Mosaic ImmunoEngineering Inc. - Quarter Report: 2021 September (Form 10-Q)

iTable of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

OR

For the transition period from _________ to _________

Commission File Number 0-22182

MOSAIC IMMUNOENGINEERING, INC.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code): (657) 208-0890

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). 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.

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 ☒

On November 1, 2021, 7,228,093 shares of common stock, par value $0.00001 per share, were outstanding.

INDEX

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 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 Merger

As reported in our 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 the Closing Date, PTSC acquired 100% of the issued and outstanding common stock of Private Mosaic, representing 630,000 shares of its Class A common stock (“Class A Stock”) and 70,000 shares of its Class B common stock (“Class B Stock”) (collectively referred to as “Target Common Stock”). In exchange for the Target Common Stock, the holders of the Class A Stock received 630,000 shares of the Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of the Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). Each share of Series A Preferred converted into 10.194106 shares of common stock of the Company pursuant to the Series A Certificate of Designation. Each share of Series B Preferred converts into 11.46837 shares of common stock of the Company, 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 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 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. 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.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, 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 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.

These forward-looking statements are subject to certain risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to those items shown under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking 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.

PART I- FINANCIAL INFORMATION

Mosaic ImmunoEngineering, Inc.

Condensed Consolidated Balance Sheets

See accompanying notes to unaudited condensed consolidated financial statements

Mosaic ImmunoEngineering, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

Mosaic ImmunoEngineering, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)

For the Three Months Ended September 30, 2021

For the Three Months Ended September 30, 2020

Mosaic ImmunoEngineering, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited) (Continued)

For the Nine Months Ended September 30, 2021

For the Period March 30, 2020 (date of inception) to September 30, 2020

See accompanying notes to unaudited condensed consolidated financial statements. 

Mosaic ImmunoEngineering, Inc.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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. We are a preclinical, development-stage biotechnology company focused on developing and eventually commercializing our proprietary technology designed to activate the innate immune system to treat and prevent cancer and infectious diseases.  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 directing 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 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. 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 August 21, 2020, we completed a reverse merger transaction pursuant to a stock purchase agreement by and between PTSC (now known as Mosaic ImmunoEngineering Inc.) 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.

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 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 70,000 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 converted into 10.194106 shares of common stock of the Company pursuant to the Series A Certificate of Designation (see Note 8). 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 approximately 90% of the issued and outstanding shares of common stock of the Company as of the Closing Date.

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”). 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 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.

Liquidity and Management’s Plans

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At September 30, 2021, the Company had cash and cash equivalents of $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.

2.        Significant Accounting Policies

Basis of Presentation

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.

Segment Reporting

The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. No revenue has been generated since inception, and all tangible assets are held in the United States.

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 were recorded at their estimated acquisition date fair values as of the Closing Date, as follows: 

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 had a 50% interest in Phoenix Digital Solutions LLC (“PDS”). On September 29, 2020, the managing members of PDS agreed to wind up and dissolve PDS as the underlying intellectual property was not 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 U.S. 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), 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.

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:

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 (see Note 7).

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.

Share-Based Compensation

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 and Diluted Income (Loss) Per Common Share

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 potential dilutive effect of unvested RSUs outstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Convertible Notes and Series 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 of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive.

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: 

Moreover, in connection with an acquisition of Crossflo by PTSC (see Note 1), 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.

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, however, early adoption is permitted. The Company adopted ASU 2018-13 effective January 1, 2021. Implementation of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

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-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).

The following tables set forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020:

Anti-Dilution Issuance Rights Liability

Pursuant to the Series B Preferred Certificate of Designation, the Series B Preferred includes certain anti-dilution issuance rights, whereby the holder will continue to maintain equity ownership equal to 10% of the fully diluted shares of common stock outstanding, calculated on an as converted basis, including all other convertible securities outstanding and reserved for issuance (and excluding stock options issued and outstanding and reserved for issuance under a Board approved employee stock option plan reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company) until the Company raises approximately $626,000 from the sale of common or preferred stock, or a combination thereof (see Note 6).

To determine the estimated fair value of the anti-dilution issuance rights liability, the Company used a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables. The estimated fair value of the anti-dilution issuance rights at the date of issuance on August 21, 2020 (at inception), December 31, 2020, and September 30, 2021, was $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.

The primary inputs used in valuing the anti-dilution issuance rights liability at inception, December 31, 2020 and September 30, 2021, were as follows:

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 formed by PTSC to pursue licensing of its intellectual property and we own 50% of the membership interests of PDS. On September 29, 2020, the members of PDS agreed to wind up and dissolve PDS as the underlying intellectual property was deemed no longer enforceable. In January 2021, the remaining cash on hand of $55,274 was equally distributed to its two members according to the dissolution plan, of which we received proceeds of $27,637 in January 2021. There were no expenses incurred during the nine months ended September 30, 2021.

5.        Accrued Expenses and Other Current Liabilities; Accrued Payable to Founders

Accrued expenses and other current liabilities consisted of the following at September 30, 2021 and December 31, 2020:

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 December 31, 2020, accrued payable to founders of $49,997 represented the overpayment of common stock subscribed. Amounts payable to founders did not earn interest and were 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).

6.        Licensing

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, 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 (see Note 2). As of September 30, 2021, the remaining Capital Threshold was approximately $626,000. The anti-dilution issuance rights under the License Option Agreement meet the definition of a derivative instrument under FASB’s ASC Topic 815, “Derivatives and Hedging” (see Note 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 enters 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.

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:

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.

8.        Stockholders’ Equity and Share-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”). Under the Reverse Merger (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 B Convertible Voting Preferred Stock (“Series B Preferred”).

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 Class 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 possessed 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.

On January 29, 2021, 630,000 shares of Series A Preferred automatically converted into an aggregate 6,422,290 shares of common stock upon the effectiveness of a registration statement registering the resale of the underlying shares. The registration statement on Form S-3 was declared effective by the 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 Class 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.

The Series B Preferred also includes certain anti-dilution rights (“anti-dilution issuance rights”), whereby the holder of Series 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 equity awards issued and outstanding and reserved for issuance under a board approved equity 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 net working capital of PTSC on the Closing Date was approximately $374,000 (see Note 2). As such, the remaining Capital Threshold was approximately $626,000 as of September 30, 2021. The anti-dilution issuance rights meet the definition of a derivative instrument under FASB’s ASC Topic 815 (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 B 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.

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, RSUs, and other equity awards to selected participants. 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 B Preferred, as calculated on an as-converted basis. As of September 30, 2021, we have reserved 802,785 shares of common stock for issuance under the 2020 Plan, of which 518,236 were subject to outstanding RSUs and 284,549 shares were available for future grants of share-based awards.

The cost of all share-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 share-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:

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:

As of September 30, 2021, the total estimated unrecognized compensation cost related to non-vested RSUs was approximately $530,000. This cost is expected to be recognized over the remaining weighted average vesting period of 0.44 years. As of September 30, 2021, there are no vested RSUs.

9.        Commitments and Contingencies

Legal Matters

While the Company is not involved in any litigation as of September 30, 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.

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. This amount will be expensed when the Company enters into a license agreement with CWRU.

10.      Related Parties

During the seven months ended December 31, 2020, the Company’s Board of Directors approved to enter into consulting agreements with Nicole Steinmetz, Ph.D., acting Chief Scientific Officer, Dr. Steinmetz’s spouse, and Steve Fiering, Ph.D., each a co-founder of Private Mosaic and greater than 5% shareholder of the Company (“Related Parties”), for their scientific contributions towards advancing the technology platforms, in the monthly amounts of $5,000, $2,500, and $2,500, respectively. During April 2021, we entered into consulting agreements with the Related Parties retroactive to September 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 Related Parties RSU’s with a fair market value equal to 20% of their deferred cash compensation as of the closing date of the financing (the “20% Deferral”). The number of RSU’s to be granted will be calculated based on the closing price of the 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.

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Mosaic ImmunoEngineering, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-KT for the seven months ended December 31, 2020.

Unless the context otherwise requires, references to the “Company,” the “combined company,” “Mosaic,” “we,” “our,” or “us” in this Quarterly Report refer to Mosaic ImmunoEngineering, Inc. and its subsidiaries (formerly known as Patriot Scientific Corporation). References to “PTSC” refer to Patriot Scientific Corporation prior to the completion of the Reverse Merger and references to “Private Mosaic” refer to privately held Mosaic ImmunoEngineering, Inc. prior to the completion of the Reverse Merger.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology.

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

Any forward-looking statements in this Quarterly Report reflect our views and assumptions only as of the date that this report. Future events or our future financial performance involves known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

About Mosaic

We are a preclinical, development-stage biotechnology company focused on developing and eventually commercializing our proprietary technology to activate the innate immune system.  Our lead product candidate, MIE-101, is based on a naturally occurring plant virus that is non-infectious in animals and humans but acts as strong adjuvant that activates multiple Toll-like receptors (“TLRs”) through its natural immune recognition. When injected into a tumor, MIE-101 naturally triggers the innate immune system, thereby altering the tumor microenvironment and directing activated anti-tumor T cells to attack both the injected tumor as well as other non-injected tumors. Published preclinical data in leading scientific journals from our co-founders’ studies and ongoing research support the anti-tumor activity of MIE-101 as a monotherapy and have demonstrated its ability to improve anti-tumor effects when combined with standard cancer treatments including chemotherapy, radiation and immunotherapy. These studies include data from multiple preclinical tumor models, veterinary studies in companion animals with naturally occurring cancer, as well as showing the potential to activate human immune effector cells in vitro.  Our goal is to advance MIE-101 into human and veterinary studies in 2022 if sufficient funding becomes available.

We are also employing this same natural adjuvant to produce modular vaccines under our Modular Vaccine Platform (“MVP”) that can prevent diseases by linking the virus directly to target antigens of interest.  In preclinical studies, vaccination with these agents has been able to protect animals from both cancer and infectious diseases and has shown promise against SARS-CoV-2.  Our MVP platform is designed to facilitate the rapid development of vaccine candidates due to its modular nature. The adjuvant and linking chemistry can be stockpiled and ready for the rapid identification of targets of interest which can be linked for preclinical testing within a few weeks. These vaccines also have a superior cold-chain profile that would potentially allow distribution to vaccination centers without refrigeration or freezing.  The MVP platform combined with our proprietary trans-dermal delivery system could potentially allow for self-administration and shipment of materials at room temperature, which makes the platform ideal for rapid response situations.

Recent Developments

Private Mosaic, a Delaware corporation, was formed on March 30, 2020. On July 1, 2020, we signed a Material Transfer, Evaluation, and Exclusive Option Agreement (“License Option Agreement”) with Case Western Reserve University (“CWRU”), granting us the exclusive right to license technology using proprietary nanotechnology to activate the innate immune system to treat and prevent cancer and infectious diseases in humans and for veterinary use. On August 21, 2020, we closed a Reverse Merger transaction by and between PTSC (now known as Mosaic ImmunoEngineering, Inc.) and Private Mosaic (“Reverse Merger”). On November 30, 2020, we filed amended and restated articles of incorporation with the Secretary of State of the State of Delaware to change the name of the Company to Mosaic ImmunoEngineering, Inc., to implement a 1-for-500 reverse stock split, and to reduce the number of authorized shares of common stock from 600 million to 100 million. The reverse stock split was effective on December 2, 2020. All share numbers and preferred stock conversion numbers included herein have been retroactively adjusted to reflect the 1-for-500 Reverse Stock Split. On December 30, 2020, we changed our fiscal year end from May 31 to December 31.

In addition, on June 10, 2021 and June 14, 2021, our Board of Directors and majority shareholders, respectively, approved a discretionary reverse stock split whereby our Board of Directors have broad authority to implement a future reverse stock split at a ratio ranging from 1-for-2 to 1-for-4 at any time on or before June 25, 2022 in order to potentially meet the initial listing bid price requirement and other listing regulations of the Nasdaq Stock Market or other national exchanges. The Board believes that listing our common stock on a national exchange will increase the liquidity of our common stock by providing us with a market for our common stock that is more accessible than if our common stock were to continue to trade on the OTCQB or on the “pink sheets” maintained by the OTC Markets Group, Inc. If the Board of Directors believes that a discretionary reverse stock split is in the best interests of the Company and its shareholders, it will consider certain factors in selecting the specific reverse stock split ratio, including prevailing market conditions, the trading price of our common stock and the steps that we will need to take in order to meet the initial listing bid price requirement and other listing regulations of the Nasdaq Stock Market or other national exchanges. We currently do not expect to list our securities on the Nasdaq Stock Market or other national exchange until after we have filed our Annual Report on Form 10-K for the year ending December 31, 2021.

Reverse Merger

On August 19, 2020, PTSC (now known as Mosaic ImmunoEngineering, Inc.) and Private Mosaic entered into a stock purchase agreement (“Stock Purchase Agreement”), whereby one of the wholly owned subsidiaries of PTSC merged with and into Private Mosaic, with Private Mosaic surviving as wholly owned subsidiary of PTSC (the “Reverse Merger”). The transaction closed on August 21, 2020 (“Closing Date”) in accordance with the terms of the Stock Purchase Agreement.

On the Closing Date, PTSC acquired 100% of the issued and outstanding common stock of Private Mosaic, representing 630,000 shares of its Class A common stock (“Class A Stock”) and 70,000 shares of its Class B common stock (“Class B Stock”) (collectively referred to as “Target Common Stock”). In exchange for the Target Common Stock, the holders of the Class A Stock received 630,000 shares of the Company’s Series A Convertible Voting Preferred Stock (“Series A Preferred”) and holders of the Class B Stock received 70,000 shares of the Company’s Series B Convertible Voting Preferred Stock (“Series B Preferred”). In January 2021, each share of Series A Preferred converted into 10.194106 shares of common stock of the Company, pursuant to the Series A Certificate of Designation. Each share of Series B Preferred converts into 11.46837 shares of common stock of the Company at the sole option of the holder, possesses full voting rights, on an as-converted basis, as the common stock of the Company and contains certain anti-dilution rights, as defined in the Series B Certificate of Designation. On a fully diluted, as converted basis, the holders of Series A Preferred and Series B Preferred, in aggregate, owned approximately 90% of the issued and outstanding common stock of the Company as of the Closing Date.

The Reverse Merger was treated by the Company as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For accounting purposes, Private Mosaic is considered to have acquired PTSC as the accounting acquirer because: (i) Private Mosaic stockholders owned approximately 90% of the combined company, on an as-converted basis, immediately following the Closing Date, (ii) Private Mosaic directors held a majority of board seats in the combined company and (iii) Private Mosaic management held all key positions in the management of the combined company. Accordingly, Private Mosaic’s historical results of operations replaced PTSC’s historical results of operations for all periods prior to the Closing Date of the Reverse Merger and, for all periods following the Closing Date of the Reverse Merger, the results of operations of the combined company will be included in the Company’s financial statements.

Based on the inception of Private Mosaic on March 30, 2020, the comparative prior year financial information and the financial condition and results of operations of the Company for the periods presented in this Quarterly Report bear no relationship to the future business, financial condition and results of operations of the Company.

License Option Agreement

On July 1, 2020, we signed a License Option Agreement with CWRU, granting us the exclusive right to license technology for a novel platform technology using proprietary nanotechnology to activate the innate immune system to treat and prevent cancer and infectious diseases in humans and for veterinary use. Under the License Option Agreement, CWRU granted us an exclusive option for a period of two (2) years to negotiate and enter into a license agreement with CWRU, provided that we meet certain diligence milestones, including but not limited to, (i) delivering a development plan within 18 months, (ii) raising $3 million in either equity, debt, or grant funding, or a combination thereof within 18 months, (iii), generating sufficient preclinical data to support the identification of the initial field of use to support the initial planned clinical indication for the technology, (iv) determining manufacturing processes and cGMP requirements to manufacture the initial product for use in toxicology studies, and (v) identifying required toxicology studies required to support Phase I clinical trials in the initial field of use.

Under the License Option Agreement, we issued CWRU 70,000 shares of Series B Preferred under the Reverse Merger, which included certain anti-dilution rights. Pursuant to the Certificate of Designation, the Series B Preferred holder will continue to maintain ownership equal to 10% of the fully diluted shares of Common Stock outstanding of the Company, including for such purposes all other convertible securities outstanding and reserved for issuance except stock options issued and outstanding and reserved for issuance under a Board approved employee stock option plans reserving for issuance no more than ten percent (10%) of the outstanding common stock of the Company then outstanding, until we initially raise at least $1 million from the sale of either preferred or common stock, or a combination thereof (“Capital Threshold”). In addition, pursuant to the License Option Agreement, net working capital acquired under the Reverse Merger of approximately $374,000 was applied against the Capital Threshold. As of September 30, 2021, the remaining Capital Threshold was approximately $626,000.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. During the three months ended September 30, 2021, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Transition Report on Form 10-KT for the seven months ended December 31, 2020, other than described below.

The Company follows ASC 480-10, “Distinguishing Liabilities from Equity” in its evaluation of the accounting for share-settled debt. ASC 480-10-25-14 requires liability accounting for certain financial instruments, including shares that embody an unconditional obligation to transfer a variable number of shares, provided that the monetary value of the obligation is based solely or predominantly on one of the following three characteristics:

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.

Results of Operation

Mosaic was incorporated on March 30, 2020 (date of inception). Therefore, limited comparative information is provided herein. Private Mosaic’s historical results of operations replaced PTSC’s historical results of operations for all periods prior to the Reverse Merger and, for all periods following the Closing Date of the Reverse Merger, the results of operations of the combined company are included in the Company’s financial statements.

Three Months Ended September 30, 2021 and 2020:

Research and Development Expenses

Research and development expenses of approximately $440,000 for the three months ended September 30, 2021 are primarily related to salaries and related costs for personnel in research and development functions and related consulting fees associated with advancing the platform technologies, including approximately $144,000 in share-based compensation. We believe our research and development expenses will increase significantly over time as we raise sufficient capital to advance our programs.

Research and development expenses of approximately $220,000 for the three months ended September 30, 2020 are related to (i) salaries and related costs for personnel in research and development functions and related consulting fees associated with advancing the platform technologies of approximately $137,000 and (ii) the non-cash expense to gain access to the research and development technology of approximately $83,000 related to the recognition of the fair market value of the Class B common stock issued under the License Option Agreement and the estimated fair market value of the anti-dilution issuance rights issued under the License Option Agreement.

General and Administrative Expenses

General and administrative expenses of approximately $521,000 for the three months ended September 30, 2021 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $450,000, including approximately $216,000 in share-based compensation, fees related to intellectual property rights of approximately $25,000, audit and related fees of approximately $9,000, director and officer insurance of approximately $13,000, investor and public relation fees of approximately $19,000, and other fees and expenses of approximately $5,000. We believe our general and administrative expenses will increase over time as we hire new employees to support key administrative functions and the planned expansion of research and development efforts.

General and administrative expenses of approximately $162,000 for the three months ended September 30, 2020 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $109,000, fees for outside legal counsel of approximately $23,000, legal fees related to intellectual property rights of approximately $9,000, audit and related fees of approximately $10,000, director and officer insurance of approximately $6,000, and other fees and expenses of approximately $5,000.

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

Research and Development Expenses

Research and development expenses of approximately $1,063,000 for the nine months ended September 30, 2021 are primarily related to salaries and related costs for personnel in research and development functions and related consulting fees associated with advancing the platform technologies, including approximately $369,000 in share-based compensation. We believe our research and development expenses will increase significantly over time as we raise sufficient capital to advance our programs.

Research and development expenses of approximately $220,000 for the period March 30, 2020 to September 30, 2020 are related to (i) salaries and related costs for personnel in research and development functions and related consulting fees associated with advancing the platform technologies of approximately $137,000 and (ii) the non-cash expense to gain access to the research and development technology of approximately $83,000 related to the recognition of the fair market value of the Class B common stock issued under the License Option Agreement and the estimated fair market value of the anti-dilution issuance rights issued under the License Option Agreement.

General and Administrative Expenses

General and administrative expenses of approximately $1,613,000 for the nine months ended September 30, 2021 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $1,382,000, including approximately $686,000 in share-based compensation, fees for outside legal counsel of approximately $20,000, fees related to intellectual property rights of approximately $48,000, audit and related fees of approximately $61,000, director and officer insurance of approximately $41,000, investor and public relation fees of approximately $46,000, and other fees and expenses of approximately $15,000. We believe our general and administrative expenses will increase over time as we hire new employees to support key administrative functions and the planned expansion of research and development personnel.

General and administrative expenses of approximately $163,000 for the period March 30, 2020 to September 30, 2020 consist principally of salaries and related costs for personnel and consultants in executive and administrative functions of approximately $109,000, fees for outside legal counsel of approximately $23,000, legal fees related to intellectual property rights of approximately $9,000, audit and related fees of approximately $10,000, director and officer insurance of approximately $6,000, and other fees and expenses of approximately $6,000.

Liquidity and Capital Resources

On August 21, 2020, we completed our Reverse Merger with PTSC, which provided us $605,215 in cash, cash equivalents, and restricted cash. During May 2021, we raised $575,000 from the issuance of convertible notes, which included $49,997 of accrued payable to founder that was converted into convertible notes. As of September 30, 2021, we had cash and cash equivalents of $393,121. Our ability to continue our operations is highly dependent on our ability to raise capital to fund future operations. We anticipate, based on currently proposed plans and assumptions that our cash on hand will not satisfy our operational and capital requirements through twelve months from the filing date of this quarterly report on Form 10-Q.

Our primary uses of capital to date are primarily related to payroll, consulting and related costs, corporate formation expenses, fees associated with the License Option Agreement and the Reverse Merger. On a go forward basis, we will need significant additional capital to support our research and development efforts, compensation and related expenses, hiring additional staff (including clinical, scientific, operational, financial, and management personnel) and costs associated with operating as a public company. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates, provided we are able to raise sufficient capital to advance our technologies.

We plan to continue to fund losses from operations and future funding needs through our cash on hand and future equity and/or debt financings, as well as potential collaborations or strategic partnerships with other companies.

There are a number of uncertainties associated with our ability to raise additional capital and we have no current arrangements with respect to any additional financing. In addition, the continuation of disruptions caused by COVID-19 may cause investors to slow down or delay their decision to deploy capital based on volatile market conditions which will adversely impact our ability to fund future operations. Consequently, there can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital will delay our ability to conduct our business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. The above matters raise substantial doubt regarding our ability to continue as a going concern.

Cash Flow Summary

The following table summarizes our sources and uses of cash for each of the periods presented.

Cash Flows From Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2021 consisted of our net loss of $2,834,210 offset by (i) share-based compensation expense of $1,055,007, (ii) non-cash interest on convertible notes of $18,526, (iii) accretion to redemption value on convertible notes of $116,305, (iv) an increase in the fair value of the derivative liability of $20,800, (v) and a net change in operating assets and liabilities of $1,111,315 primarily due to an increase in accrued compensation and other accrued expenses of $1,058,142.

Net cash used in operating activities for the period March 30, 2020 (inception) to September 30, 2020 consisted of our net loss of $387,036 offset by non-cash expenses of (i)) equity in loss of affiliated company of $4,153, (ii) the fair value of common stock issued under the License Option Agreement of $7, and (iii) the fair value of derivative liability associated with anti-dilution issuance rights of $83,500. Additionally, cash used in operating activities for the period ended September 30, 2020 was supplemented with a net change in operating assets and liabilities of $231,388 primarily due to an increase in accrued compensation and other accrued expenses of $262,945.

Cash Flows From Investing Activities

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

Net cash provided by investing activities for the period March 30, 2020 (inception) to September 30, 2020 consisted of cash, cash equivalents, and restricted cash acquired in the Reverse Merger of $605,215.

Cash Flows From Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2021 consisted of net proceeds received from the issuance of convertible notes of $525,003, which amount excludes $49,997 that was payable to one of our co-founders as of December 31, 2020 and invested in the convertible notes in May 2021. As of September 30, 2021, the principal amount of the convertibles notes was $575,000.

Net cash provided by financing activities for the period March 30, 2020 (inception) to September 30, 2020 represents the proceeds received from the founders of Private Mosaic from the issuance of Class A Common Stock.

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, however, early adoption is permitted. The Company adopted ASU 2018-13 effective January 1, 2021. Implementation of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

As 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.

As required by Rule 13a-15(b) under the Exchange Act, as of September 30, 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 September 30, 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 quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II- OTHER INFORMATION

Information pertaining to legal proceedings is provided in Note 9, Commitments and Contingencies, to the unaudited condensed consolidated financial statements and is incorporated by reference herein.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with our unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q (this “Quarterly Report”) before making a decision to invest in our securities. 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 our business, financial condition, results of operations and 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 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 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:

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”.

If 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 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 our consolidated financial statements for the transition period ended December 31, 2020 on 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 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 our 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.

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, university 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 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: