Unless the context otherwise requires, references to the "Company," the
"combined company," "Mosaic," "we," "our," or "us" in this Annual Report on Form
10-K ("Annual 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 consolidated financial
statements and related notes thereto appearing elsewhere in this Annual Report.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report, including all documents incorporated by reference herein,
includes certain statements constituting "forward-looking" statements within the
meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act
and the Private Securities Litigation Reform Act of 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 Annual 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 of the date made. Any
forward-looking statement is not a guarantee of future performance. Please see
Part I, 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
any future period. 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.
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Overview
We are a development-stage biotechnology company focused on advancing and
eventually commercializing our proprietary immunomodulator platform technology.
Our lead immunomodulator product candidate, MIE-101, is based on a naturally
occurring plant virus known as Cowpea mosaic virus (or CPMV) which is believed
to be non-infectious in animals including mice, dogs and humans. However,
because of its virus structure and genetic composition, CPMV elicits a strong
immune response when delivered directly into tumors as shown in our preclinical
studies. Data from numerous mouse cancer models and in companion dogs with
naturally occurring tumors show the ability of intratumoral administration of
CPMV to result in anti-tumor effects in treated tumors and systemically at other
sites of disease through immune activation.
Our lead immuno-oncology candidate, MIE-101, resulted from years of research by
our scientific co-founders that was supported by numerous grants from federal
and private funding agencies. Published preclinical data from our co-founders'
studies and ongoing research support the potential anti-cancer activity of
MIE-101 as a monotherapy. In addition, preclinical data generated further
support the potential of MIE-101 to improve anti-tumor effects of standard
cancer treatments including chemotherapy, radiation therapy and checkpoint
inhibitors. These studies include data from multiple preclinical tumor models,
veterinary studies in companion animals with naturally occurring cancer, as well
as showing the potential to activate human immune effector cells in vitro.
MIE-101 is currently in late-stage preclinical development and our goal is to
advance MIE-101 into veterinary studies in 2022 and into Phase I clinical trials
in 2023, provided we are able to raise sufficient funding.
The Company's immunomodulator platform technology has also been used to produce
modular vaccines under our Modular Vaccine Platform ("MVP") that may help
prevent or treat diseases in studies that were supported by funding agencies.
This vaccine system uses the immunomodulator technology platform as an adjuvant
by linking non-infectious virus particles directly to epitopes that correspond
to disease targets of interest. In preclinical studies, vaccination with MVP
candidates have been able to protect animals from both cancer and infectious
diseases including published results demonstrating significant promise against
SARS-CoV-2. We believe our MVP platform represents a way to efficiently develop
vaccine candidates in response to emerging infectious diseases. The adjuvant and
linker chemistry can be stockpiled and ready for the rapid identification of
targets of interest which can be evaluated via preclinical testing in a
relatively short period time. These vaccines may also have a superior cold-chain
profile that would potentially allow distribution to vaccination centers without
refrigeration or freezing. The MVP platform combined with our proprietary
trans-dermal delivery system could potentially allow for self-administration and
shipment of materials at room temperature, which makes the platform ideal for
rapid response situations.
Summary of Significant Events
Private Mosaic, a Delaware corporation, was formed on March 30, 2020. On July 1,
2020, we signed a License Option Agreement with CWRU, granting us the exclusive
right to license technology for a novel platform technology using an
immunomodulator platform technology to treat and prevent cancer and infectious
diseases in humans and for 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 Private
Mosaic. 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 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. On May 7, 2021, we issued unsecured convertible
promissory notes in the aggregate principal amount of $575,000.
39
In addition, we plan to file an application with The Nasdaq Stock Market
requesting that our common stock and potentially warrants (if applicable), be
listed on the Nasdaq Capital Market in 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 through June 25, 2022 at a
ratio ranging from 1-for-2 to 1-for-4 or any number in between in order to
potentially achieve compliance with the initial listing requirements of the
Nasdaq Stock Market.
The following discussion represents additional information pertaining to these
corporate events:
Reverse Merger
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 wholly owned subsidiary of Patriot
Scientific Corporation (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 Corporation acquired 100% of the issued
and outstanding common stock of Private Mosaic, representing 630,000 shares of
its Class A common stock ("Class A Stock") and 70,000 shares of its Class B
common stock ("Class B Stock") (collectively referred to as "Target Common
Stock"). In exchange for the Target Common Stock, the holders of the Class A
Stock received 630,000 shares of the Company's Series A Convertible Voting
Preferred Stock ("Series A Preferred") and holders of the Class B Stock received
70,000 shares of the Company's Series B Convertible Voting Preferred Stock
("Series B Preferred"). Each share of Series A Preferred converted into
10.194106 shares of common stock as defined in the Series A Certificate of
Designation. Each share of Series B Preferred converts into 11.46837 shares of
common stock 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, owned 90% of the issued and outstanding common stock of
the Company as of the Closing Date.
The Reverse Merger was treated by the Company as a reverse merger in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"). For accounting purposes, Private Mosaic is considered to have
acquired PTSC as the accounting acquirer because: (i) Private Mosaic
stockholders owned 90% of the combined company, on an as-converted basis,
immediately following the Closing Date, (ii) Private Mosaic directors held a
majority of board seats in the combined company and (iii) Private Mosaic
management held all key positions in the management of the combined company.
Accordingly, Private Mosaic's historical results of operations replaced PTSC's
historical results of operations for all periods prior to the Closing Date of
the Reverse Merger and, for all periods following the Closing Date of the
Reverse Merger, the results of operations of the combined company are included
in the Company's financial statements.
Name Change
On November 30, 2020, Patriot Scientific Corporation changed its name to Mosaic
ImmunoEngineering, Inc. 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.
40
Change in Fiscal Year
On December 30, 2020, the Board approved a change to our fiscal year end from
May 31 to December 31. The change in fiscal year was effective for the Company's
2020 fiscal year.
License Option Agreement
On July 1, 2020, we signed a License Option Agreement with CWRU, granting us the
exclusive right to license technology for a novel platform technology using an
immunomodulator platform technology to treat and prevent cancer and infectious
diseases in humans and for veterinary use. Under the License Option Agreement,
CWRU granted us an exclusive option for a period of two (2) years to negotiate
and enter into a license agreement with CWRU, provided that we meet certain
diligence milestones, including but not limited to, (i) delivering a development
plan within 18 months, (ii) raising $3 million in either equity, debt, or grant
funding, or a combination thereof within 18 months, (iii), generating sufficient
preclinical data to support the identification of the initial field of use to
support the initial planned clinical indication for the technology, (iv)
determining manufacturing processes and cGMP requirements to manufacture the
initial product for use in toxicology studies, and (v) identifying required
toxicology studies required to support Phase I clinical trials in the initial
field of use. We are currently in negotiations on the final license agreement
with CWRU and since July 2020, we have incurred in excess of $4 million towards
advancing the Company and the underlying technology and we currently believe we
have met the aforementioned development milestones.
Under the License Option Agreement, we issued CWRU 70,000 shares of Series B
Preferred under the Reverse Merger, which included certain anti-dilution rights.
Pursuant to the Certificate of Designation, the Series B Preferred holder will
continue to maintain ownership equal to 10% of the fully diluted shares of
common stock outstanding of the Company, including for such purposes all other
convertible securities outstanding and reserved for issuance except stock
options issued and outstanding and reserved for issuance under a Board approved
employee stock option plans reserving for issuance no more than ten percent
(10%) of the outstanding common stock of the Company then outstanding, until we
initially raise at least $1 million from the sale of either preferred or common
stock, or a combination thereof ("Capital Threshold"). In addition, pursuant to
the License Option Agreement, net working capital acquired under the Reverse
Merger of approximately $374,000 was applied against the Capital Threshold. As
of December 31, 2021, the remaining Capital Threshold was approximately
$626,000.
Convertible Notes
On May 7, 2021 ("Effective Date"), we issued unsecured convertible promissory
notes ("Convertible Notes") in the aggregate principal amount of $575,000 to
five (5) accredited investors, including three members of our Board of Directors
that participated on the same terms as other accredited investors (collectively,
the "Investors") in exchange for $525,003 in gross proceeds in addition to
$49,997 in accrued payable to founder that was invested in Convertible Notes.
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.
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.
41
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.
Discretionary Authority to Implement a Reverse Stock Split at a Ratio of 1:2 to
1:4 ("Discretionary Reverse Stock Split")
We plan to file an application with The Nasdaq Stock Market requesting that our
common stock and potentially warrants (if applicable), be listed on the Nasdaq
Capital Market in 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 through June 25, 2022 at a ratio ranging
from 1-for-2 to 1-for-4 in order to meet the Nasdaq Stock Market initial listing
requirements. The Board maintains the right to elect not to proceed with the
Discretionary Reverse Stock Split if it determines, in its sole discretion, that
the Company will be able to satisfy the initial listing requirements of the
Nasdaq Stock Market without implementing the Discretionary Reverse Stock Split
or if it is otherwise no longer in the best interests of the Company. However,
the effect of a Discretionary Reverse Stock Split on the market price of the
common stock cannot be predicted with any certainty, and the history of similar
stock split combinations for companies in like circumstances is varied. It is
possible that the per share price of the common stock after the Discretionary
Reverse Stock Split will not rise in proportion to the reduction in the number
of shares of the common stock outstanding resulting from the Discretionary
Reverse Stock Split, effectively reducing our market capitalization, and there
can be no assurance that the market price per post-reverse split share will
either exceed or remain in excess of the prescribed initial listing minimum bid
price for a sustained period of time. The market price of our common stock may
vary based on other factors that are unrelated to the number of shares
outstanding, including the Company's future performance.
PLEASE NOTE THAT UNLESS SPECIFICALLY INDICATED TO THE CONTRARY, THE DATA
CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING BUT NOT LIMITED TO SHARE
NUMBERS AND CONVERSION PRICES, DOES NOT REFLECT THE IMPACT OF THE DISCRETIONARY
REVERSE STOCK SPLIT THAT MAY BE EFFECTUATED.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and judgments that significantly affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates, and such differences could affect the results of
operations reported in future periods. We believe the following critical
accounting policies affect our most significant estimates and judgments used in
the preparation of our consolidated financial statements.
1. Investment in Affiliated Company
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 December 31, 2021 and 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.
42
2. Fair Value of Financial Instruments
Anti-Dilution Issuance Rights Derivative 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 December
31, 2021, December 31, 2020, and August 21, 2020 (at inception), the estimated
fair value of the anti-dilution issuance rights was $104,300, $83,500, and
$83,500, 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.
The primary inputs used in valuing the anti-dilution issuance rights liability
at December 31, 2021, December 31, 2020, and at August 21, 2020 (at inception),
were as follows:
December 31, December 31, At
2021 2020 inception
Fair value of common stock (per
share) $ 1.02 $ 3.25 $ 3.30
Estimated additional shares of
common stock 134,229 31,353 57,462
Expected volatility 105% 90% 135%
Expected term (years) 0.25 0.25 0.45
Risk-free interest rate 0.06% 0.09% 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.
3. Convertible Notes
The Company follows ASC 480-10, "Distinguishing Liabilities from Equity" in its
evaluation of the accounting for share-settled debt (Convertible Notes). 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.
43
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.
4. 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.
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 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.
Results of Operations
Private Mosaic, the accounting acquirer in the Reverse Merger, was incorporated
on March 30, 2020 (date of inception). Therefore, Private Mosaic's historical
results of operations replaced PTSC's historical results of operations for all
periods prior to the Closing Date of the Reverse Merger and, for all periods
following the Closing Date of the Reverse Merger, the results of operations of
the combined company are included in the Company's financial statements.
In addition, on December 30, 2020, we changed our fiscal year end from May 31st
to December 31st effective for the period ended December 31, 2020. Therefore,
the prior year financial information covers the periods from June 1, 2020 to
December 31, 2020 and from March 30, 2020 (date of inception) to May 31, 2020.
44
Year Ended December 31, 2021 and Prior Year Periods from June 1, 2020 to
December 31, 2020 and from March 30, 2020 (date of inception) to May 31, 2020:
Research and Development Expenses
Research and development expenses of approximately $1,456,000 for the year ended
December 31, 2021 are primarily related to salaries and related costs for
personnel in research and development functions and related consulting fees
associated with advancing the platform technologies, including approximately
$499,000 in share-based compensation expense. 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 $343,000 for the seven months
ended December 31, 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 $259,000
and (ii) the recognition of the fair market value of the Class B common stock
issued under the License Option Agreement and the 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 to the License Option Agreement, we receive rights to
materials and research information to evaluate the technology for a period of
two years with an option to license the technology, provided we achieve certain
research and development milestones and financial milestones, as defined in the
agreement (see Note 6 to the accompanying consolidated financial statements).
There were no research and development expenses for the period from March 30,
2020 (date of inception) to May 31, 2020.
General and Administrative Expenses
General and administrative expenses of approximately $2,045,000 for the year
ended December 31, 2021 consist principally of salaries and related costs for
personnel and consultants in executive and administrative functions of
approximately $1,740,000, including approximately $809,000 in share-based
compensation expense, fees for outside legal counsel of approximately $23,000,
fees related to intellectual property rights of approximately $70,000, audit,
tax, accounting and filing fees of approximately $88,000, director and officer
insurance of approximately $52,000, investor and public relation fees of
approximately $54,000, and other fees and expenses of approximately $18,000. 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 $493,000 for the seven
months ended December 31, 2020 consist principally of salaries and related costs
for personnel and consultants in executive and administrative functions of
approximately $347,000, fees for outside legal counsel of approximately $52,000,
fees related to intellectual property rights of approximately $17,000, audit and
accounting related fees of approximately $42,000, director and officer insurance
of approximately $21,000, and other fees and expenses of approximately $14,000.
General and administrative expenses of $511 for the period from March 30, 2020
(date of inception) to May 31, 2020 are primarily related to corporate formation
costs.
Other Income (Expense)
Change in Valuation of Derivative Liability
The change in valuation of the derivative liability of approximately $21,000 for
the year ended December 31, 2021 pertains to an increase in the estimated fair
value of the anti-dilution issuance rights provided under the Series B Preferred
(see Notes 3 and 6 to the accompanying consolidated financial statements).
45
Interest Expense and Accretion to Redemption Value on Convertible Notes
Non-cash interest expense of approximately $30,000 for the year ended December
31, 2021 represents interest expense on convertible notes (see Note 7 to the
accompanying consolidated financial statements).
Accretion to redemption value on convertible notes of approximately $130,000 for
the year ended December 31, 2021 pertains to the accretion of the convertible
notes to their redemption value of $718,750 based on the underlying terms of the
convertible notes (see Note 7 to the accompanying consolidated financial
statements).
Equity in Loss of Affiliated Company
Equity in loss of affiliated company of approximately $5,000 for the seven
months ended December 31, 2020 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 (see Note 4 to the
accompanying consolidated financial statements).
Liquidity and Capital Resources
On August 21, 2020, we completed our Reverse Merger with PTSC, which provided us
$605,215 in cash, cash equivalents, and restricted cash. During May 2021, we
raised $575,000 from the issuance of convertible notes, which included $49,997
of accrued payable to founder that was invested in convertible notes. As of
December 31, 2021, we had cash and cash equivalents of $226,142. 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 Annual Report on
Form 10-K.
Our primary uses of capital to date are primarily related to payroll, consulting
and related costs, corporate formation and ongoing public company expenses, fees
associated with license agreements, including patent related expenses, and costs
of 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, and hiring additional staff (including clinical,
scientific, operational, financial, and management personnel). We expect to
incur substantial expenditures in the foreseeable future for the development and
potential commercialization of our product candidates, provided we are able to
raise sufficient capital to advance our technologies.
We plan to continue to fund losses from operations and future funding needs
through our cash on hand and future equity and/or debt offerings, as well as
potential collaborations or strategic partnerships with other companies.
There are a number of uncertainties associated with our ability to raise
additional capital and we have no current arrangements with respect to any
additional financing. In addition, the continuation of disruptions caused by
COVID-19 may cause investors to slow down or delay their decision to deploy
capital based on volatile market conditions which will adversely impact our
ability to fund future operations. Consequently, there can be no assurance that
any additional financing on commercially reasonable terms, or at all, will be
available when needed. The inability to obtain additional capital will delay our
ability to conduct our business operations. Any additional equity financing may
involve substantial dilution to our then existing stockholders. The above
matters raise substantial doubt regarding our ability to continue as a going
concern.
46
Cash Flow Summary
The following table provides a summary of our net cash flow activity for the
year ended December 31, 2021 and the prior year periods from June 1, 2020 to
December 31, 2020 and from March 30, 2020 (date of inception) to May 31, 2020:
For the
Period March
Seven 30, 2020
Months (date of
Year Ended Ended inception)
December 31, December to May 31,
2021 31, 2020 2020
Net cash (used in) provided by
operating activities $ (679,236 ) $ (253,040 ) $ 500
Net cash provided by investing
activities 27,637 605,215 -
Net cash provided by financing
activities 525,003 63 -
Net (decrease) increase in cash and
cash equivalents $ (126,596 ) $ 352,238 $ 500Cash Flows From Operating Activities
Net cash used in operating activities for the year ended December 31, 2021
consisted of our net loss of $3,684,478 offset by (i) share-based compensation
expense of $1,308,008, (ii) non-cash interest on convertible notes of $30,121,
(iii) accretion to redemption value on convertible notes of $130,027, (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 $1,516,286 primarily due to an
increase in accrued compensation of $997,866 and an increase in accrued expenses
and other of $456,846.
Net cash used in operating activities for the seven months ended December 31,
2020 consisted of our net loss of $842,243, offset by non-cash items consisting
of (i) share-based compensation expense of $45,708, (ii) equity in loss of
affiliated company of $5,102, (iii) the fair value of common stock issued under
the License Option Agreement of $7, and (iv) the fair value of derivative
liability associated with anti-dilution issuance rights of $83,500.
Additionally, cash used in operating activities for the seven months ended
December 31, 2020 was supplemented with a net change in operating assets and
liabilities of $454,886 primarily due to an increase in accrued compensation of
$393,431 and an increase in accrued expenses and other of $88,128.
Net cash provided by operating activities for the period March 30, 2020 (date of
inception) to May 31, 2020 consisted of our net loss of $511 offset by an
increase in amounts payable to founders of $1,011.
Cash Flows From Investing Activities
Net cash provided by investing activities for the year ended December 31, 2021
consisted of net proceeds received of $27,637 from the dissolution of Phoenix
Digital Solutions LLC ("PDS"), representing our 50% interest in PDS.
Net cash provided by investing activities for the seven months ended December
31, 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 year ended December 31, 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.
47
Net cash provided by financing activities for the seven months ended December
31, 2020 represents the proceeds received from the founders of Private Mosaic
from the issuance of Class A Common Stock.
Recent Accounting Pronouncements
For a detailed description of recent accounting pronouncements, see Note 2,
Summary of Significant Accounting Policies, to the consolidated financial
statements included in Part IV, Item 15 of this Report and begin on page F-1
with the index to consolidated financial statements.
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