During the six months ended June 30, 2020, the Company had not generated any
revenues, had a net loss of approximately $1,978,000 and had used cash in
operations of approximately $1,154,000. As of June 30, 2020, the Company had a
working capital deficiency of approximately $6,528,000 and an accumulated
deficit of approximately $23,124,000. Subsequent to June 30, 2020 and as more
fully described in Note 10, Subsequent Events, the Company received proceeds of
$603,355 through the sale of 80,466 shares of Series A Convertible Preferred
Stock at $7.50 per share and net proceeds of $497,500 through the issuance of a
convertible note payable in the principal amount of $555,556. 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.
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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 sources of
operating funds since inception have 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,
2019, 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 applicable to
common stockholders 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 and six months ended June 30, 2020 and 2019
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:
June 30,
2020 2019
Options 3,782,004 -
Warrants 5,744,477 6,409,157
Convertible notes 3,258,424 1,073,921
Convertible preferred stock 12,617,490 11,554,260
Total 25,402,395 19,037,338
Convertible notes are assumed to be converted at the rate of $0.75 per common
share, which is the conversion price. 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.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to the
fiscal 2020 presentation, including certain accrued liabilities that have been
reclassified from accrued compensation to accrued interest as well as certain
operating expenses that have been reclassified to other expenses. These
reclassifications have no impact on the previously reported net loss.
Note 4 - Fair Value
During the six months ended June 30, 2020, in connection with the extension of
certain convertible notes payable that previously contained a variable
conversion price with no floor and, a result, triggered sequencing, the parties
agreed to amend the conversion terms such that a conversion price floor of $0.75
per share was established. As a result, the Company had no remaining outstanding
instruments with a variable conversion price with no floor and, accordingly, the
Company reclassified derivative liabilities with an aggregate fair value of
$345,830 to additional paid-in capital. See Note 6, Notes Payable and
Convertible Notes Payable for additional details.
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The following table summarizes the Company's instruments recorded at fair value
as of June 30, 2020 and December 31, 2019:
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 6,920 - - 6,920
Accrued interest -
warrants 74,598 - - 74,598
Accrued interest -
warrants - related party 138,317 - - 138,317
Balance - June 30, 2020 $ 257,335 $ - $ - $ 257,335
Accrued compensation -
common stock $ 40,021 $ - $ - $ 40,021
Accrued compensation -
warrants 17,931 - - 17,931
Accrued interest -
warrants 57,343 - - 57,343
Accrued interest -
warrants - related party 115,932 - - 115,932
Derivative liabilities 351,900 - - 351,900
Balance - December 31,
2019 $ 583,127 $ - $ - $ 583,127Financial 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. As of
June 30, 2020, the Company's Level 3 liabilities shown in the above table
consist of accrued obligations to issue warrants and common stock. As of
December 31, 2019, the Company's Level 3 liabilities shown in the above table
consist of sequenced warrants with no price floor as the Company was unable to
determine that it had sufficient authorized common stock to settle such
arrangements, warrants deemed to be derivative liabilities according to the
Company's sequencing policy in accordance with ASC 815-40-35-12, the embedded
conversion options within its convertible notes payable and an accrued
obligation to issue warrants and common stock.
In applying the Black-Scholes option pricing model utilized in the valuation of
Level 3 liabilities, the Company used the following approximate assumptions:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Risk-free interest
rate 0.24% - 0.29 % 1.17% - 2.18 % 0.24% - 1.55 % 1.17% - 2.44 %
Expected term
(years) 4.00 - 5.00 0.05 - 5.00 0.52 - 5.00 0.02 - 5.00
Expected volatility 110 % 110 % 110 % 110 %
Expected dividends 0.00 % 0.00 % 0.00 % 0.00 %
The expected term used is the contractual life of the instrument being valued.
Since the Company's stock does not have significant trading 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.
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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 six months ended June
30, 2020:
Accrued Accrued Derivative
Interest Compensation Liability Total
Balance - December 31, 2019 $ 173,275 $ 57,952 $ 351,900 $ 583,127
Accrued compensation - common
stock - 8,897 - 8,897
Accrued interest - common stock 56,875 - - 56,875
Accrued interest - warrants 17,600 - - 17,600
Accrued interest - warrants -
related party 23,270 - - 23,270
Change in fair value (1,230 ) (134 ) (16,977 ) (18,341 )
Issuance of warrants - (10,877 ) 10,907 30
Issuance of common stock (56,875 ) (11,418 ) - (68,293 )
Reclassification of derivative
liabilities to equity - - (345,830 ) (345,830 )
Balance - June 30, 2020 $ 212,915 $ 44,420 $ - $ 257,335As of June 30, 2020, the Company had an obligation to issue 150,000 shares of
common stock to service providers that had a fair value of $37,500, which was a
component of accrued compensation on the condensed consolidated balance sheet.
See Note 7, Stockholders' Deficiency - Stock Warrants for additional details
associated with the issuance of warrants.
Note 5 - Advances Payable
On May 6, 2020, the Company received proceeds of $100,000 through an advance. In
connection with the advance, the Company issued a five-year immediately vested
warrant to purchase 200,000 shares of common stock at $0.75 per share. The
warrant had an issuance date relative fair value of $24,386, which was recorded
as interest expense on the condensed consolidated statement of operations. On
June 1, 2020, the Company repaid the advance in full.
On June 18, 2020, the Company paid $5,000 in partial repayment of an outstanding
advance.
Note 6 - Notes Payable and Convertible Notes Payable
As of June 30, 2020 and through the date of this filing, notes payable with
principal amounts totaling $1,538,000 were past due and are classified as
current liabilities on the condensed consolidated balance sheet as of June 30,
2020. Such notes continue to accrue interest and all relevant penalties have
been accrued as of June 30, 2020. Of such past due notes payable, a holder of a
note with principal amount of $250,000 issued a notice of default. See Note 9,
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.
During the three months ended June 30, 2020 and 2019, the Company recorded
interest expense of $93,879 and $77,673, respectively, and amortization of debt
discount of $36,228 and $6,529, respectively. During the six months ended June
30, 2020 and 2019, the Company recorded interest expense of $181,528 and
$188,457, respectively, and amortization of debt discount of $44,530 and $6,529,
respectively. As of June 30, 2020 and December 31, 2019, the Company had
$697,253 and $573,007, respectively, of accrued interest (including interest in
the form of warrants (see Note 4)) and penalties related to notes payable, which
is included with accrued interest and accrued interest - related parties on the
condensed consolidated balance sheets.
Convertible Notes Payable
On January 3, 2020, a third party repaid a convertible note in full on behalf of
the Company, which payment included a prepayment penalty for an aggregate total
payment of $100,896 (principal and interest of $68,000 and $32,896,
respectively), which was fully repaid by the Company as of June 30, 2020. The
Company determined the transaction was a note extinguishment and recorded a loss
on extinguishment of $1,441 in the condensed consolidated statements of
operations.
On January 10, 2020, the Company issued a convertible note payable in the
principal amount of $78,000. The note accrues interest at 12% per annum and
matures on January 10, 2021. Any amount of principal or interest which is not
paid at maturity shall accrue interest at 22% per annum. The note also includes
certain prepayment penalties that provide for payments ranging from 115% to 140%
of the then-outstanding principal and interest. The note is convertible at the
option of the holder into common stock at 61% of the lowest trading price during
the ten (10) consecutive trading days prior to the conversion date at any time
during the period which is 180 days following the issuance date of the
convertible note and ending on the later of (i) January 10, 2021 or (ii), in the
event of default, the date of the payment of the default amount. The convertible
note contained an original issuance discount of $3,000 which was recorded as a
debt discount and will be amortized over the term of the note. See Note
10, Subsequent Events, additional details associated with the repayment of this
convertible note.
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On various dates from February 20, 2020 through February 24, 2020, the maturity
dates of three convertible notes in the aggregate principal amount of $145,000
were extended to February 15, 2021. The notes had previous maturity dates
ranging from January 2017 to February 2018. In connection with these extensions,
the parties agreed that (i) the Company would issue an aggregate of 227,500
shares of common stock to the holders with a fair value of $56,875 and (ii) a
conversion price floor of $0.75 per share would be established. The fair value
of the common stock was setup as a debt discount and will be amortized over the
amended term of the notes. On March 31, 2020, the Company issued the shares of
common stock.
On March 2, 2020, the Company received further proceeds of $500,000 through a
previously issued convertible note dated October 28, 2019 in the principal
amount of up to $1,500,000, such that the Company had now received aggregate
proceeds of $1,000,000 under the convertible note.
On June 18, 2020, the Company received further proceeds of $500,000 through a
previously issued convertible note dated October 28, 2019 in the principal
amount of up to $1,500,000, such that the Company had now received aggregate
proceeds of $1,500,000 under the convertible note. The convertible note has a
maturity date of October 31, 2020. In connection with the receipt of these
proceeds, the Company issued a five-year immediately vested warrant for the
purchase of 1,200,000 shares of common stock at an exercise price of $1.25 per
share. The warrant had an issuance date relative fair value of $153,790, which
was recorded as a debt discount and will amortized over the term of the note.
Notes Payable
On April 15, 2020, the maturity dates of two promissory notes in the aggregate
principal amount of $350,000 were extended to April 15, 2021. In connection with
these extensions, the Company issued an aggregate of 525,000 shares of common
stock to the holders with a fair value of $131,250. The Company determined the
extensions were note extinguishments and recorded a loss on extinguishment of
$131,250 in the condensed consolidated statements of operations during the three
months ended June 30, 2020.
On June 3, 2020, the Company issued a note payable in the principal amount of
$100,000. The note does not accrue interest and matures on December 3, 2020. The
note was repaid in full by the Company on June 18, 2020. In connection with the
note issuance, the Company issued a five-year immediately vested warrant to
purchase 50,000 shares of common stock at an exercise price of $0.75 per share.
The warrant had an issuance date relative fair value of $7,466, which was
recorded as a debt discount and was to be amortized over the term of the note,
however, was recognized during the three months ended June 30, 2020 as a result
of the repayment of the note. See Note 10, Subsequent Events, additional details
associated with the repayment of this note.
Note 7 - Stockholders' Deficiency
Series A Convertible Preferred Stock
On January 29, 2020, the Board of Directors extended the expiration date of the
Private Placement Memorandum ("PPM") to March 31, 2020 and has authorized two
sixty-day extensions beyond that date at management's discretion, under which
the Company continues to raise up to $10,000,000 via the sale of up to 1,333,333
shares of Series A Convertible Preferred Stock at $7.50 per share. On March 25,
2020, the Board of Directors extended the expiration date of the PPM to May 30,
2020. On May 27, 2020, the Board of Directors extended the expiration date of
the PPM to July 29, 2020.
During the six months ended June 30, 2020, the Company received aggregate
proceeds of $125,000 through the sale of 16,666 shares of Series A Convertible
Preferred Stock at $7.50 per share.
During the three and six months ended June 30, 2020, the Company accrued and
recorded cumulative Series A Convertible Preferred Stock dividends of $211,885
and $423,190, respectively, with an increase in liabilities and a corresponding
decrease in additional paid-in capital. During the three and six months ended
June 30, 2019, the Company accrued and recorded cumulative Series A Convertible
Preferred Stock dividends of $188,973 and $337,008, respectively, with an
increase in liabilities and a corresponding decrease in additional paid-in
capital.
During the three months ended June 30, 2020, the Company issued 574,576 shares
of common stock valued at $0.75 per share for aggregate value of $430,905,
pursuant to the terms of the Series A Convertible Preferred Stock Certificate of
Designation, in connection with the partial payment of accrued dividends for
Series A Convertible Preferred Stock.
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Common Stock
On March 31, 2020, the Company issued 25,671 shares of immediately vested common
stock with a fair value of $6,418 to a service provider in connection with
consulting services provided.
During the three months ended June 30, 2020, the Company issued an aggregate of
1,270,000 shares of common stock with an issuance date fair value of $317,500 to
service providers in connection with consulting services provided. In connection
with the issuances, the Company expects to recognize the fair value of the
warrants over the service period, such that it recognized stock-based
compensation expense of $305,000 during the three and six months ended June 30,
2020, which amount was included within general and administrative expenses on
the condensed consolidated statements of operations
See Note 6, Notes Payable and Convertible Notes Payable for additional details
associated with the issuance of common stock.
Stock Warrants
On February 13, 2020, the Company issued five-year placement agent warrants to
purchase 66,653 shares of common stock at an exercise price of $0.75 per share
in satisfaction of accrued liabilities of $10,907 that were earned in connection
with the sale of Series A Convertible Preferred Stock during the year ended
December 31, 2019.
On May 20, 2020, the Company issued a five-year warrant to purchase 100,000
shares of common stock at an exercise price of $0.75 per share to a service
provider in connection with consulting services provided. The warrant had an
issuance date fair value of $16,129, which was recognized immediately. In
connection with the issuance, the Company expects to recognize the fair value of
the warrants over the service period, such that it recognized stock-based
compensation expense of $4,322 during the three and six months ended June 30,
2020, which amount was included within general and administrative expenses on
the condensed consolidated statements of operations.
See Note 5, Advances Payable and Note 6, Notes Payable and Convertible Notes
Payable for additional details associated with the issuance of stock warrants.
Stock-Based Compensation
During the three and six months ended June 30, 2020, the Company recognized
stock-based compensation expense of $332,894 and $337,422, respectively, related
to common stock and warrants, which amounts were included within general and
administrative expenses on the condensed consolidated statements of
operations. During the three and six months ended June 30, 2019, the Company
recognized stock-based compensation expense of $3,748 and $3,739,
respectively, related to warrants, which amounts were included within general
and administrative expenses on the condensed consolidated statements of
operations. As of June 30, 2020, there was $24,307 of unrecognized stock-based
compensation expense which the Company expects to recognize over a weighted
average period of 0.3 years.
Note 8 - 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 June 30, 2020 and
2019, the Company recorded research and development expense of $50,000 and
$25,000, respectively, and during the six months ended June 30, 2020 and 2019,
the Company recorded research and development expense of $75,000 and $50,000,
respectively, in connection with the agreement with Yeda.
As of June 30, 2020 and December 31, 2019, the Company was required to issue
warrants to purchase an aggregate of 906,500 and 756,500, respectively, shares
of common stock at an exercise price of $0.75 per share to directors of the
Company in connection with loans made to the Company in the aggregate amount of
$459,000 which required certain penalties in the form of warrants. As a result,
the Company had accrued $138,317 and $115,932 associated with the fair value of
the obligations as of June 30, 2020 and December 31, 2019, respectively, which
amount is included in accrued interest - related parties on the condensed
consolidated balance sheets.
Note 9 - Commitments and Contingencies
MD Anderson Sponsored Research Agreements
The Company recognized $124,926 and $362,471 of research and development
expenses during the three and six months ended June 30, 2020, respectively,
associated with services provided by The University of Texas M.D. Anderson
Cancer Center ("MD Anderson") in the periods, under the two agreements with MD
Anderson dated November 2019 and February 2019, respectively. The Company
recognized $297,015 and $981,270 of research and development expenses during
the three and six months ended June 30, 2019, respectively, associated with
services provided by MD Anderson in those periods. As of June 30, 2020 and
December 31, 2019, the Company had $350,165 and $382,398, respectively, of
accrued research and development expenses pursuant to the agreements with MD
Anderson, which are included within accrued expenses on the condensed
consolidated balance sheets.
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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 June 30, 2020 and December 31, 2019, the Company has not accrued any
amounts for contingencies.
Note 10 - Subsequent Events
The Company has evaluated events that have occurred after the balance sheet and
through the date the financial statements were issued. Based upon the
evaluation, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the
financial statements, except as disclosed below.
Series A Convertible Preferred Stock
Subsequent to June 30, 2020, the Company received proceeds of $603,355 through
the sale of 80,446 shares of Series A Convertible Preferred Stock at $7.50 per
share, such that the Company's PPM was now fully subscribed.
Convertible Notes Payable
On July 6, 2020, the Company repaid a convertible note in full, which payment
included a prepayment penalty, for an aggregate total payment of $115,483
(principal and interest of $78,000 and $37,483, respectively). See Note 6, Notes
Payable and Convertible Notes Payable - Convertible Notes Payable for additional
details associated with the repayment of this convertible note.
On July 29, 2020, the Company issued a convertible note payable in the principal
amount of $555,556 for net proceeds of $497,500 (gross proceeds of $500,000 less
$2,500 of issuance costs) which matures on January 29, 2021. The note accrues
interest at 13% per annum and is convertible into common stock at the lower of
(i) a conversion price of $0.75 per share (the "Fixed Conversion Price") or (ii)
in the event of a default, as defined in the note, a conversion price of 65% of
the lowest volume weighted average price for the ten consecutive trading days
ending on the trading day that is immediately prior to the applicable conversion
date (the "Default Conversion Price"). The Default Conversion Price shall not
apply before March 29, 2021. So long as the convertible note is outstanding,
upon any issuance by the Company of any equity at an effective price lower than
the conversion price (the "Base Conversion Price"), then the conversion price
shall be reduced to equal such Base Conversion Price. In connection to the
issuance of the convertible note payable, the Company issued a five-year
immediately vested warrant to purchase 146,199 shares of common stock at an
exercise price of $0.95 per share, which may be exercised on a cashless basis.
Notes Payable
On July 29, 2020, the Company fully repaid the principal of a promissory note in
the amount of $100,000. See Note 6, Notes Payable and Convertible Notes Payable
- Notes Payable for additional details associated with the repayment of this
note.
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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 June 30, 2020 and for the three and six
months ended June 30, 2020 and 2019 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, 2019 as filed with the Securities and Exchange Commission ("SEC")
on March 30, 2020.
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, 2019 filed with the SEC on March 30, 2020.
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 of Science. 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 or tissue, 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 prerequisite 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 of 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.
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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 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-rejection 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.
Recent Developments
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.
Convertible Notes Payable
On June 18, 2020, the Company received proceeds of $500,000 through a previously
issued convertible note dated October 28, 2019 in the principal amount of
$1,500,000, such that the Company had now received aggregate proceeds of
$1,500,000 under the convertible note. The convertible note has a maturity date
of October 31, 2020. In connection with the receipt of these proceeds, the
Company issued a five-year immediately vested warrant for the purchase of
1,200,000 shares of common stock at an exercise price of $1.25 per share.
On July 29, 2020, the Company issued a convertible note payable in the principal
amount of $555,556 for net proceeds of $497,500 (gross proceeds of $500,000 less
$2,500 of issuance costs) which matures on January 29, 2021. The note accrues
interest at 13% per annum and is convertible into common stock at the lower of
(i) a conversion price of $0.75 per share (the "Fixed Conversion Price") or (ii)
in the event of a default, as defined in the note, a conversion price of 65% of
the lowest volume weighted average price for the ten consecutive trading days
ending on the trading day that is immediately prior to the applicable conversion
date (the "Default Conversion Price"). The Default Conversion Price shall not
apply before March 29, 2021. So long as the convertible note is outstanding,
upon any issuance by the Company of any equity at an effective price lower than
the conversion price (the "Base Conversion Price"), then the conversion price
shall be reduced to equal such Base Conversion Price. In connection to the
issuance of the convertible note payable, the Company issued a five-year
immediately vested warrant to purchase 146,199 shares of common stock at an
exercise price of $0.95 per share, which may be exercised on a cashless basis.
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Condensed Consolidated Results of Operations
Three Months Ended June 30, 2020 Compared with the Three Months Ended June 30,
2019
Research and Development
Research and development expense was $209,926 and $410,770 for the three months
ended June 30, 2020 and 2019, respectively, a decrease of $200,844, or 49%,
primarily related to the recognition of expense in connection with a milestone
payment to MD Anderson in the amount of approximately $172,000 associated with
validation runs and depletions performed during the three months ended June 30,
2019.
General and Administrative
General and administrative expense, which is associated with external consulting
and professional fees, payroll and stock-based compensation expenses, was
$693,405 and $297,936 for the three months ended June 30, 2020 and 2019,
respectively, an increase of $395,469, or 133%, primarily related to increases
in the 2020 period of approximately $304,000 in non-cash stock-based
compensation expenses, approximately $36,000 of legal fees, approximately
$21,000 of consulting and marketing fees and approximately $16,000 of insurance
expenses.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the three months ended
June 30, 2019, was a gain of $32,400, primarily due to the warrants and
conversion options, which were deemed to be derivative liabilities, either
drawing closer to their expiration dates or were no longer outstanding. There
was no change in fair value of derivative liabilities during the three months
ended June 30, 2020 as a result of the reclassification of our derivative
liabilities to additional paid-in capital during the first quarter of 2020.
Interest Expense
Interest expense for the three months ended June 30, 2020 and 2019 was $93,879
and $77,673, respectively, an increase of $16,206, or 21%, primarily as a result
of increases in notes payable outstanding during the 2020 period.
Amortization of Debt Discount
Amortization of debt discount was $36,228 and $6,529 for the three months ended
June 30, 2020 and 2019, respectively, which is associated with warrants and
original issuance discounts issued in connection with notes payable.
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Warrant Modification Expense
During the three months ended June 30, 2019, we recognized $229,400 of warrant
modification expense related to the extension of the expiration date of a
certain warrant.
Loss on Extinguishment of Debt
During the three months ended June 30, 2020 and 2019, we recognized $131,250 and
$1,504 of loss on extinguishment of debt in connection with the extension and
repayment of notes payable.
Gain on Forgiveness of Accrued Expenses
During the three months ended June 30, 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.
Six Months Ended June 30, 2020 Compared with the Six Months Ended June 30, 2019
Research and Development
Research and development expense was $529,138 and $1,160,512 for the six months
ended June 30, 2020 and 2019, respectively, a decrease of $631,374, or 54%,
primarily related to the recognition of expense in connection with milestone
payments to MD Anderson in the amount of approximately $618,000 associated with
the initial upfront payment as well as with validation runs and depletions
performed during the six months ended June 30, 2019.
General and Administrative
General and administrative expense was $1,107,525 and $686,049 for the six
months ended June 30, 2020 and 2019, respectively, an increase of $421,476, or
61%, primarily related to increases in the 2020 period of approximately $309,000
in non-cash stock-based compensation expenses, approximately $62,000 of legal
fees, approximately $41,000 of consulting and marketing fees and approximately
$18,000 of insurance expenses.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the six months ended June
30, 2020 and 2019 was a gain of $16,977 and a gain of $85,000, 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 six months ended June 30, 2020 and 2019 was $181,528
and $188,457, respectively, a decrease of $6,929, or 4%.
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Amortization of Debt Discount
Amortization of debt discount was $44,530 and $6,529 for the six months ended
June 30, 2020 and 2019, respectively, which is associated with warrants and
conversion options issued in connection with notes payable.
Warrant Modification Expense
During the six months ended June 30, 2019, we recognized $229,400 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 six ended June 30, 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.
Loss on Extinguishment of Debt
During the six months ended June 30, 2020 and 2019, we recognized $132,691 and
$1,504, respectively, of loss on extinguishment of debt in connection with the
extension and repayment of convertible notes payable.
Gain on Forgiveness of Accrued Expenses
During the six months ended June 30, 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:
June 30, December 31,
2020 2019
(unaudited)
Cash $ 1,113 $ 27,908
Working capital deficiency $ (6,528,017 ) $ (5,596,941 )
During the six months ended June 30, 2020, we had not generated any revenues,
had a net loss of approximately $1,978,000 and had used cash in operations of
approximately $1,154,000. As of June 30, 2020, we had a working capital
deficiency of approximately $6,528,000 and an accumulated deficit of
approximately $23,124,000. Subsequent to June 30, 2020, we received proceeds of
$603,355 through the sale of 80,446 shares of Series A Convertible Preferred
Stock at $7.50 per share and net proceeds of $497,500 through the issuance of a
convertible note payable in the principal amount of $555,556. These conditions
raise substantial doubt about our ability to continue as a going concern within
twelve months from the date these financial statements are issued.
We are currently funding its 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 six months ended June 30, 2020 and 2019, our sources and uses of cash
were as follows:
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Net Cash Used in Operating Activities
We experienced negative cash flows from operating activities for the six months
ended June 30, 2020 and 2019 in the amounts of approximately $1,154,000 and
$1,186,000, respectively. The net cash used in operating activities for the six
months ended June 30, 2020 was primarily due to cash used to fund a net loss of
approximately $1,978,000, adjusted for net non-cash expenses in the aggregate
amount of approximately $516,000, partially offset by $308,000 of net cash
provided by changes in the levels of operating assets and liabilities. The net
cash used in operating activities for the six months ended June 30, 2019 was
primarily due to cash used to fund a net loss of approximately $2,411,000,
adjusted for net non-cash expenses in the aggregate amount of approximately
$434,000, partially offset by approximately $791,000 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 six months ended June 30, 2020
and 2019 was approximately $1,127,000 and $1,195,000, respectively. The net cash
provided by financing activities during the six months ended June 30, 2020 was
attributable to $1,075,000 of proceeds from the issuance of convertible notes
payable, $125,000 of proceeds from the issuance of Series A preferred stock,
$100,000 of proceeds from the issuance of notes payable and $100,000 of proceeds
from advances payable, offset by the repayment of a note payable in the amount
of $100,000, $105,000 of repayments of advances payable and a $68,000 repayment
of a convertible note payable. The net cash provided by financing activities
during the six months ended June 30, 2019 was attributable to approximately
$1,123,000 of proceeds received from the issuance of Series A preferred stock
and $72,000 of net proceeds from debt financings.
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.
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