This Management Discussion and Analysis ("MD&A") contains "forward-looking statements," which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management's future plans or objectives or to our future economic and financial performance. In some cases, you can identify these statements by terminology such as "may," "should," "plans," "believe," "will," "anticipate," "estimate," "expect," "project" or "intend," including their opposites or similar phrases or expressions.

You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should not be regarded as a representation by the Company or any other person that the events or plans of the Company will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this MD&A. Except as may be required under applicable securities laws, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this MD&A or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe under "Risk Factors" in this Annual Report on Form 10-K. Actual results may differ materially from any forward-looking statement.






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Overview

We are a cell therapy company focused on immunotherapy. Since our inception, we have been involved with the development of proprietary immune system management technology licensed from Yeda Research & Development Company Limited ("Yeda"), the commercial arm of the Weizmann Institute. We have recently shifted the focus of our research and development efforts to MD Anderson.

This technology addresses one of the most fundamental challenges within human immunology: how to tune the immune response such that it tolerates selected desirable foreign cells, but continues to attack all other (undesirable) targets. In simpler terms, a number of potentially life-saving treatments have limited effectiveness today because the patient's immune system rejects them. For example, while HSCT - hematopoietic stem cell transplantation (e.g. bone marrow transplantation) has become a preferred therapeutic approach for treating blood cell cancer, most patients do not have a matched family donor. Although matched unrelated donors and cord blood can each provide an option for such patients, haploidentical stem cell transplants (sourced from partially mismatched family members) are rapidly gaining favor as a treatment of choice. This is still a risky and difficult procedure primarily because of potential conflicts between host and donor immune systems and also due to viral infections that often follow even successful HSCT while the compromised new immune system works to reconstitute itself by using the transplanted stem cells. Today, rejection is partially overcome using aggressive immune suppression treatments that leave the patient exposed to many dangers by compromising their immune system.

The unique advantage of Cell Source technology lies in the ability to induce sustained tolerance of transplanted cells (or organs) by the recipient's immune system in a setting that requires only mild immune suppression, while avoiding the most common post-transplant complications. The scientific term for inducing such tolerance in a transplantation setting is chimerism, where the recipient's immune system tolerates the co-existence of the (genetically different) donor type and host (recipient) type cells. Attaining sustained chimerism is an important perquisite to achieving the intrinsic GvL (graft versus leukemia) effect of HSCT and supporting the reconstitution of normal hematopoiesis (generation of blood cells, including those that protect healthy patients from cancer) in blood cancer patients. Preclinical data show that Cell Source's Veto Cell technology (currently in clinical trials in the US) can provide superior results in allogeneic (donor-derived) HSCT by allowing for haploidentical stem cell transplants under a mild conditioning regimen, while avoiding the most common post-transplant complications. Combining this with CAR (Chimeric Antigen Receptor) T cell therapy as a unified VETO CAR-T treatment, we will be able to treat patients in relapse as well as those in remission and use the cancer killing power of CAR-T to protect the patient while their immune system fully reconstitutes, thus providing an end-to-end solution for blood cancer treatment by potentially delivering a fundamentally safer and more effective allogeneic HSCT: prevention of relapse; avoidance GvHD; prevention of viral infections; and enhanced persistence of GvL effect. This means that the majority of patients will be able to find a donor, and will have access to a potentially safer procedure with higher long term survival rates than what either donor-derived HSCT or autologous CAR-T each on their own currently provide.

The ability to induce permanent chimerism (and thus sustained tolerance) in patients - which allows the transplantation to overcome rejection without having to compromise the rest of the immune system - may open the door to effective treatment of a number of severe medical conditions, in addition to blood cancers, which are characterized by this need. These include:





    ·   The broader set of cancers, including solid tumors, that can potentially
        be treated effectively using genetically modified cells such as CAR-T cell
        therapy, but also face efficacy and economic constraints due to limited
        persistence based on immune system issues (i.e., the need to be able to
        safely and efficiently deliver allogeneic CAR-T therapy). Inducing
        sustained tolerance to CAR-T cells may bring reduced and cost and
        increased efficacy by allowing for off-the-shelf (vs. patient-derived)
        treatments with more persistent cancer killing capability.

    ·   Organ failure and transplantation. A variety of conditions can be treated
        by the transplantation of vital organs. However, transplantation is
        limited both by the insufficient supply of available donor organs and the
        need for lifelong, daily anti-reject treatments post-transplant.
        Haploidentical organ transplants, with sustained chimerism, have the
        potential to make life saving transplants accessible to the majority of
        patients, with the prospect of improved life quality and expectancy.

    ·   Non-malignant hematological conditions (such as type one diabetes and
        sickle cell anemia) which could, in many cases, also be more effectively
        treated by stem cell transplantation if the procedure could be made safer
        and more accessible by inducing sustained tolerance in the stem cell
        transplant recipient.




Human Capital Resources

Other than our Chief Executive Officer, we currently do not have any full-time employees, but retain the services of independent contractors/consultants on a contract-employment basis.





Recent Developments

Preclinical Results and Clinical Results

After two years of intensive collaboration with Professor Zelig Eshhar, the inventor of CAR-T cell therapy, interim data confirmed that Veto Cells can markedly extend persistence of genetically modified T cells from the same donor and that genetically modified Veto Cells can effectively inhibit tumors expressing an antigen recognized by the transgenic T cell receptor. Furthermore, human Veto Cells transfected with CAR exhibit anti-tumor activity in-vitro without losing their veto activity. These preclinical results will form the basis of the development of a clinical protocol for allogeneic VETO CAR-T HSCT combined therapy for blood cancer treatment. Cell Source plans to submit this protocol for approval in the second quarter of 2021. The Phase 1/2 clinical trial at the University of Texas MD Anderson Cancer Center, using Cell Source's Anti-viral Veto Cells, has successfully completed the first treatment cohort, with 3 patients each receiving a haploidentical HSCT under reduced intensity conditioning with Veto Cells. This first in human dose optimization trial has thus far shown that the initial dose is in fact the optimal dose, as all three patients had successful stem cell engraftment after 42 days, in the absence of GvHD. Cell Source is now continuing the trial as it proceeds with the next cohort of patients, using the same dose level.






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COVID-19

Recently, the outbreak of the novel coronavirus, or COVID-19, around the world has adversely impacted global commercial activity and contributed to significant volatility in financial markets and disrupted normal business operations. The global impact of the outbreak has been rapidly evolving, and many countries have reacted by instituting quarantines and restrictions on travel, and many businesses and other institutions have temporarily closed or reduced work activities at their facilities. Such actions are creating disruption in global supply chains, and adversely impacting a number of industries, such as transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the novel coronavirus. Nevertheless, the novel coronavirus presents material uncertainty and its disruption of the capital markets may have a material adverse impact on our ability to raise additional capital and may slow down the pace at which research and clinical trials may be conducted on our behalf.

Consolidated Results of Operations

Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019





Research and Development

Research and development expense was $998,554 and $2,630,385 for the years ended December 31, 2020 and 2019, respectively, a decrease of $1,631,831, or 62%. The decrease is primarily attributable to a decrease in expenses related to MD Andersen of approximately $630,000 during the 2020 period as compared to the 2019 period due to milestone payments being made in the 2019 period. Furthermore, the Company recognized $825,100 of stock-based compensation expense during the 2019 period associated with a stock option grant to Dr. Reisner, who chairs the Company's Scientific Advisory Board and leads the Reisner Laboratory at MD Anderson.





General and Administrative

General and administrative expense was $2,639,482 and $1,174,816 for the years ended December 31, 2020 and 2019, respectively, an increase of $1,464,666, or 125%, primarily related to increases expenses recognized during the year ended December 31, 2020 of approximately $773,000 in non-cash stock-based compensation expenses in connection with stock option grants to directors, common stock and stock warrant issuances to consultants and Scientific Advisory Board members, approximately $245,000 of legal fees and approximately $323,000 of consulting and investor relations fees.





Interest Expense

Interest expense for the years ended December 31, 2020 and 2019 was $636,156 and $292,977, respectively, an increase of $343,179, or 117%, primarily as a result of increases in convertible notes payable outstanding during the 2020 period.

Amortization of Debt Discount

Amortization of debt discount was $301,250 and $14,970 for the years ended December 31, 2020 and 2019, respectively, which is primarily associated with the fair value of warrants issued in connection with convertible notes payable.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities for the years ended December 31, 2020 and 2019 was a gain of $16,977 and a gain of $146,700, respectively, primarily due to warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.





Warrant Modification Expense

During the year ended December 31, 2019, we recognized $283,500 of warrant modification expense on the extension of an expiration date of a certain warrant.

Loss on Exchange of Notes Payable for Series A Convertible Preferred Stock

During the year ended December 31, 2019, we recognized a loss on exchange of notes payable for Series A Convertible Preferred Stock of $262,470, which represents the value of the preferred shares in excess of the carrying value of notes payable.






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Gain on Forgiveness of Accrued Interest for Common Stock

During the year ended December 31, 2020, we recognized a $132,502 gain on exchange of accrued interest for common stock, which represents the excess carrying value of the accrued interest as compared to the issuance date fair value of the common stock.

Loss on Extinguishment of Notes Payable

During the years ended December 31, 2020 and 2019, we recognized $134,202 and $1,504, respectively, of loss on extinguishment of notes payable in connection with the extension and repayment of notes payable.

Gain on Forgiveness of Accrued Expenses

During the year ended December 31, 2019, we recognized $38,427 of gain on forgiveness of accrued expenses. The gain recognized represents the forgiveness of accrued payroll expenses and director fees due by a former member of the Board of Directors.

Liquidity and Going Concern

We measure our liquidity in a number of ways, including the following:





                                     December 31,
                                 2020             2019

Cash                         $    245,119     $     27,908

Working capital deficiency $ (7,947,382 ) $ (5,596,941 )

During the year ended December 31, 2020, we had not generated any revenues, had a net loss of approximately $4,560,000 and had used cash in operations of approximately $2,775,000. As of December 31, 2020, we had a working capital deficiency of approximately $7,947,000 and an accumulated deficit of approximately $25,706,000. Subsequent to December 31, 2020, we received proceeds of $860,000 through the issuance of convertible notes payable. These conditions raise substantial doubt about our ability to continue as a going concern at least one year after the date these financial statements are issued.

We are currently funding our operations on a month-to-month basis. 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 years ended December 31, 2020 and 2019, 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 years ended December 31, 2020 and 2019 in the amounts of $2,774,631 and $2,587,212, respectively. The net cash used in operating activities for the year ended December 31, 2020 was primarily due to cash used to fund a net loss of $4,560,165, adjusted for net non-cash expenses in the aggregate amount of $1,362,196, partially offset by $423,338 of net cash provided by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year ended December 31, 2019 was primarily due to cash used to fund a net loss of $4,475,495, adjusted for net non-cash income in the aggregate amount of $1,318,196, partially offset by $570,087 of net cash provided by changes in the levels of operating assets and liabilities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the years ended December 31, 2020 and 2019 was $2,991,842 and $2,596,186, respectively. The net cash provided by financing activities during the year ended December 31, 2020 was attributable to $2,547,500 of proceeds from the issuance of convertible notes payable, $728,347 of proceeds from the issuance of Series A preferred stock, $100,000 of proceeds from the issuance of notes payable, $114,000 of proceeds from advances payable, $1,995 of proceeds from a warrant exercise, offset by the repayments of notes payable in the amount of $200,000, $154,000 of repayments of advances payable and $146,000 of repayments of convertible notes payable. The net cash provided by financing activities during the year ended December 31, 2019 was attributable to $1,795,677 of proceeds from the issuance of Series A preferred stock, $665,000 of proceeds from the issuance of convertible notes payable, $275,500 of proceeds from an advance payable, $120,000 of proceeds from the issuance of notes payable, offset by $140,000 of repayments of advances payable, $70,000 of repayments of notes payable and $49,991 of payments of equity issuance costs.






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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below.

The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our accounting policies are more fully described in Note 3 - Summary of Significant Accounting Policies, in our financial statements included elsewhere in this annual report.





Convertible Instruments

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument.

If the instrument is determined to not be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the commitment date fair value to the effective conversion price of the instrument.

The Black-Scholes option pricing model was used to estimate the fair value of the Company's warrants and embedded conversion options. The Black-Scholes option pricing model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value under the Binomial Lattice model and the Black-Scholes option pricing model to be materially the same.

Embedded conversion options within notes payable are recorded as a debt discount and are amortized as interest expense over the term of the related debt instrument.

Fair Value of Financial Instruments

The Company measures the fair value of financial assets and liabilities based on ASC 820 "Fair Value Measurements and Disclosures" ("ASC 820"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for identical assets or liabilities;

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable; and

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).






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The carrying amounts of the Company's financial instruments, such as cash, other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amounts of Company's credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates, are comparable to rates of returns for instruments of similar credit risk.





Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and is then recognized over the period the services are required to be provided in exchange for the award, usually the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.

Because the Company's common stock historically was not actively traded on a public market, the fair value of the Company's restricted equity instruments is estimated by management based on observations of the sales prices of both restricted and freely tradable common stock, or instruments convertible into common stock. The Company obtained a third-party valuation of its common stock as of December 31, 2017, which was considered in management's estimation of fair value during the year ended December 31, 2019. The Company, in estimating the fair value of its common stock as of December 31, 2019, concluded that it did not need to obtain a third-party valuation as of such date as (a) the nature of the Company's operations has not significantly changed during the year ended December 31, 2019 and (b) the Company continued to raise capital during the year ended December 31, 2019 at the same valuation as the capital raised during the period ended December 31, 2017. The Company obtained a third-party valuation of its common stock as of December 31, 2020, which was considered in management's estimation of fair value during the year ended December 31, 2020. The third-party valuation was performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The estimates used by management are considered highly complex and subjective. The Company anticipates that once its shares become more actively traded, the use of such estimates will no longer be necessary to determine the fair value of its common stock.

The December 2020 independent appraisal utilized the option pricing method, or OPM, as the most reliable method with the following steps being applied:





  · Establishment of total enterprise or equity value;
  · Analysis of equity rights for each class of security;
  · Selection of appropriate model for valuation purposes;
  · Determination of key valuation inputs; and
  · Computation of the fair value of the subject security.

Under the OPM, it was determined the Company's common stock a fair value of $0.47 per share, which included a discount for lack of marketability of 30%. Furthermore, the independent appraisal determined the Company's expected volatility was 90% by evaluating historical and implied volatilities of guideline companies.

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