(Unaudited)
|
|
For The Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,458,509
|
)
|
|
$
|
(712,184
|
)
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
(52,600
|
)
|
|
|
(135,400
|
)
|
Amortization of debt discount
|
|
|
-
|
|
|
|
156,467
|
|
Loss on exchange of notes payable for preferred shares
|
|
|
262,470
|
|
|
|
-
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
33,007
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
4,009
|
|
|
|
(47,082
|
)
|
Other current assets
|
|
|
(2,560
|
)
|
|
|
7,923
|
|
Accounts payable
|
|
|
492,501
|
|
|
|
394
|
|
Accrued expenses
|
|
|
193,431
|
|
|
|
(18,476
|
)
|
Accrued expenses - related parties
|
|
|
25,000
|
|
|
|
25,000
|
|
Accrued interest
|
|
|
76,861
|
|
|
|
12,220
|
|
Accrued interest - related parties
|
|
|
740
|
|
|
|
740
|
|
Accrued compensation
|
|
|
20,206
|
|
|
|
424
|
|
Net Cash Used In Operating Activities
|
|
|
(405,444
|
)
|
|
|
(709,974
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from cash advances
|
|
|
75,000
|
|
|
|
-
|
|
Proceeds from issuance of notes payable
|
|
|
-
|
|
|
|
500,000
|
|
Proceeds from issuance of preferred stock - Series A
|
|
|
325,000
|
|
|
|
50,000
|
|
Net Cash Provided By Financing Activities
|
|
|
400,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
Net Decrease In Cash
|
|
|
(5,444
|
)
|
|
|
(159,974
|
)
|
|
|
|
|
|
|
|
|
|
Cash - Beginning of Period
|
|
|
18,934
|
|
|
|
371,048
|
|
|
|
|
|
|
|
|
|
|
Cash - End of Period
|
|
$
|
13,490
|
|
|
$
|
211,074
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
18,030
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Preferred
stock issued in exchange for
notes and advances payable
|
|
$
|
1,090,254
|
|
|
$
|
-
|
|
Accrual of earned preferred stock dividends
|
|
$
|
(148,035
|
)
|
|
$
|
(107,496
|
)
|
Warrants
and conversion options issued in connection with
issuance and extension of notes payable
|
|
$
|
-
|
|
|
$
|
49,600
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Business Organization, Nature of Operations and Basis of Presentation
Organization and Operations
Cell Source, Inc. (“Cell Source”, “CSI” or the “Company”) is a Nevada corporation formed on June 6, 2012 that is the parent
company of Cell Source Limited (“CSL”), a wholly owned subsidiary which was founded in Israel in 2011 in order to commercialize a suite of inventions relating to certain cancer treatments. The Company is a biotechnology company focused on
developing cell therapy treatments based on the management of immune tolerance. The Company’s lead prospective product is its patented Veto Cell immune system management technology, which is an immune tolerance biotechnology that enables the
selective blocking of immune responses. CSL’s Veto Cell immune system management technology is based on technologies patented, owned, and licensed to CSL by Yeda Research and Development Company Limited, an Israeli corporation ("Yeda") (see
Note 7,
Related Party Transactions
). The Company’s target indications include: lymphoma, leukemia and multiple myeloma through the
facilitation of safer and more accessible stem cell (e.g. bone marrow) transplantation acceptance, treatment of end stage kidney disease and other non-malignant organ diseases through improved organ transplantation (broadened donor pool,
reduced dependence on post-transplant anti-rejection therapy), and ultimately treating a variety of cancers and non-malignant diseases.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial
position of the Company as of March 31, 2019 and the condensed consolidated results of its operations and cash flows for the three months ended March 31, 2019 and 2018. The results of operations for the three months ended March 31, 2019 are not
necessarily indicative of the operating results for the full year ending December 31, 2019 or any other period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
related disclosures of the Company as of December 31, 2018 and for the year then ended which were included in the Company's Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019.
Note 2- Going Concern and Management Plans
During the three months ended
March 31, 2019, the Company had not generated any revenues, had a net loss of approximately $1,459,000 and had used cash in operations of approximately
$405,000
. As of March 31, 2019, the
Company had a working capital deficiency of approximately
$5,111,000 and
an accumulated deficit of approximately $18,129,000. Subsequent to March 31, 2019 and as more fully described in Note
9,
Subsequent Events
, the Company received aggregate proceeds of $573,308 through the sale of 76,437 shares of Series A Convertible Preferred Stock at $7.50 per share and $70,000 through the issuance of a short term note payable. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern within twelve months
from the date these financial statements are issued
.
The Company is currently funding its operations on a month-to-month basis. While there can be no assurance that it will be successful, the Company is in active negotiations to raise additional capital.
The Company’s primary source of operating funds since inception has been equity and debt financings. Management’s plans include continued efforts to raise additional capital through debt and equity financings. There is no assurance that these funds
will be sufficient to enable the Company to fully complete its development activities or attain profitable operations. If the Company is unable to obtain such additional financing on a timely basis or, notwithstanding any request the Company may
make, if the Company’s debt holders do not agree to convert their notes into equity or extend the maturity dates of their notes, the Company may have to curtail its development, marketing and promotional activities, which would have a material
adverse effect on the Company’s business, financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations and liquidate.
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which
contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not
necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Note 3 - Summary of Significant Accounting Policies
Since the date of the Annual Report on
Form 10-K for the year ended December 31, 2018, there have been no material changes to the Company’s significant accounting policies.
Loss Per Share
The Company computes basic net loss per share by dividing net loss by the weighted average number of common shares
outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all dilutive securities into common stock using the
“treasury stock” and/or “if converted” methods, as applicable. Weighted average shares outstanding for
the three months ended March 31, 2019 and 2018
includes
the weighted average impact of warrants to purchase an aggregate of 2,043,835 shares of common stock because their exercise price was determined to be nominal.
The common stock equivalents associated with the following securities are excluded from the calculation of weighted
average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
6,374,157
|
|
|
|
11,915,481
|
|
Convertible notes
|
|
|
1,069,101
|
|
|
|
1,520,732
|
|
Convertible preferred stock
|
|
|
10,489,890
|
|
|
|
6,504,570
|
|
Total
|
|
|
17,933,148
|
|
|
|
19,940,783
|
|
Convertible notes are assumed to be converted at the rate of $0.75 per common share, which is the conversion price as
of March 31, 2019. However, such conversion rates are subject to adjustment under certain circumstances, which may result in the issuance of common shares greater than the amount indicated.
Note 4 - Fair Value
The Company determines the estimated fair value of amounts presented in these condensed consolidated financial
statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are
not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. These fair value estimates were based upon pertinent information available as of March 31, 2019 and December 31, 2018 and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value
of its restricted common stock during the three months ended March 31, 2019 based upon observations of the recent sales of Preferred Stock which is convertible into common stock as well as the thinly traded volume and closing prices of its common
stock. The Company obtained a third-party valuation of its common stock as of December 31, 2017, which was also considered in management’s estimation of the fair value of its restricted common stock during the three months ended March 31, 2019.
The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:
Level 1
|
Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|
Level 2
|
Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as
other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
Level 3
|
Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or
liability.
|
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy,
fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and
considers factors specific to each asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified
within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market
interest rates) and unobservable (e.g., changes in historical company data) inputs. The following table summarizes the valuation of the Company’s derivatives by the above fair value hierarchy levels as of March 31, 2019 and December 31, 2018
using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - common stock
|
|
$
|
37,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,500
|
|
Accrued compensation - warrants
|
|
|
33,228
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,228
|
|
Accrued compensation - warrants - related party
|
|
|
79,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,603
|
|
Derivative liabilities
|
|
|
147,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2019
|
|
$
|
298,231
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
298,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - common stock
|
|
$
|
37,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,500
|
|
Accrued compensation - warrants
|
|
|
24,741
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,741
|
|
Accrued compensation - warrants - related party
|
|
|
55,083
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,083
|
|
Derivative liabilities
|
|
|
200,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
$
|
317,824
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
317,824
|
|
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash
flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants deemed to be derivative liabilities according to the
Company’s sequencing policy in accordance with ASC 815-40-35-12, the conversion option of convertible notes payable, and an accrued obligation to issue warrants and common stock.
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all Level 3
liabilities measured at fair value on a recurring basis using unobservable inputs during the three months ended March 31, 2019:
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
Compensation
|
|
|
Liabilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
$
|
117,324
|
|
|
$
|
200,500
|
|
|
$
|
317,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - warrants
|
|
|
8,560
|
|
|
|
-
|
|
|
|
8,560
|
|
Accrued compensation - warrants - related party
|
|
|
24,683
|
|
|
|
-
|
|
|
|
24,683
|
|
Change in fair value
|
|
|
(236
|
)
|
|
|
(52,600
|
)
|
|
|
(52,836
|
)
|
Balance - March 31, 2019
|
|
$
|
150,331
|
|
|
$
|
147,900
|
|
|
$
|
298,231
|
|
As of March 31, 2019, the Company had an obligation to issue 150,000 shares of common stock to a service provider. The shares had a fair value of $37,500, which was a component of accrued compensation on the condensed consolidated balance
sheets.
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.21% - 2.44
|
%
|
|
|
1.73% - 2.69
|
%
|
Expected term (years)
|
|
|
0.02 - 5.00
|
|
|
|
0.25 - 5.00
|
|
Expected volatility
|
|
|
110
|
%
|
|
|
110
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock has not been
publicly traded for a sufficiently long period of time or with significant volume, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the
instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term
of the instrument being valued.
Note 5 – Notes Payable and Convertible Notes Payable
During the three months ended March 31, 2019 and 2018, the Company recorded interest expense of $76,867 and $30,265,
respectively, and interest expense for related party debt of $740 and $740, respectively.
During the three months ended March 31, 2019 and 2018, the Company recorded amortization of debt discount of $0 and
$137,974, respectively, and amortization of debt discount for related party debt of $0 and $18,493, respectively.
As of March 31, 2019 and through the date of this filing, notes payablewith principal amounts totaling $1,983,000 were past dueand
are classified as current liabilities on the condensed consolidated balance sheet as of March 31, 2019. Such notes continue to accrue interest and all relevant penalties have been accrued as of March 31, 2019. Of such past due notes payable, a
holder of a note with principal amount of $250,000 issued a notice of default. See Note 8,
Commitments and Contingencies – Litigation
for
additional details. The Company is in negotiations with all holders of notes payable to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
As of March 31, 2019 and December 31, 2018, the Company had $234,580 and $302,974, respectively, of accrued interest and penalties
related to notes payable, which is included with accrued interest and accrued interest – related parties on the condensed consolidated balance sheets.
Notes Payable
On March 31, 2019, holders of notes with aggregate principal amounts of $400,000 and aggregate late payment penalties
of $40,000 exchanged those notes for 70,400 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6
, Stockholders’ Deficiency - Series A Convertible Preferred Stock,
this difference of $88,000 was recorded in the condensed consolidated statement
of operations as a loss on exchange of notes payable for Series A Convertible Preferred Stock.
Convertible Notes Payable
On March 31, 2019, holders of notes with aggregate principal amounts of $290,000 and aggregate accrued interest of $97,784 exchanged
those notes for 74,967 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6,
Stockholders’ Deficiency - Series A Convertible Preferred Stock
, this difference of $174,470 was recorded in the condensed consolidated statements of operations as a loss
on exchange of notes payable for Series A Convertible Preferred Stock.
Note 6 – Stockholders’ Deficiency
Series A Convertible Preferred Stock
On January 27, 2019, the Board of Directors extended the expiration date of the Private Placement Memorandum (“PPM”)
to March 31, 2019 and has authorized two sixty-day extensions beyond that date at management's discretion, under which the Company continues to raise up to $7,500,000 via the sale of up to 1,000,000 shares of Series A Convertible Preferred Stock
at $7.50 per share. On March 27, 2019, the Board of Directors extended the expiration date of the PPM to May 30, 2019.
On various dates from January 7, 2019 through March 13, 2019, the Company received proceeds of $325,000 through the sale of 43,331
shares of Series A Convertible Preferred Stock at $7.50 per share.
On March 31, 2019, in connection with the exchange of
various notes payable, accrued interest and late payment penalties totaling $827,784, the Company issued 145,367 shares of Series A Convertible Preferred Stock under the terms of the PPM with a total value of $1,090,254, as more fully described
in Note 5,
Notes Payable
. As the value of those shares
exceeded the carrying value of the note payable, accrued interest and late payment penalties, the difference of $262,470 was recorded in the condensed consolidated statement of operations during the three months ended March 31, 2019 as a loss on
exchange of notes payable for Series A Convertible Preferred Stock.
During the three months ended March 31, 2019 and 2018, the Company accrued and recorded Series A Preferred Stock
dividends of $148,035 and $107,496, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.
Stock-Based Compensation
During the three months ended March 31, 2019 and 2018, the Company recognized expense of $33,007 and $0,
respectively, of stock-based compensation related to warrants. As of March 31, 2019, there was no unrecognized stock-based compensation expense.
Note 7 – Related Party Transactions
In 2011, the Company entered into a Research and License Agreement with Yeda for Veto Cell technology. As Yeda is a
founder and a significant shareholder of the Company, it is a related party.
During the three months ended March 31, 2019 and 2018, the Company recorded research and development expense of
$25,000 and $225,139, respectively, in connection with the agreement with Yeda.
On January 7, 2018, the Company received
proceeds of $50,000 from the Chairman of the Board through the sale of 6,667 shares of
Series A Convertible Preferred Stock at $7.50 per share, which amount is included in the issuances disclosed in Note 6,
Stockholders’ Deficiency.
Note 8 – Commitments and Contingencies
MD Anderson Agreements
On February 19, 2019, the Company entered into an agreement with
The University of Texas M.D. Anderson Cancer Center (“MD Anderson”)
for the latter to perform cell production and conduct Phase I/II human clinical trials. In connection with that agreement, the Company
committed to fund such work in the amount of approximately $2,000,000 over a two-year period beginning that same date
, with payments becoming due as certain specified
milestones are met by MD Anderson.
The Company recognized $684,255 and $0 of research and
development expenses during the
three months ended March 31, 2019 and 2018
,
respectively, associated with services provided by MD Anderson in the periods, under the two agreements with MD Anderson dated November 2018 and February 2019.
As of March 31, 2019, the Company had $559,336 of accrued research and
development expenses pursuant to the agreements with MD Anderson, which are included within accrued expenses on the condensed consolidated balance sheet.
Litigation
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss
to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the
perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount
of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably
possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
In January 2019, the holder of a promissory note in the principal amount of $250,000 due on March 16, 2016 instituted a collection action in the Supreme Court of the State of New York,
County of New York. A motion for summary judgement was heard on March 7, 2019 and the Company did not oppose the motion. The Company has had discussion with respect to entering into an agreement providing for a payment plan with the holder of the
note, but no agreement has yet been reached.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the
guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. As of March 31, 2019 and December 31, 2018,
the Company has not accrued any amounts for contingencies.
Note 9 – Subsequent Events
Series A Convertible Preferred Stock
On various dates from April 5 to April
30, 2019, the Company received aggregate proceeds of $573,308 through the sale of 76,437 shares of Series A Convertible Preferred Stock at $7.50 per share. Of those amounts, an aggregate of $295,825 was received from two members of the Board of
Directors for 39,441 shares of Series A Convertible Preferred Stock.
Note Payable
On May 15, 2019, the Company issued a non-interest-bearing bridge note payable in the principal amount of $70,000 with
a term of ten days. Concurrent with the issuance of this note, the Company issued five-year warrants for the purchase of up to 35,000 shares of common stock at $0.75 per share.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
.
The following
discussion and analysis of the condensed consolidated results of operations and financial condition of Cell Source, Inc. ("CSI", “Cell Source”, the “Company”, “us,” “we,” “our,”) as of March 31, 2019 and for the three months ended March 31,
2019 and 2018 should be read in conjunction with our unaudited financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”)
on April 1, 2019.
This Quarterly Report
contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans
or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of
our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We
caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the
statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the
year ended December 31, 2018 filed with the SEC
on April 1, 2019.
Overview
We are a biotechnology company focused on developing cell therapy treatments based on the management of immune
tolerance. Our technology platform has been extensively tested by in vitro studies and confirmed in animal trials. We continue to move forward towards clinical trials as more fully discussed in our Annual Report on Form 10-K for the year ended
December 31, 2018 which was filed with the SEC on April 1, 2019.
Consolidated Results of Operations
Three Months Ended March 31, 2019 Compared with the Three Months Ended March 31, 2018
Research and Development
Research and development expense was
$749,742
and
$
302,755
for
the
three months
ended
March 31
, 2019 and 2018, respectively, an increase of $446,987, or 148%, primarily related to the commencement
of research by MD Anderson.
Selling, General and Administrative
Selling, general and administrative expense was $421,290 and $357,357 for the
three months
ended
March 31
, 2019 and 2018, respectively, an increase of $63,933, or 18%, primarily related to increases of
approximately $59,000 inauditand professional fees in the 2019 period, approximately $33,000 of stock-based compensation expense, offset by decreases of approximately $27,000 in consulting fees.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
three months
ended
March 31
, 2019 and 2018 was a gain of $52,600 and $135,400, respectively, primarily due to the warrants and conversion
options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.
Interest Expense
Interest expense for the three months ended March 31, 2019 and 2018 was $77,607 and $31,005, respectively, anincrease
of $46,602, or 150%, primarily as a result of penalties of approximately $46,000 due to penalties associated with certain past due notes payable.
Amortization of Debt Discount
Amortization of debt discount was $0 and
$
156,467 for the three months ended
March 31
, 2019 and 2018
,
respectively, which is associated with warrants and conversion options issued in connection with notes payable.
Loss on Exchange of Notes Payable for Series A Convertible Preferred Stock
During the three months ended March 31, 2019, we recognized a $262,470 loss on exchange of notes payable for Series A Convertible
Preferred Stock. The losses recognized represent the value of the preferred shares in excess of the carrying value of the notes payable.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
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March 31,
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December 31,
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2019
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2018
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|
|
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(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
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|
$
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13,490
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|
|
$
|
18,934
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|
Working capital deficiency
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|
$
|
(5,111,461
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)
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$
|
(4,920,171
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)
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During the three months ended March 31, 2019, the Company had not generated any revenues, had a net loss of approximately
$1,459,000, and used cash in operations of approximately
$405,000
. As of March 31, 2019, the Company had a working capital deficiency of approximately
$5,111,000 and
an accumulated deficit of approximately $18,129,000. Subsequent to March 31, 2019, the Company received aggregate proceeds of $573,308 through the sale
of 76,437 shares of Series A Convertible Preferred Stock at $7.50 per share and $70,000 through the issuance of a short term note payable. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within
twelve months
from the date these financial statements are issued
.
Our ability to continue our operations is dependent on the execution of management’s plans, which include the raising
of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. We may need to incur additional liabilities with certain related parties to sustain our
existence. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of our
financial statements.
There can be no assurances that we will be successful in generating additional cash from equity or debt financings or
other sources to be used for operations. Should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail certain or all operational activities and/or contemplate the sale of our assets, if
necessary.
During the three months ended March 31, 2019 and 2018, our sources and uses of cash were as follows:
Net Cash Used in Operating Activities
We experienced negative cash flows from operating activities for the
three months
ended March 31, 2019 and 2018 in the amounts of approximately $405,000 and $710,000, respectively. The net cash used in operating activities for the three months ended March 31, 2019 was
primarily due to cash used to fund a net loss of approximately $1,459,000, adjusted for net non-cash expenses in the aggregate amount of approximately $243,000, partially offset
by $
810,000
of net cash provided by changes in the levels of operating assets and liabilities.
The net cash used in operating activities for
the three months ended March 31, 2018 was primarily due to cash used to fund a net loss of approximately $712,000, adjusted for net non-cash expenses in the aggregate amount of approximately $21,000, and
by $
19,000
of net cash used to fund changes in the levels of operating assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the
three months
ended March 31, 2019 and 2018 was $400,000 and $550,000, respectively. The net cash provided by financing activities during the three months ended March 31, 2019 was attributable to $325,000 of proceeds from
the issuance of Series A preferred stock and $75,000 of proceeds received from cash advances. The net cash provided by financing activities during the three months ended March 31, 2018 was attributable to $500,000 of proceeds from the issuance of
notes payable and $50,000 of proceeds received from the issuance of Series A preferred stock.
Off-Balance Sheet
Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies, see Note 3,
Summary of Significant Accounting Policies,
in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the
objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls
are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit
the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.
In connection with the preparation of this Quarterly Report, management, with the participation of our Principal
Executive and Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal
Executive and Financial Officer concluded that, as of March 31, 2019, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Except as described below, we are not involved in any pending legal proceeding or litigations and, to the best of
our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.
In January 2019, the holder of a promissory note in the principal amount of $250,000 due on March 16, 2016
instituted a collection action in the Supreme Court of the State of New York, County of New York. A motion for summary judgement was heard on March 7, 2019 and the Company did not oppose the motion. The Company has had discussion with respect
to entering into an agreement providing for a payment plan with the holder of the note, but no agreement has yet been reached.
Item 1A. Risk Factors.
There have been no material changes to the
risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on April 1, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Between January 7, 2019 and March 13, 2019, the Company sold 43,331 shares of Series A Convertible Preferred Stock at an aggregate
purchase price of $325,000. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.
On March 31, 2019, the Company issued 145,367 shares of Series A Convertible Preferred Stock in exchange for the
surrender of notes payable with a total outstanding principal amount and accrued interest and penalties of $827,784.
The Company relied upon the exemption provided by
Section 3(a)(9) of the Securities Act in connection with this transaction.
On May 15, 2019, the Company issued five-year warrants to purchase 35,000 shares of common stock at an exercise price of $0.75 per
share to a purchaser of a note in principal amount of $70,000. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.
Between April 5, 2019 and April 30, 2019, the Company sold 76,437 shares of Series A Convertible Preferred Stock at an
aggregate purchase price of $573,308. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.
Item 3. Defaults Upon Senior Securities.
As of March 31, 2019 and through the date of this filing, notes payable and convertible notes payable with face
values totaling $1,983,000 were past due and are classified as current liabilities on the condensed consolidated balance sheet as of March 31, 2019. Such notes continue to accrue interest and all relevant penalties have been accrued as of
March 31, 2019.
Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Item 1 above for additional
details.
We are in negotiations with all holders to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
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Number
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Description
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10.39(a)
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Amendment No. 1 to Veto Cell Production and Clinical Trial Program Agreement dated as of April 4, 2019 between Cell Source
Limited and The University of Texas M.D. Anderson Cancer Center (1)
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31
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief
Executive Officer and Chief Financial Officer
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32
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*
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief
Executive Officer and Chief Financial Officer
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Schema Document
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101.CAL
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XBRL Calculation Linkbase Document
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101.DEF
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XBRL Definition Linkbase Document
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101.LAB
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XBRL Label Linkbase Document
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101.PRE
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XBRL Presentation Linkbase Document
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(1)
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Certain
information has been excluded from this exhibit because (i) it is not material and (ii) would be competitively harmful if publicly disclosed.
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*
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This certification is being furnished and shall not be deemed "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise be subject to the liability of
that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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CELL SOURCE, INC.
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Dated: May 20, 2019
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By:
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/s/ Itamar Shimrat
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Name: Itamar Shimrat
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Title: Chief Executive Officer and
Chief Financial Officer (Principal
Executive, Financial and Accounting
Officer)
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