting rights, on an as-converted basis, as the common stock of the Company as defined inpursuant to the Series A Certificate of Designation.Designation (see Note 8). Each share of Series B Preferred converts into shares of common stock (as adjusted for the Reverse Stock Split) of the Company, 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, ownowned approximately 90% of the issued and outstanding shares of common stock of the Company.Company as of the Closing Date.
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Private Mosaic was determined to be the accounting acquirer based upon the terms of the Stock Purchase Agreement and other factors including: (i) Private Mosaic stockholders owned 90% of the combined organization immediately following the Closing Date, (ii) Private Mosaic directors held a majority of board seats in the combined organization and (iii) Private Mosaic management held all key positions in the management of the combined company.
Reverse Stock Split
On October 21, 2020 and October 22, 2020, our Board of Directors and majority shareholders, respectively, approved the Reverse Stock Split of one (1) share of our common stock for every 500 shares of our common stock (“1-for-500”1-for-500”). On November 30, 2020, we filed the Amended and Restated Certificate to effect a Reverse Stock Split on December 2, 2020, whereby every 500 shares of the Company’s issued and outstanding common stock were combined into one share of its common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the par value per share of $0.00001. The accompanying unaudited condensed consolidated financial statements and notes give retroactive effect to the reverse stock split for all periods presented.
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 following chart reflects the changes inBoard believes that listing our capital structure, including the assumed conversion of Series A Preferred and Series B Preferred, following the Reverse Stock Split, including the issuance of 3,017 new shares of 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 lieuthe best interests of fractional shares under the ReverseCompany 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 Split.
| Reverse Stock Split Ratio | Shares of Common Stock Issued and Outstanding | Series A Preferred (1) | Shares of Common Stock to Be Issued Upon Conversion of Series A Preferred (1) | Series B Preferred (2) | Shares of Common Stock to Be Issued Upon Conversion of Series B Preferred (2) | Fully Diluted Shares of Common Stock Outstanding, on an as-converted basis | ||||||||||||||||||
| No split (Pre Reverse Stock Split) | 401,392,948 | 630,000 | 3,211,143,390 | 70,000 | 401,392,950 | 4,013,929,288 | ||||||||||||||||||
| 1-for-500 (Post Reverse Stock Split) | 805,803 | 630,000 | 6,422,290 | 70,000 | 802,786 | 8,030,879 | ||||||||||||||||||
_________________
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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.
Liquidity and Management’s Plans
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. At NovemberSeptember 30, 2020,2021, the Company had cash and cash equivalents of $412,526$393,121 and has not yet generated any revenues. Therefore, 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 and cash equivalents 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.
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.
| 11 |
2. Significant Accounting Policies
Basis of Presentation
In conjunction with the Reverse Merger, 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 combined company will be included in the Company’s consolidated financial statements. Since Private Mosaic was incorporated on March 30, 2020, there was no comparative prior year financial information included herein.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated.
In conjunction with the Reverse Merger, 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 combined company are included in the Company’s unaudited condensed consolidated financial statements. Since Private Mosaic was incorporated on March 30, 2020, prior year financial information covers the period March 30, 2020 (date of inception) to September 30, 2020. In addition, operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim period presented. Operating results
Segment Reporting
The Company manages its operations as a single operating segment for the threepurposes of assessing performance and six months ended November 30, 2020making operating decisions. No revenue has been generated since inception, and all tangible assets are not necessarily indicative ofheld in the results that may be expected for the fiscal year ending May 31, 2021.United States.
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Reverse Merger
On August 21, 2020, Private Mosaic completed a Reverse Merger with PTSC pursuant to which Private Mosaic merged into PTSC (see Note 1). 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 connection with the transaction and arewere recorded at their estimated acquisition date fair values as of the Closing Date, as follows:
| Schedule of assets acquired and liabilities assumed | ||||
| Cash and cash equivalents | $ | 427,971 | ||
| Restricted cash and cash equivalents | 177,244 | |||
| Refundable income taxes | 26,078 | |||
| Prepaid expenses and other current assets | 10,402 | |||
| Investment in affiliated company | 32,739 | |||
| Accounts payable, accrued expenses and other | (299,999 | ) | ||
| Net assets acquired | $ | 374,435 | ||
| Cash and cash equivalents | $ | 427,971 | ||
| Restricted cash and cash equivalents | 177,244 | |||
| Refundable income taxes | 26,078 | |||
| Prepaid expenses and other current assets | 10,402 | |||
| Investment in affiliated company | 32,739 | |||
| Accounts payable, accrued expenses and other | (299,999 | ) | ||
| Net assets acquired | $ | 374,435 |
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Cash and Cash Equivalents
We consider all highly liquid investments acquired with a maturity of three months or less from the purchase date to be cash equivalents.
Investment in Affiliated Company
We havehad a 50%50% interest in 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 earnings (loss) of affiliated company” and also is adjusted by contributions to and distributions from PDS. We review our investment in PDS to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss. On September 29, 2020, the managing members of PDS agreed to wind up and dissolve PDS as the underlying intellectual property was no longernot deemed enforceable by the managing members. In January 2021, the remaining assets of PDS were distributed to its members (see Note 4).
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents.
We invest our cash and cash equivalents primarily in money market funds. Cash and cash equivalents are maintained with high quality financial institutions, which are regularly monitored by management. At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. We perform ongoing evaluations of these financial institutions to limit our concentration of risk exposure.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts payable, accrued payable to founders, derivative liability, accrued expenses and other, and convertible notes. The carrying value of these financial instruments, except for the derivative liability and convertible notes, approximates fair value because of the immediate or short-term maturity of the instruments. We record the derivative liability at fair value (see Note 3). The convertible notes are initially recorded at their amortized cost and are being accreted to their redemption value over the estimated conversion period using the effective interest method (see Note 7).
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates in these unaudited condensed consolidated financial statements include those related to the fair value of the anti-dilution issuance rights liability (derivative liability), investment in affiliated company,the timing of conversion of the convertible notes, the provision or benefit for income taxes and the corresponding valuation allowance on deferred tax assets. In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. On an ongoing basis, the Company evaluates its estimates, judgments, and methodologies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Due to the inherent uncertainty involved in making such accounting estimates and assumptions, the actual financial statement results could differ materially from such accounting estimates and assumptions.
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Patent Costs
Patent related costs in connection with filing and prosecuting patent applications and patents filed by the Company are expensed as incurred and are classified as general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
Income (Loss) Per Share
Basic income (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.
For the three and six months ended November 30, 2020, the issuance of 7,225,076 shares of common stock upon the conversion of Series A Preferred and Series B Preferred were excluded in the calculation of diluted loss per share as the impact was anti-dilutive during periods of net loss.
In connection with an acquisition of Crossflo by PTSC, 5,690 escrow shares were issued that are contingent upon certain representations and warranties made by Crossflo. We exclude these escrow shares from the basic income (loss) per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income.
Income Taxes
We follow authoritative guidance in accounting for uncertainties in income taxes. This authoritative guidance prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance, we may only recognize tax positions that meet a “more likely than not” threshold.
We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income.
In addition, utilization of our net operating loss carryforwards 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.
| 13 |
Convertible Notes
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 | |
| 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
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WithMoreover, equity classification was not an appropriate classification for the exception of refundable income taxes, we have determined that it was more likely than not that all of our deferred tax assets will not be realized inconvertible notes because the future due to our continuing pre-tax and taxable losses in addition to the potential loss of deferred tax assets as a resultunderlying terms of the Reverse Mergerconvertible 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 (see Note 1)7). As a result of this determination, and with the exception for the aforementioned refundable income taxes, we have recorded a full valuation allowance against our deferred tax assets.
Assessment of Contingent Liabilities
We may 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.
We account for restricted stock units (“RSUs”) and other share-based awards granted under our equity compensation plan in accordance with the authoritative guidance for share-based compensation. The fair value of RSUs is measured at the grant date based on the closing market price of our common stock on the date of grant and is recognized as expense on a straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of share-based compensation expense as they occur. At September 30, 2021, there were no outstanding share-based awards with market or performance conditions.
In addition, we periodically grant RSUs to non-employee consultants, which we account for in accordance with the authoritative guidance for share-based compensation. The cost of non-employee services received in exchange for share-based awards are measured based on either the fair value of the consideration received or the fair value of the share-based award issued, whichever is more reliably measurable.
Basic income (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing our net income (loss) available to common stockholders by the sum of the weighted average number of common shares outstanding during the period, plus the potential dilutive effects of unvested RSUs and shares of common stock expected to be issued under our Series B Preferred during the period.
The Company manages its operations as a single operating segment for the purposespotential dilutive effect of assessing performance and making operating decisions. No revenue has been generated since inception, and all tangible assets are held in the United States.
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issue addressed in ASU 2016-15 that will affect the Company is classifying distributions received from equity method investments. The guidance provides an accounting policy election for classifying distributions received from equity method investments using either a cumulative earnings approach or a nature of distributions approach. The Company adopted this standard on March 30, 2020 (date of inception). The adoption did not have a material effect on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the changeunvested RSUs outstanding during the period are calculated in accordance with the totaltreasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of cash, cash equivalents,our Convertible Notes and amounts generally describedSeries A and Series B Preferred outstanding during the period is calculated using the if-converted method assuming the conversion of Convertible Notes and Series A and Series B Preferred as restricted cashof the earliest period reported or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconcilingat the beginning-of-period and end-of-period total amounts shown on the statementdate of cash flows. The Company adopted this standard on March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). 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.
issuance, if later, but are excluded if their effect is anti-dilutive.
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The following table presents common share equivalents excluded from the calculation of diluted net income (loss) per share for the three and nine months ended September 30, 2021 and the three months ended September 30, 2020 and for the period March 30, 2020 (date of inception) to September 30, 2020, as the effect of their inclusion would have been anti-dilutive during periods of net loss:
| Schedule of anti-dilutive shares | ||||||||||||||||
Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | For the Period March 30, 2020(1) to September 30, 2020 | |||||||||||||
| Convertible Notes | 241,955 | 0 | 130,283 | 0 | ||||||||||||
| Series A and Series B Preferred | 802,786 | 3,219,871 | 802,786 | 1,601,233 | ||||||||||||
| Unvested RSUs | 510,400 | 0 | 451,547 | 0 | ||||||||||||
| Total | 1,555,141 | 3,219,871 | 1,384,616 | 1,601,233 | ||||||||||||
Moreover, in connection with an acquisition of Crossflo by PTSC (see Note 1), escrow shares were issued that are contingent upon certain representations and warranties made by Crossflo. We exclude these escrow shares from the basic income (loss) per share calculations and would have included the escrowed shares in the diluted income per share calculations if we reported net income.
Recently Adopted Accounting Standards
In February 2016,December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU No. 2016-02, “Leases (Topic 842)”2019-12”), as amended, which modifies leasesimplifies the accounting for lessees to increase transparencyincome taxes by removing certain exceptions and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements (“improving consistent application in certain areas of Topic 740. ASU 2016-02”). ASU 2016-022019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2020, however, early adoption is permitted. The Company adopted ASU 2016-022018-13 effective 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.January 1, 2021. Implementation of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
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. The Company adopted ASU 2018-13 effective March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
3. Fair Value of Financial Instruments
The Company’s financial instruments consist of money market funds as well as an anti-dilution issuance rights liability pursuant to the License Option Agreement with Case Western Reserve University (“CWRU”) (see Note 6). The anti-dilution issuance rights meet the definition of a derivative under FASB’s ASC Topic 815 and the liability is carried at fair value.
Under this authoritative guidance, we are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We determine fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment or valuations by third partythird-party professionals. The three levels of inputs that we may use to measure fair value are:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
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The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy:hierarchy as of September 30, 2021 and December 31, 2020:
| Schedule of fair value of financial assets and liabilities | ||||||||||||||||
| Fair Value Measurements at September 30, 2021 Using | ||||||||||||||||
| Fair Value at September 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 393,121 | $ | 393,121 | $ | 0 | $ | 0 | ||||||||
| Total assets | $ | 393,121 | $ | 393,121 | $ | 0 | $ | 0 | ||||||||
| Liabilities: | ||||||||||||||||
| Anti-dilution issuance rights liability | $ | 104,300 | $ | 0 | $ | 0 | $ | 104,300 | ||||||||
| Total liabilities | $ | 104,300 | $ | 0 | $ | 0 | $ | 104,300 | ||||||||
| Fair Value Measurements at November 30, 2020 Using | ||||||||||||||||
| Fair Value at November 30, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 412,526 | $ | 412,526 | $ | – | $ | – | ||||||||
| – | – | |||||||||||||||
| Total assets | $ | 412,526 | $ | 412,526 | $ | – | $ | – | ||||||||
| Liabilities: | ||||||||||||||||
| Anti-dilution issuance rights liability | $ | 83,500 | $ | – | $ | – | $ | 83,500 | ||||||||
| Total liabilities | $ | 83,500 | $ | – | $ | – | $ | 83,500 | ||||||||
| Fair Value Measurements at May 31, 2020 Using | Fair Value Measurements at December 31, 2020 Using | |||||||||||||||||||||||||||||||
| Fair Value at May 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value at December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash | $ | 500 | $ | 500 | $ | – | $ | – | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 352,738 | $ | 352,738 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
| Total assets | $ | 500 | $ | 500 | $ | – | $ | – | $ | 352,738 | $ | 352,738 | $ | 0 | $ | 0 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Anti-dilution issuance rights liability | $ | 83,500 | $ | 0 | $ | 0 | $ | 83,500 | ||||||||||||||||||||||||
| Total liabilities | $ | 83,500 | $ | 0 | $ | 0 | $ | 83,500 | ||||||||||||||||||||||||
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).
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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. AtThe estimated fair value of the anti-dilution issuance rights at the date of issuance on August 21, 2020 (at inception), December 31, 2020, and as of NovemberSeptember 30, 2020, the estimated fair value of the anti-dilution issuance rights2021, was $83,500.$83,500, $83,500 and $104,300, respectively. 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.
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The primary inputs used in valuing the anti-dilution issuance rights liability at inception, December 31, 2020 and upon remeasurement at NovemberSeptember 30, 2020,2021, were as follows:
| Schedule of assumptions used | ||||||||||||||||||||
| At November 30, 2020 | At inception | At inception | December 31, 2020 | September 30, 2021 | ||||||||||||||||
| Fair value of common stock (per share) | $2.85 | $3.30 | $ | 3.30 | $ | 3.25 | $ | 1.50 | ||||||||||||
| Estimated additional shares of common stock | 40,787 | 57,462 | 57,462 | 31,353 | 85,847 | |||||||||||||||
| Expected volatility | 100% | 135% | 135% | 90% | 65% | |||||||||||||||
| Expected term (years) | 0.33 | 0.45 | ||||||||||||||||||
| Risk-free interest rate | 0.08% | 0.11% | 0.11% | 0.09% | 0.05% | |||||||||||||||
The fair value of the derivative liability was determined by management with the assistance of an independent third-party specialist. The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption. In addition, the Company incorporated the estimated number of shares, timing, and probability of future equity financings in the calculation of the anti-dilution issuance rights liability.
4. Investment in Affiliated Companies
Phoenix Digital Solutions, LLC (“PDS”)
PDS was previously formed by PTSC to pursue licensing of its intellectual property. Weproperty and we own 50%50% of the membership interests of PDS, representing $27,590 as of November 30, 2020.PDS. On September 29, 2020, the managing members of PDS agreed to wind up and dissolve PDS as the underlying intellectual property was deemed no longer enforceable. We expect that our 50% membership interest inIn January 2021, the remaining net cash on hand will approximateof $55,274 was equally distributed to its two members according to the book value at Novemberdissolution plan, of which we received proceeds of $27,637 in January 2021. There were no expenses incurred during the nine months ended September 30, 2020. PDS’s balance sheet at November 30, 2020 is as follows:
| November 30, 2020 | ||||
| (Unaudited) | ||||
| Assets: | ||||
| Cash | $ | 55,180 | ||
| Total assets | $ | 55,180 | ||
| Members’ Equity: | ||||
| Members’ equity | $ | 55,180 | ||
| Total members’ equity | $ | 55,180 | ||
2021.
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PDS’s statements of operations for the three and six months ended November 30, 2020 are as follows:
Three Months Ended November 30, 2020 | Six Months Ended November 30, 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Expenses | $ | 2,086 | $ | 10,300 | ||||
| Net loss | $ | (2,086 | ) | $ | (10,300 | ) | ||
Holocom, Inc.
We currently own 2,100,000 shares of preferred stock, representing approximately a 46% ownership interest, on an as-converted basis, in Holocom, Inc. (“Holocom”), a California corporation that manufactures products that protect information transmitted over secure networks. The shares are convertible at our option into shares of Holocom’s common stock on a one-to-one basis. The preferred stock entitles us to receive non-cumulative dividends at the per annum rate of $0.04 per share, when and if declared by the Board of Directors of Holocom, as well as a liquidation preference of $0.40 per share, plus an amount equal to all declared but unpaid dividends.
As of the Closing Date (see Note 2) and as of November 30, 2020, our investment in Holocom was valued at $0 based on various indicators of impairment, including Holocom’s inability to meet its business plan and raise sufficient capital, in addition to the general economic environment.
5. Accrued Expenses and Other Current Liabilities; Accrued Payable to Founders
Accrued expenses and other current liabilities consisted of the following as of:at September 30, 2021 and December 31, 2020:
| Schedule of accrued expenses and other current liabilities | ||||||||||||||||
| November 30, 2020 | May 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||
| Accrued compensation | $ | 424,861 | $ | – | $ | 1,120,496 | $ | 393,431 | ||||||||
| Accrued consulting | 370,000 | 40,000 | ||||||||||||||
| Crossflo acquisition liability | 177,244 | – | 177,244 | 177,244 | ||||||||||||
| Other accrued expenses | 66,466 | – | 51,234 | 50,157 | ||||||||||||
| Total accrued expenses and other current liabilities | $ | 668,571 | $ | – | $ | 1,718,974 | $ | 660,832 | ||||||||
In September 2008, PTSC acquired Patriot Data Solutions Group, Inc. formerly known as Crossflo Systems, Inc. (“PDSG”). In connection with an acquisition of Crossflo by PTSC, we have accrued $177,244 that could be payable to Crossflo investors.
Accrued Payable to Founders
At MayDecember 31, 2020, accrued payable to founders of $1,011 represents reimbursable advances to the Company to establish the Company and a bank account for operations. At November 30, 2020, accrued payable to founders of $51,152 represents advances to the Company to establish the Company and a bank account for operations plus$49,997 represented the overpayment of $49,997 in common stock subscribed. Amounts payable to founders dodid not earn interest and arewere not convertible into any other security.
During May 2021, the amount payable to founders was invested in the Company’s convertible notes (see Note 7).
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6. Licensing
6. License Option Agreement with CWRU
On July 1, 2020, we signed a Material Transfer, Evaluation, and Exclusive Option Agreement (“License Option Agreement”) with CWRU, granting the Company the exclusive right to license certain technology covering immunostimulatory nanotechnology-based therapeutics and vaccines to treat and prevent cancer and infectious diseases in humans and for veterinary use.use, including MIE-101, our lead clinical candidate. 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.Threshold (see Note 2). As of NovemberSeptember 30, 2020,2021, the remaining Capital Threshold was approximately $626,000.$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, Derivatives“Derivatives and HedgingHedging” (see Note 3)3).
In addition, we are responsible for the reimbursement of all patent fees incurred by CWRU under the License Option Agreement from the effective date of the License Option Agreement. During the three and nine months ended September 30, 2021, we incurred $8,993 and $31,810, respectively, in patent legal fees associated with the License Option Agreement which are included in general and administrative expenses in the accompanying unaudited condensed consolidated financial statements. During the three months ended September 30, 2020, we incurred $9,278 in patent legal fees associated with the License Option Agreement. 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 effective 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 enterenters into a license agreement with CWRU.
License Agreements with University of California San Diego (“UC San Diego”)
During July 2021, we licensed the exclusive rights to develop and commercialize several novel vaccine candidates, including SARS-CoV-2 and other infectious disease applications from UC San Diego. Under the licensing agreement, we are obligated to pay (i) a nominal upfront license access fee, (ii) all patent costs incurred prior to the effective date of the license agreement, (iii) annual license maintenance fees, (iv) aggregate future milestone payments based on potential clinical development and regulatory milestones of up to $165,000 through Phase III development plus additional milestones upon regulatory approval in the U.S. and other countries, (v) potential sales milestones upon achieving certain sales levels, and (vi) a low single digit royalty on net sales and/or a percentage of sublicense income. During the three months ended September 30, 2021, we expensed $14,400 associated with the upfront fee and historical patent costs, of which, $500 was included in research and development expense and $13,900 was included in general and administrative expense in the accompanying unaudited condensed consolidated statement of operations.
During September 2021, we licensed the exclusive rights from UC San Diego to develop and commercialize technology that involves the loading of immuno-stimulatory molecules into plant virus protein nanoparticles, including the ability to load these molecules into MIE-101, our lead clinical candidate. These plant virus protein nanoparticles can be loaded with other Toll-like receptor (“TLR”) agonists to further tailor specific immune response parameters. Under the licensing agreement, we are obligated to pay (i) a nominal upfront license access fee, (ii) all patent costs incurred prior to the effective date of the license agreement, (iii) annual license maintenance fees, (iv) aggregate future milestone payments based on potential clinical development and regulatory milestones of up to $1,250,000 through Phase III development plus additional milestones upon regulatory approval in the U.S. and other countries, and (v) a low single digit royalty on net sales and/or a percentage of sublicense income. During the three months ended September 30, 2021, we expensed $7,360 associated with the upfront fee and historical patent costs, of which, $5,000 was included in research and development expense and $2,360 was included in general and administrative expense in the accompanying unaudited condensed consolidated statement of operations.
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7. Convertible Notes
On May 7, 2021 (“Effective Date”), we entered into a convertible note purchase agreement (“Note Agreement”) with five (5) accredited investors, including two (2) members of our Board of Directors that participated on the same terms as other accredited investors (collectively, the “Investors”). Pursuant to the Note Agreement, the Company received $525,003 in gross proceeds in addition to $49,997 in accrued payable to founder that was converted into convertible notes and the Company issued unsecured convertible promissory notes (“Convertible Notes”) in the aggregate principal amount of $575,000.
The Convertible Notes have no stated maturity date; bear interest at a simple rate equal to eight percent (8.0%) per annum until converted; and automatically convert into the same equity securities issued for cash in the Qualified Financing (as described below), or at the option of the Investors, into the same equity securities issued for cash in a Smaller Financing (as described below). Interest on the Convertible Notes will be accreted and added to the unpaid principal balance prior to conversion. During the three and nine months ended September 30, 2021, the Company recorded non-cash interest expense on Convertible Notes in the amount of $11,595 and $18,526, respectively.
The Convertible Notes will convert into the same equity securities offered in the Qualified Financing or Smaller Financing (“Conversion Shares”), as described below, at a conversion price equal to the lower of (i) the product equal to 80% times the lowest per unit purchase price of the equity securities issued for cash in the Qualified Financing or Smaller Financing, or (ii) $2.377 (“Conversion Price”). The Conversion Price may be reduced or increased proportionately as a result of stock splits, stock dividends, recapitalizations, reorganizations, and similar transactions. Upon any conversion of the Convertible Notes in connection with a Qualified Financing or a Smaller Financing, as applicable, the Convertible Notes shall convert immediately prior to the closing thereof, such that the investors paying cash in such Qualified Financing or Smaller Financing, as applicable, are not diluted by the conversion of the Convertible Notes.
Pursuant to the Note Agreement, a Qualified Financing represents a single transaction or series or transactions whereby the Company receives aggregate gross proceeds of at least $5 million from the sale of equity securities following the Effective Date (excluding proceeds from the issuance of any future Convertible Notes). A Smaller Financing represents any sale of equity securities whereby the aggregate gross proceeds are less than $5 million (excluding proceeds from the issuance of any future Convertible Notes).
In addition, in the event of a corporate transaction covering the sale of all or substantially all of the Company’s assets, or merger or consolidation with or into another entity, or change in ownership of at least 50% in voting securities of the Company, the holder of the Convertible Note may elect that either: (a) the Company pay the holder of such Convertible Note an amount equal to the sum of (i) all accrued and unpaid interest due on such Convertible Note and (ii) one and one-half (1.5) times the outstanding principal balance of such Convertible Note; or (b) such Convertible Note will convert into that number of conversion shares equal to the quotient obtained by dividing (i) the outstanding principal balance and unpaid accrued interest of such Convertible Note on the date of conversion by (ii) $2.377.
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 as we are instead using our equity shares as the currency to settle our obligation. In addition, pursuant to ASC 835-30, the Convertible Notes were initially recorded at their amortized cost of $575,000 and are being accreted to their redemption value of $718,750 over the estimated conversion period of approximately six months using the effective interest method. During the three and nine months ended September 30, 2021, the Company recorded $75,303 and $116,305, respectively, in accretion to redemption value on Convertible Notes.
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8. Stockholders’ Equity and Stock-BasedShare-Based Compensation
Stockholders’ Equity
The Company’s authorized capital consists of 100,000,000 shares of common stock, par value $0.00001 per share, and 5,000,000 shares of preferred stock, par value $0.00001 per share (“Preferred Stock”Stock”). Under the Reverse Merger (as discussed below)(see Notes 1 and 2), we designated and issued 630,000 shares of Series A Convertible Voting Preferred Stock (“Series A Preferred”) and 70,000 shares of Series AB Convertible Voting Preferred Stock.Stock (“Series B Preferred”).
Preferred Stock Issued under Reverse Merger
On the Closing Date of the Reverse Merger (see Note 1), PTSC acquired 100% of the issued and outstanding common stock of Private Mosaic, representing 630,000 shares of its Class A Stock and 70,000 shares of its Class B 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 Preferred and holders of the Class B Stock received 70,000 shares of the Company’s Series B Preferred.
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In addition, holders of the Series A Preferred and Series B Preferred have certain investor registration rights, although 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. On November 30, 2020, we filed an Amended and Restated Certificate to, among other things, 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, as previously approved by the majority stockholders, which provides sufficient authorized shares of common stock for the conversion of Series A Preferred and Series B Preferred. 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 (see Note 1).
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 SeriesClass 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 10.194106 shares of common stock of the Company (“Series A Conversion Number”). In addition, the Series A Preferred possessespossessed full voting rights prior to conversion, on an as-converted basis, as the common stock of the Company, as defined in the Series A Certificate of Designation. Furthermore, the
On January 29, 2021, 630,000 shares of Series A Preferred will automatically convertconverted into common stock of the Company upon (i) the Company filing an Amended and Restated Certificate so that the Company has a sufficient number of authorized and unissuedaggregate 6,422,290 shares of common stock so as to permit the conversion of all outstanding shares of the Series A Preferred into common stock and (ii)upon the effectiveness of anya registration statement registering the resale of the underlying shares. On November 30, 2020, we filed the Amended and Restated Certificate to permit the conversion of Series A Preferred and on December 10, 2020, we filed aThe registration statement on Form S-3 to cover the resale of the underlying shares of common stock.
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 heldwas declared effective 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.SEC on January 29, 2021.
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 SeriesClass 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 11.46837 shares of common stock of the Company (“Series B Conversion Number”). In addition, the Series B Preferred possesses full voting rights, on an as-converted basis, as the common stock of the Company, as defined in the Series B Certificate of Designation. Furthermore, the Series B Preferred does not have any mandatory conversion rights and only converts upon written notice from the holder.
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The ClassSeries B Preferred also includes certain anti-dilution rights (“anti-dilution issuance rights”), whereby the holder of ClassSeries 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 optionsequity awards issued and outstanding and reserved for issuance under a board approved employee stock option plansequity compensation plan reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company then outstanding, until we raise at least $1 million from the sale of either preferred or common stock, or a combination thereof (“Capital Threshold”). In addition, pursuant to the License Option Agreement, any net working capital acquired under a reverse merger or acquisition shall be applied against the Capital Threshold. The preliminary net working capital of PTSC on the Closing Date was approximately $374,000.$374,000 (see Note 2). As such, the remaining Capital Threshold iswas approximately $626,000 as of NovemberSeptember 30, 2020.2021. The anti-dilution issuance rights meet the definition of a derivative instrument under FASB’s ASC Topic 815 Derivatives and Hedging (see Note 3).
In the event of any Liquidation Event, the Holders of Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock, an amount per share in cash equal to the greater of (x) the stated value of $6.50 for each share of Series AB Preferred then held by the holder or (y) the amount payable per share of common stock which such holder of Series B Preferred would have received if such Holder had converted to common stock immediately prior to the Liquidation Event.
Stock-Based
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Share-Based Compensation
2020 Omnibus Incentive Plan
On October 21, 2020, we adopted our 2020 Omnibus Incentive Plan (the “2020 Plan”) and on October 22, 2020, the 2020 Plan was approved by our stockholders. The 2020 Plan was adopted to promote our long-term success and the creation of stockholder value by motivating participants, through equity incentive awards, to achieve long-term success in our business. The 2020 Plan permits the discretionary award of stock options, restricted stock, restricted stock units (“RSUs”),RSUs, and other equity awards to selected participants. Under the 2020 Plan, we have initially reserved 802,785 shares of common stock for issuance thereunder. On the first anniversary date from the adoption date of the 2020 Plan (or October 21, 2021), the number of shares of common stock reserved for issuance under the 2020 Plan shall automatically increase to 20% of the fully diluted shares of common stock outstanding, including shares of common stock reserved for issuance under convertible securities, such as the shares issuable upon the conversion of Series A and Series B Preferred, as calculated on an as-converted basis. As of September 30, 2021, we have reserved shares of common stock for issuance under the 2020 Plan, of which were subject to outstanding RSUs and shares were available for future grants of share-based awards.
The cost of all stock-basedshare-based awards will be recognized in the consolidated financial statements based on the fair value of the awards. The fair value of stock option awards will be determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards and RSUs will be equal to the closing market price of our common stock on the date of grant. The Company will generally recognize stock-basedshare-based compensation expense over the period of vesting or period that services will be provided for all time-based awards. Share-based compensation expense for the three and nine months ended September 30, 2021 was comprised of the following:
| Schedule of Share-based compensation expense | ||||||||
Three months ended September 30, 2021 | Nine months ended September 30, 2021 | |||||||
| Research and development | $ | 144,234 | $ | 369,246 | ||||
| General and administrative | 215,751 | 685,761 | ||||||
| Total | $ | 359,985 | $ | 1,055,007 | ||||
There was no share-based compensation expense recognized during the prior periods ended September 30, 2020.
The following summarizes our RSUs transaction activity for the nine months ended September 30, 2021:
| Schedule of Restricted Stock Unit Activity | ||||||||
Shares | Weighted Average Grant Date Fair Value | |||||||
| Nonvested at January 1, 2021 | 336,328 | $ | 3.30 | |||||
| Granted | 181,908 | 2.86 | ||||||
| Vested | 0 | – | ||||||
| Forfeited | 0 | – | ||||||
| Nonvested at September 30, 2021 | 518,236 | $ | 3.15 | |||||
As of NovemberSeptember 30, 2020,2021, the total estimated unrecognized compensation cost related to non-vested RSUs was approximately $. This cost is expected to be recognized over the remaining weighted average vesting period of years. As of September 30, 2021, there wereare no awards granted or outstanding under the 2020 Plan (see Note 9).vested RSUs.
8.
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9. Commitments and Contingencies
Legal Matters
While the Company is not involved in any litigation as of NovemberSeptember 30, 2020,2021, the Company 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 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.
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Indemnification
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 unaudited 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 5,690 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 Section 2.5 of the Agreement. We have evaluated the potential for loss regarding our claim and believe that it is probable that the resolution of this issue will not result in a material obligation to the Company, although there is no assurance of this. Accordingly, we have not recorded a liability for this matter.
Patent Expenses
Under the License Option Agreement (see Note 6), if we enter into a license agreement with CWRU, we would be responsible for the reimbursement of all past patent costs incurred by CWRU though the date of the License Option Agreement, which amount has been estimated to be approximately $267,000.$267,000. This amount will be expensed when the Company intends to enterenters into a license agreement with CWRU.
9. Subsequent Events
On
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10. Related Parties
During the seven months ended December 16,31, 2020, we granted an aggregatethe Company’s Board of 336,328 RSUsDirectors approved to non-employee directors, key management,enter into consulting agreements with Nicole Steinmetz, Ph.D., acting Chief Scientific Officer, Dr. Steinmetz’s spouse, and key consultantsSteve Fiering, Ph.D., each a co-founder of Private Mosaic and greater than 5% shareholder of the Company under(“Related Parties”), for their scientific contributions towards advancing the 2020 Plan. Each RSU representstechnology platforms, in the contingent rightmonthly amounts of $5,000, $2,500, and $2,500, respectively. During April 2021, we entered into consulting agreements with the Related Parties retroactive to receive, upon vesting, one shareSeptember 1, 2020. During the three and nine months ended September 30, 2021, we expensed $30,000 and $90,000, respectively, in related party consulting fees included in research and development expenses in the accompanying unaudited condensed consolidated financial statements. Pursuant to the consulting agreements, Dr. Steinmetz, her spouse, and Dr. Fiering are to be initially paid 15% of their monthly amounts up and until the Company is able to raise at least $4 million in new funding. In exchange for the deferral of consulting payments, the Company agreed to grant each of the Company’s common stock. The RSUs vest at various dates through September 1, 2022. The aggregateRelated Parties RSU’s with a fair market value onequal to 20% of their deferred cash compensation as of the closing date of grant was approximately $1,110,000the financing (the “20% Deferral”). The number of RSU’s to be granted will be calculated based on the closing price of ourthe Company’s common stock on the closing date of the financing and will vest one-year from the date of grant. There was no share-based compensation expense recorded for three and nine months ended September 30, 2021 pertaining to the 20% Deferral as the terms are unknown and are based on a future performance trigger. As of September 30, 2021, $19,500 in aggregate has been paid to the Related Parties and we have accrued $110,500 in aggregate in consulting fees provided by the Related Parties, which amount is included in accrued expenses and other in the accompanying unaudited condensed consolidated financial statements. During the three and nine months ended September 30, 2020, we accrued $10,000 in related party expenses for the Related Parties.
11. Subsequent Events
We have evaluated subsequent events after the consolidated balance sheet date and through the filing date of this Quarterly Report on Form 10-Q, and based on our evaluation, management has determined that no other subsequent events have occurred that would require recognition in the accompanying unaudited condensed consolidated financial statements or disclosure in the notes thereto other than as disclosed herein and in the accompanying notes.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 reportQuarterly 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 (as discussed below) and references to “Private Mosaic” refer to privately held Mosaic ImmunoEngineering, Inc. prior to the completion of the Reverse Merger.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidatedfinancial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited financial statements and notes thereto of Private Mosaic as of and for the period ended May 31, 2020 included in our Current Report on Form 8-K/A, filed with the Securities and Exchange Commission, or SEC, on October 14, 2020. As further described in “Note 1 – Organization and Business” and “Note 2 – Significant Accounting Policies” in this Quarterly Report, Private Mosaic was determined to be the accounting acquirer in the Reverse Merger and, accordingly, the pre-Merger historical financial information presented in this Quarterly Report reflects the standalone financial statements of Private Mosaic.
Cautionary Note Regarding Forward-Looking Statements
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 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. 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 a novel platformdeveloping and eventually commercializing our proprietary technology using immunostimulatory nanotechnology-based therapeutics and vaccines to treat and prevent cancer and infectious diseases in humans and for veterinary use. Mosaic’s founders came together to advanceactivate the development of a novel nanoparticle-based intra-tumoral immunotherapy with broad potential to treat solid cancers in both humans and companion animals.
innate immune system. Our lead oncologyproduct candidate, MI-O-101, resultedMIE-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 years of research by our 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 theseco-founders’ studies and ongoing research supports MI-O-101 anti-cancersupport the anti-tumor activity of MIE-101 as a monotherapy and has establishedhave demonstrated its ability to improve anti-tumor effects when combined with standard cancer therapiestreatments including chemotherapy, radiation and immunotherapy in a wide variety of tumor types, includingimmunotherapy. These studies include data from multiple preclinical animaltumor models, veterinary studies in companion animals with naturally occurring cancer, as well as showing the potential to activate human immune cells. MI-O-101effector cells in vitro. Our goal is currently in late-stage preclinical development with plans to advance the lead candidate towards Phase 1 asMIE-101 into human and veterinary studies in 2022 if sufficient funding becomes available.
Our
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We are also employing this same natural adjuvant to produce modular vaccines under our Modular Vaccine Platform (“MVP”) is based on combiningthat can prevent diseases by linking the same nanotechnology-based adjuvant used in immuno-oncologyvirus directly to target antigens of interest. In preclinical studies, vaccination with carefully selected targets of interest to direct a protective or potentially a therapeutic immune response. This technology platformthese agents has been successfully evaluated for effectiveness with oncologyable to protect animals from both cancer targets, oncology virus targets and recently in infectious diseases.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 inwithin a shorter timeline.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 which allowscould potentially allow for self-administration and shipment of materials at room temperature, which makes the platform ideal for rapid response situations. We
Recent Developments
Private Mosaic, a Delaware corporation, was formed on March 30, 2020. On July 1, 2020, we signed a Material Transfer, Evaluation, and our research partners are actively working towards a possible lead candidate for COVID-19 while simultaneously advancingExclusive 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 for rapid response, as well as the development of more traditional vaccine candidates into treat and prevent cancer and infectious diseases in humans and oncology.
Recent Developments
for veterinary use. On August 21, 2020, we closed a Reverse Merger transaction (as discussed below) by and between Patriot Scientific CorporationPTSC (now known as Mosaic ImmunoEngineering, Inc.) and privately heldPrivate Mosaic ImmunoEngineering Inc, (“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 (“Amended and Restated Certificate”) to change the name of the Company to Mosaic ImmunoEngineering, Inc. (“Name Change”), to implement a 1-for-500 reverse stock split, (“Reverse Stock Split”), and to reduce the number of authorized shares of common stock from 600 million to 100 million. The Reverse Stock Splitreverse 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, Patriot Scientific CorporationPTSC (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 Patriot Scientific CorporationPTSC merged with and into Private Mosaic, with Private Mosaic surviving as wholly owned subsidiary of Patriot Scientific CorporationPTSC (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, Patriot Scientific CorporationPTSC 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 Scientific Corporation’s (now known as Mosaic ImmunoEngineering Inc.)the Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of Patriot Scientific Corporation’s (now known as Mosaic ImmunoEngineering Inc.)the Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). EachIn January 2021, each share of Series A Preferred convertsconverted into 10.194106 shares of common stock (as adjusted for the Reverse Stock Split) of the Company, and possesses full voting rights, on an as-converted basis, as the common stock of the Company, as defined inpursuant to the Series A Certificate of Designation. Each share of Series B Preferred converts into 11.46837 shares of common stock (as adjusted for the Reverse Stock Split) 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, ownowned approximately 90% of the issued and outstanding common stock of the Company.
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 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 will replacereplaced 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, there is nothe 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 Material Transfer, Evaluation, and ExclusiveLicense Option Agreement (“License Option Agreement”) with Case Western Reserve University (“CWRU”),CWRU, granting the Companyus the exclusive right to license technology for a novel platform technology using immunostimulatory nanotechnology-based therapeutics and vaccinesproprietary 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 the Company theus 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, the Companywe 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 boardBoard approved employee stock option plans reserving for issuance no more than ten percent (10%) of the outstanding Common Stockcommon stock of the Company then outstanding, until we initially raise at least $1 million from the sale of either preferred or Common Stock,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 NovemberSeptember 30, 2020,2021, the remaining Capital Threshold was approximately $626,000.
Name Change
Patriot Scientific Corporation changed its name to Mosaic ImmunoEngineering Inc. on November 30, 2020 to align the Company’s corporate name with its new strategic direction, upon filing its Amended and Restated Certificate.
Reverse Stock Split
On October 21, 2020 and October 22, 2020, our Board of Directors and majority shareholders, respectively, approved the Reverse Stock Split of one (1) share of our Common Stock for every 500 shares of our Common Stock (“1-for-500”). On November 30, 2020, we filed the Amended and Restated Certificate to effect a Reverse Stock Split on December 2, 2020, whereby every 500 shares of the Company’s issued and outstanding common stock were combined into one share of its common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the par value per share of $0.00001. The following chart reflects the changes in our capital structure, including the assumed conversion of Series A Preferred and Series B Preferred, following the Reverse Stock Split, including the issuance of 3,017 new shares of common stock in lieu of fractional shares.
| Reverse Stock Split Ratio | Shares of Common Stock Issued and Outstanding | Series A Preferred (1) | Shares of Common Stock to Be Issued Upon Conversion of Series A Preferred (1) | Series B Preferred (2) | Shares of Common Stock to Be Issued Upon Conversion of Series B Preferred (2) | Fully Diluted Shares of Common Stock Outstanding, on an as-converted basis | ||||||||||||||||||
| No split (Pre Reverse Stock Split) | 401,392,948 | 630,000 | 3,211,143,390 | 70,000 | 401,392,950 | 4,013,929,288 | ||||||||||||||||||
| 1-for-500 (Post Reverse Stock Split) | 805,803 | 630,000 | 6,422,290 | 70,000 | 802,786 | 8,030,879 | ||||||||||||||||||
_________________
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. We believeDuring the followingthree months ended September 30, 2021, there were no significant changes in our critical accounting policies affect our most significant estimates and judgments usedas previously disclosed by us in the preparationPart II, Item 7 of our condensed consolidatedTransition 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 statements.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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On August 21, 2020, the Reverse Merger transaction was closed 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 connection with the transaction and are recorded at their estimated acquisition date fair values as of the Closing Date, as follows:
| Cash and cash equivalents | $ | 427,971 | ||
| Restricted cash and cash equivalents | 177,244 | |||
| Refundable income taxes | 26,078 | |||
| Prepaid expenses and other current assets | 10,402 | |||
| Investment in affiliated company | 32,739 | |||
| Accounts payable, accrued expenses and other | (299,999 | ) | ||
| Net assets acquired | $ | 374,435 |
We have a 50% interest in 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 earnings (loss) of affiliated company” and also is adjusted by contributions to and distributions from PDS. We review our investment in PDS to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss.
We currently own 2,100,000 shares of preferred stock, representing approximately a 46% ownership interest, on an as-converted basis, in Holocom, Inc. (“Holocom”), a California corporation that manufactures products that protect information transmitted over secure networks. The shares are convertible at our option into shares of Holocom’s common stock on a one-to-one basis. The preferred stock entitles us to receive non-cumulative dividends at the per annum rate of $0.04 per share, when and if declared by the Board of Directors of Holocom, as well as a liquidation preference of $0.40 per share, plus an amount equal to all declared but unpaid dividends. As of the Closing Date and as of November 30, 2020, our investment in Holocom was valued at $0 based on various indicators of impairment, including Holocom’s inability to meet its business plan and raise sufficient capital, in addition to the general economic environment.
Anti-Dilution Issuance Rights Liability
Pursuant to the Series B Preferred Certificate of Designation, the Series B Preferred includes certain anti-dilution issuance rights, whereby the holder will continue to maintain equity ownership equal to 10% of the fully diluted shares of common stock outstanding, calculated on an as converted basis, including all other convertible securities outstanding and reserved for issuance (and excluding stock options issued and outstanding and reserved for issuance under a Board approved employee stock option plan reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company) until we raise approximately $626,000 from the sale of common or preferred stock, or a combination thereof.
To determine the estimated fair value of the anti-dilution issuance rights liability, the Company used a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables. At the date of issuance on August 21, 2020 (at inception) and as of November 30, 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 November 30, 2020, were as follows:
| At November 30, 2020 | At inception | |||||||
| Fair value of common stock (per share) | $2.85 | $3.30 | ||||||
| Estimated additional shares of common stock | 40,787 | 57,462 | ||||||
| Expected volatility | 100% | 135% | ||||||
| Expected term (years) | 0.33 | 0.45 | ||||||
| Risk-free interest rate | 0.08% | 0.11% | ||||||
The fair value of the common stock was determined by management with the assistance of an independent third-party specialist. The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption. In addition, the Company incorporated the estimated number of shares, timing, and probability of future equity financings in the calculation of the anti-dilution issuance rights liability.
We follow authoritative guidance in accounting for uncertainties in income taxes. This authoritative guidance prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance, we may only recognize tax positions that meet a “more likely than not” threshold.
We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income.
In addition, utilization of our net operating loss carryforwards 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 of refundable 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 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 income taxes, we have recorded a full valuation allowance against our deferred tax assets.
We may 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 OperationsOperation
Mosaic was incorporated on March 30, 2020 (date of inception). Therefore, nolimited 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 and Six Months Ended NovemberSeptember 30, 2021 and 2020:
Research and Development Expenses
Research and development expenses of approximately $252,000$440,000 for the quarterthree months ended NovemberSeptember 30, 20202021 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.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 $336,000$220,000 for the sixthree months ended NovemberSeptember 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 $252,000$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 to the holder of the Series B Preferred in the amount of approximately $84,000. 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 tounder the License Option Agreement,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 receive rightshire new employees to materialssupport key administrative functions and research information to evaluate the technology for a periodplanned expansion of two years with an option to license the technology, provided we achieve certain research and development milestonesefforts.
General and financial milestones, as definedadministrative 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 agreement (see Note 6nine 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 accompanying unaudited condensed consolidated financial statements).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.
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General and Administrative Expenses
General and administrative expenses of approximately $376,000$1,613,000 for the threenine months ended NovemberSeptember 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 $288,000,$109,000, fees for outside legal counsel of approximately $28,000,$23,000, legal fees related to intellectual property rights of approximately $11,000,$9,000, audit and related fees of approximately $26,000,$10,000, director and officer insurance of approximately $14,000,$6,000, and other fees and expenses of approximately $9,000.$6,000.
General and administrative expenses of approximately $405,000 for the six months ended November 30, 2020 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $296,000, fees for outside legal counsel of approximately $43,000, fees related to intellectual property rights of approximately $11,000, audit and related fees of approximately $28,000, director and officer insurance of approximately $16,000, and other fees and expenses of approximately $11,000. We believe our general and administrative expenses should increase over time as we advance our programs, increase our headcount and operating activities, and as we continue to incur expenses associated with being a public company.
Equity in Loss of Affiliated Company
Equity in loss of affiliated company of approximately $1,000 and $5,000 for the three and six months ended November 30, 2020, respectively, primarily represents expenses associated with winding up and dissolving Phoenix Digital Solutions LLC. The Company has determined that the underlying patents were no longer enforceable and therefore, deemed it to be in the best interest of shareholders to dissolve Phoenix Digital Solutions LLC and distribute the remaining assets. On September 29, 2020, the managing members of PDS agreed to wind up and dissolve PDS. In October 2020, the Certificate of Cancellation was filed with Secretary of State of the state of Delaware.
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 acquired. Since our inception on March 30, 2020,cash. During May 2021, we have not raised any other capital.$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 NovemberSeptember 30, 2020,2021, we had cash and cash equivalents of $412,526.$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 corporate activities associated with 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.candidates, provided we are able to raise sufficient capital to advance our technologies.
We plan to continue to fund losses from operations and capitalfuture funding needs through our cash on hand and future equity and/or debt financings, as well as potential additional collaborations or strategic partnerships with other companies.
There are a number of uncertainties associated with our ability to raise additional capital and we have no current arrangements with respect to any additional financing. In addition, the continuation of disruptions caused by COVID-19 may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. Consequently, there can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital will delay our ability to conduct our business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. The above matters raise substantial doubt regarding our ability to continue as a going concern.
Cash Flow Summary
The following table provides a summarysummarizes our sources and uses of our net cash flow activity for each of the six months ended November 30, 2020:periods presented.
Nine Months Ended September 30, 2021 | For the Period March 30, 2020 (inception) to September 30, 2021 | |||||||||||
| Net cash used in operating activities | $ | (193,252 | ) | $ | (512,257 | ) | $ | (67,988 | ) | |||
| Net cash provided by investing activities | 605,215 | 27,637 | 605,215 | |||||||||
| Net cash provided by financing activities | 63 | 525,003 | 63 | |||||||||
| Net increase in cash and cash equivalents | $ | 412,026 | $ | 40,383 | $ | 537,290 | ||||||
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Cash Flows From Operating Activities
Net cash used in operating activities for the sixnine months ended NovemberSeptember 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 $746,926,$387,036 offset by non-cash items consistingexpenses of (i)) equity in loss of affiliated company of $5,149,$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 six monthsperiod ended NovemberSeptember 30, 2020 was supplemented with a net change in operating assets and liabilities of $465,018.$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 sixnine months ended NovemberSeptember 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 sixnine months ended NovemberSeptember 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.Common Stock.
RecentRecently Adopted Accounting PronouncementsStandards
In August 2016,December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments”2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU No. 2016-15”2019-12”)., which simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. ASU 2016-15 provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issue addressed in ASU 2016-15 that will affect the Company2019-12 is classifying distributions received from equity method investments. The guidance provides an accounting policy electioneffective for classifying distributions received from equity method investments using either a cumulative earnings approach or a nature of distributions approach.fiscal years, and interim periods within those years, beginning after December 15, 2020, however, early adoption is permitted. The Company adopted this standard on March 30, 2020 (date of inception). The adoption did not have a material effect on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on March 30, 2020 (date of inception).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.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). 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, 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 2016-02”). ASU 2016-02 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted ASU 2016-02 effective 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.
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. The Company adopted ASU 2018-13 effective March 30, 2020 (date of inception). Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate RiskAs a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this item.
Our cash and cash equivalents as of November 30, 2020 consisted of readily available cash in our 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 amounts of cash and cash equivalents at one financial institution that exceeds federally insured limits.
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| Item 4. | Controls and Procedures |
As required by Rule 13a-15(b) under the Exchange Act, as of NovemberSeptember 30, 2020,2021, 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 NovemberSeptember 30, 2020,2021, 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.
| Item 1. | Legal Proceedings |
Information pertaining to legal proceedings is provided in Note 8,9, Commitments and Contingencies, to the unaudited condensed unaudited consolidated financial statements and is incorporated by reference herein.
| Item 1A. | Risk Factors |
Investing in our common stock involves a high degree of risk. You should carefully consider carefully the risks described below, together 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 year ended May 31, 2020 includedbefore making a decision to invest in our Current Reportsecurities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on Form 8-K/A, filed with the Securitiesour business, financial condition, results of operations and Exchange Commission, or SEC, on October 14, 2020.cash flows and, in such case, our future prospects would likely be materially and adversely affected.
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 (as discussed below) 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.
Private Mosaic was formed on March 30, 2020, and therefore, we have limited operating history and we have not raised any capital other than the remaining net assets acquired under the Reverse Merger.Merger and $575,000 from the issuance of unsecured convertible promissory notes (“Convertible Notes”) in May 2021. 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:
| · | develop product manufacturing processes under the Food and Drug Administration's (“FDA’s”) current Good Manufacturing Practice regulations (“cGMP”) for each of our product candidates and enter into manufacturing supply agreements to support toxicology studies and initial Phase I clinical trials; |
| · | contract preclinical toxicology studies to support the safety of our product candidates prior to starting any human trial; |
| · | continue preclinical research and translational studies to enhance our understanding of the mechanism of action of the product candidates; |
| · | enter into collaboration arrangements with regards to product discovery and product development; |
| · | in-license our products and technologies from Case Western Reserve University and acquire rights to other technologies; |
| prepare regulatory filings, such as filing Investigational New Drug (“IND”) applications with the FDA that are required prior to starting any human clinical trial; |
| · | plan, initiate, enroll, and complete clinical trials; |
| · | maintain, expand and protect our intellectual property portfolio; |
| · | hire additional personnel to support our research, development, and administrative efforts; and |
| · | operate as a public company. |
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We expect that it will be several years, if ever, before we have a product candidate ready for commercialization. If we are unable to advance our product candidates and begin to generate clinical data, we may have greater difficulty raising capital on favorable terms, or at all. In addition, there are many risks associated with our financial position and need for additional capital, as further described below under the section titled “Risks Related to Our Financial Position and Need for Additional Capital”.
WeIf we are able to raise sufficient capital, we expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses that we incur may fluctuate significantly from quarter to quarter.quarter and year to year.
To become and remain profitable, we or a potential partner 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 all phases of 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 or a potential partner may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our development efforts will take several years and will require significant capital, that will dilute the ownership interest of common stockholders. A decline in the value of the Company could also cause stockholders to lose all or part of their investment.
Our auditors have expressed substantial doubt about our ability to continue as a going concern.
The Report of Independent Registered Public Accounting Firm on Private Mosaic’s Mayour consolidated financial statements for the transition period ended December 31, 2020 financial statements includeson Form 10-KT included an explanatory paragraph stating that the Company’s limited cash on hand and its limited operating history raises substantial doubt about its ability to continue as a going concern. The unaudited condensed unaudited consolidated financial statements for the three and nine months ended September 30, 2021 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 drugour product candidates are in preclinical development.
We currently do not have any products that have gained regulatory approval. Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates. As a result, our business is substantially dependent on our ability to successfully complete the development of and obtain regulatory approval for our product candidates.
We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the nanotechnology area. If we are unsuccessful in accomplishing the numerous and complex objectives in developing our product candidates, we may not be able to successfully develop and commercialize our two product candidates, and our business will suffer.
Our 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 university 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.
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Business interruptions resulting from the coronavirus disease (COVID-19) outbreak or similar public health crises could cause a disruption of the development of our product candidates and adversely impact our business.
Public 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 evolve, and to date has led to the implementation of various mitigation responses, including government-imposed quarantines, travel restrictions and other 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 research activities, and while COVID-19 has not materially affected our operations to date, the extent to which COVID-19 could impact our operations or those of our third-party partners will depend on future developments, which are highly uncertain and 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 the short and long term, among others. Timely initiation and completion of planned preclinical studies is dependent upon the availability of, for example, preclinical study sites, universitiesuniversity researchers and investigators, regulatory agency personnel, and materials, which may be adversely affected by global health matters, such as pandemics. We plan to conduct preclinical and eventually clinical studies in geographies that are currently being affected by COVID-19. Additionally, concerns over the economic impact of COVID-19 pandemic have caused extreme volatility in financial and other capital markets which may adversely impact our stock price and our ability to access the 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 potential 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. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the product manufacturing of 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 several years to complete. The outcome 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 planned clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on time, 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 the future. We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates. Planned clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:
| · | delay or failure in reaching agreement with the FDA, European Medicines Agency (“EMA”), or a comparable foreign regulatory authority on a trial design that we want to execute; |
| · | delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical study; |
| · | delays in reaching, or failure to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; |
| · | inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in other clinical programs; |
| · | delay or failure in recruiting and enrolling suitable subjects to participate in a trial; |
| · | delay or failure in having subjects complete a trial or return for post-treatment follow-up; |
| · | clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial; |
| · | lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical studies and increased expenses associated with the services of our contract research organizations (“CROs”) and other third parties; |
| · | clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs; |
| · | the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate; |
| · | we may experience delays or difficulties in the enrollment of patients that our product candidates are designed to target based on the inclusion and exclusion criteria; |
| · | our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all; |
| · | we may have difficulty partnering with experienced Clinical Research Organization (“CROs”) and study sites that can identify patients that our product candidates are designed to target and run our clinical trials effectively; |
| regulators or institutional review boards (“IRBs”) may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks; |
| · | the cost of clinical trials of our product candidates may be greater than we anticipate; |
| · | the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; or |
| · | there may be changes in governmental regulations or administrative actions. |
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:
| · | be delayed in obtaining marketing approval for our product candidates, if ever; |
| · | obtain approval for indications or patient populations that are not as broad as intended or desired; |
| · | obtain approval with labeling that includes significant use or distribution restrictions or safety warnings that would reduce the potential market for our products or inhibit our ability to successfully commercialize our product candidates; |
| · | be subject to additional post-marketing restrictions and/or testing requirements; or |
| · | have the product removed from the market after obtaining marketing approval. |
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Product development costs will also increase if we experience delays in testing or marketing 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 exclusive 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 operations. In addition, enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of the Company to decline and limit our ability to obtain additional financing.
If serious adverse events or unacceptable side effects are identified during the development of our product 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 in our planned clinical studies and, as 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 occurrencesoccurrence of clinically significant adverse events may harm our business, financial condition and prospects significantly.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our or third 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 do not presently maintain insurance coverage to 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 cyber incident could have a material adverse effect on our business, financial condition, and results of operations.
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.
Ensuring that we will have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles or GAAP.
In addition, we are required to be compliant with public company internal control requirements mandated under Section 302 and 906 of the Sarbanes-Oxley Act. If we are unable to successfully maintain internal controls over financial reporting, the accuracy and timing of our financial reporting, and our stock price, may be adversely affected.
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Risks Related to Our Financial Position and Need for Additional Capital
We 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 parallel with our ongoing activities, particularly as we initiate product manufacturing to support preclinical and clinical testing, preclinical studies, including toxicology studies, and clinical development, and eventually, if successful, seek marketing approval for, our product candidates. If we are unable to raise capital when needed or on attractive terms, we would be forced to further delay reduce, or eliminate our preclinical and clinical development programs or any future commercialization efforts.
Based upon current operating plans, our current working capital is insufficient to fund our operations for the next twelve months. We will 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 funding needs may fluctuate significantly based on several factors, including, but not limited to:
| · | the scope, progress, results and costs of product development and manufacture of drug product to support preclinical and clinical development of our product candidates; |
| · | the extent to which we enter into additional collaboration arrangements regarding product discovery or development; |
| · | the costs, timing and outcome of regulatory review of our product candidates; |
| · | our ability to establish additional collaborations with favorable terms, if at all; |
| · | the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval; |
| the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; |
| · | The costs to in-license our product candidates from Case Western Reserve University, and others if we acquire or in-license other products or technologies; and |
| · | revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval. |
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 cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts.
Our common stock is quoted on the OTC Pink Current Information, 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 common stock is subject to rules relating to low-priced stock (“Penny Stock”) which may limit our ability to raise capital.
Our common 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 stock and may affect our ability to raise additional capital.
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 approximately 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.
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 in immuno-oncology that are 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 commercial 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.
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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:
| · | decreased demand for any product candidates or products that we may |
| · | injury to our reputation and significant negative media attention; |
| · | withdrawal of clinical trial participants; |
| · | significant costs to defend the related litigation; |
| · | substantial monetary awards to trial participants or patients; |
| loss of revenue, if approved; |
| · |
| reduced resources of our management to pursue our business strategy; and |
| · | the inability to commercialize any products that we may develop. |
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 potential development programs, delay its potential development schedule or reduce the scope of research activities, or increase our expenditures and all 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.
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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 existing manufacturing facilities,infrastructure or capabilities, we will likelymay utilize third parties to formulate, manufacture, package, and distribute preclinical and clinical supplies of our product 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 potential 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:
| · | reliance on the third party for regulatory compliance and quality assurance; |
| · | the possible breach of the manufacturing agreement by the third party; |
| · | the possible misappropriation of our proprietary information, including our trade secrets and know-how; and |
| · | the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. |
The third parties we plan tomay 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 candidatescandidate, 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.
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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 somelimited 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. Also, examination is often lengthy and can involve numerous challenges to the claims sought. 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 usingand patent portfolios concerning certain immunostimulatory nanotechnology-based therapeutics and vaccinesformulations 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.
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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 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 licensors and 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 challenging validity before the USPTO.United States Patent and Trademark Office (“USPTO”) and/or European Patent Office (“EPO”). 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 theany 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.
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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 plan to 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.
Risks Related to Our Employee Matters, Managing Growth and Macroeconomic Conditions
Our future success depends on our ability to attract, hire, retain and motivate executives, key employees, and our general workforce.
We are highly dependent on the product development, clinical and business development expertise of the principal members of our management, scientific and clinical teams. Although we have entered into offer letters with our executives and key employees, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.
In addition, our business plan relies significantly on the continued services of our President and Chief Executive Officer, Steven King. If we were to lose his services, including through death or disability, our ability to continue to execute our business plan would be materially impaired. The Company has not entered into an employment agreement with Mr. King, or any other officer of the Company.
Recruiting and retaining qualified scientific, clinical, regulatory, and manufacturing personnel is critical to our success. Due to the small size of the Company and the limited number of employees, each of our executives and key employees serves in a critical role. The loss of the services of our executive officers or other key employees could impede the achievement of our development objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of, and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also may experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in product manufacturing, preclinical development, clinical development, regulatory strategy, and commercial strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to provide services to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our development strategy will be limited.
We expect to expand our research and development function, as well as our corporate operations, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of product manufacturing, preclinical research, clinical development, and regulatory affairs.affairs, as capital resources become available. To manage our anticipated future growth, we must also implement and improve our managerial, operational and financial systems, identify new facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
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We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.
We will incur significant legal, accounting and other expenses that Private Mosaic did not incur as a private company, including costs associated with public company reporting requirements. We will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act and rules and regulations promulgated by the SEC and national exchanges, such as Nasdaq.The OTC Markets. These rules and regulations are expected to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These rules and regulations may also make it difficult and expensive for the Company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the Company to attract and retain qualified individuals to serve on our board of directors or as executive officers of the Company, which may adversely affect investor confidence in the Company and could cause our business or stock price to suffer.
We may face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.
We may in the future become subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. Regardless of the outcome, litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.
Risks Related to Our Common Stock
Our Board of Directors has discretionary authority to implement a reverse stock split at any time on or before June 25, 2022.
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.
There are many risks associated with the reverse stock split, if implemented. Shareholders should note that the effect of the reverse stock split, if any, on the market price of our common stock cannot be accurately predicted. In particular, we cannot assure you that the price per share of our common stock after the reverse stock split will be two (2) to four (4) times, as applicable, the prices for shares of our common stock immediately prior to the reverse stock split. Furthermore, even if the market price of our common stock does rise following the reverse stock split, we cannot assure you that the market price of our common stock immediately after the proposed reverse stock split will be maintained for any period of time. Even if an increased per-share price can be maintained, the reverse stock split may not achieve the desired results to meet the initial listing standing of a national exchange. Moreover, because some investors may view the reverse stock split negatively, we cannot assure you that the reverse stock split will not adversely impact the market price of our common stock.
If the reverse stock split is effected and the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split. The total market capitalization of our common stock after implementation of the reverse stock split when and if implemented may also be lower than the total market capitalization before the reverse stock split. Furthermore, the liquidity of the common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split.
While we aim that the reverse stock split will be sufficient to obtain our listing on the Nasdaq Stock Market or other national exchange, it is possible that, even if the reverse stock split results in a bid price for the common stock that exceeds the required price per share, another reverse split may be necessary in the future and we may not be able to continue to satisfy the other criteria for continued listing of the common stock on the Nasdaq Stock Market or other national exchange.
While 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, the Board of Directors may implement the reverse stock split at any time on or before June 25, 2022.
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Our common stock is quoted on the OTCQB tier of the OTC Markets, which could adversely affect the market price and liquidity of our common stock.
Our common stock is quoted on OTCQB tier of the OTC Markets. 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.
If we fail to meet the eligibility requirements of OTCQB, we could be removed from the OTCQB which would limit the ability of broker-dealers to sell our securities in the secondary market.
The companies whose securities are quoted on the OTCQB Venture Market must maintain certain eligibility criteria, including having a minimum bid price for of $0.01, having at least 50 beneficial shareholders owning at least 100 shares of common stock, a public float of at least 10% of total issued and outstanding shares of common stock, as defined by OTC Markets, current in the payment of annual fees and certifications, among other requirements as defined by the OTC Markets, to continue to be quoted on the OTCQB. There is no guarantee that we will continue to meet OTCQB criteria to continue to have our common stock be quoted thereon. As a result, failure to be quoted on the OTCQB would cause the Company’s common stock to be quoted on the OTC Pink Open Market, which may severely adversely affect the market liquidity for our shares by limiting the ability of broker-dealers to sell such shares, and the ability of stockholders to sell their shares in the secondary market. In addition, if we are no longer quoted on the OTCQB, there can be no assurance that will meet the eligibility criteria and requalify for quotation on the OTCQB.
Although our stock is quoted on the OTCQB, we could subsequently be removed from the OTCQB if we fail to remain current with our financial reporting requirements.
Companies trading on the OTCQB must be reporting issuers under Section 12 of the Exchange Act and must be current in their reports under Section 13 in order to maintain price quotation privileges on the OTCQB. If we fail to remain current in our reporting requirements, we would be removed from the OTCQB. As a result, the market liquidity of our securities could be severely adversely affected by limiting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their securities in the secondary market.
The market for our common stock is subject to rules relating to low-priced stock (“Penny Stock”) which may limit our ability to raise capital.
Our common 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 stock and may affect our ability to raise additional capital.
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.
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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 approximately 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.
We expect our stock price to be volatile, and the market price of our common stock may drop unexpectedly.
The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biopharmaceutical, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
| · | results from preclinical testing and clinical trial results, and our ability to obtain regulatory approvals for our product candidates, and delays or failures to obtain such approvals; |
| · | issues in manufacturing our product candidates; |
| · | the entry into, or termination of, key agreements, including our License Option Agreement with CWRU and any future license agreement; |
| · | the initiation of, material developments in, or conclusion of litigation to enforce or defend any of the underlying intellectual property rights under the License Option Agreement or defend against the intellectual property rights of others; |
| announcements by competitors of new commercial products, clinical progress or the lack thereof, significant contracts, or commercial relationships; |
| · | the introduction of technological innovations or new therapies that compete with our potential products; |
| · | the loss of key employees; |
| · | general and industry-specific economic conditions that may affect our research and development expenditures; |
| · | changes in the structure of healthcare payment systems; and |
| · | issuance of new shares of common stock from raising additional capital, which may not be available on acceptable terms, or at all; and | |
| · | period-to-period fluctuations in our financial results. |
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our financial position.
Our share price could decline as a result of short sales.
When an investor sells stock that he does not own, it is known as a short sale. The seller, anticipating that the price of the stock will go down, intends to buy stock to cover his/her sale at a later date. If the price of the stock goes down, the seller will profit to the extent of the difference between the price at which he originally sold it less his later purchase price. Short sales enable the seller to profit in a down market. Short sales could place significant downward pressure on the price of our common stock. Penny stocks which do not trade on an exchange, such as our common stock, are particularly susceptible to short sales.
We may issue preferred stock, and the terms of such preferred stock may reduce the value of our common stock.
We are authorized to issue up to a total of 5,000,000 shares of preferred stock in one 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. If we issue shares of preferred stock, it could affect the rights or reduce the value of our common stock. In particular, specific rights granted 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. As we seek capital for our business, such capital may be raised through the issuance of preferred stock.
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Our executive officers, directors and principal stockholders, if they choose to act together, will have the ability to control all matters submitted to stockholders for approval.
Shareholders of Private Mosaic beneficially own shares representing approximately 90% of our capital stock, on an as-converted basis. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:
| · | delay, defer or prevent a change in control; |
| · | entrench our management and the board of directors; or |
| · | impede a merger, consolidation, takeover or other business combination involving the Company that other stockholders may desire. |
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.
Ensuring that we will have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles or GAAP.
In addition, we will be required to be compliant with public company internal control requirements mandated under Section 302 and 906 of the Sarbanes-Oxley Act. We will be implementing measures designed to improve our internal controls over financial reporting, including bringing in additional accounting resources, if necessary, and establishing new accounting and financial reporting procedures to establish an appropriate level of internal controls over financial reporting. However, we are still in the process of implementing these measures and cannot provide assurances that we will be successful in doing so. If we are unable to successfully implement internal controls over financial reporting, the accuracy and timing of our financial reporting, and our stock price, may be adversely affected and we may be unable to maintain compliance with the applicable stock exchange listing requirements.
Implementing any appropriate changes to our internal controls may distract the officers and employees of the Company, entail substantial costs to modify its existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of the internal controls of the Company, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase operating costs and harm the business. In addition, investors’ perceptions that the internal controls of the Company are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm the stock price of the Company.
We do not expect to pay any cash dividends in the foreseeable future.
We expect to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain, if any, for any stockholders for the foreseeable future.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
None.Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
Those exhibits marked with an asterisk (*) refer toThe exhibits filed herewith. The other exhibitsor furnished as part of this Quarterly Report on Form 10-Q are incorporated herein by reference, as indicated in the following list.set forth below.
| * | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: | MOSAIC IMMUNOENGINEERING, INC.
/s/ Steven King
Steven King. President and Chief Executive Officer, Director (Principal Executive Officer)
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Dated: | MOSAIC IMMUNOENGINEERING, INC.
/s/ Paul Lytle
Paul Lytle. EVP, Chief Financial Officer, Director (Principal Financial Officer and Principal Accounting Officer)
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