During the three months ended March 31, 2021, the Company had not generated any
revenues, had a net loss of approximately $1,525,000 and had used cash in
operations of approximately $1,114,000. As of March 31, 2021, the Company had a
working capital deficiency of approximately $9,142,000 (including $1,558,000 of
notes payable past due) and an accumulated deficit of approximately $27,231,000.
Subsequent to March 31, 2021 and as more fully described in Note 9 - Subsequent
Events, the Company received proceeds of $100,000 through the issuance of
convertible notes. These conditions raise substantial doubt about the Company's
ability to continue as a going concern for at least one year from the date these
financial statements are issued.
7
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,
2020, 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. Basic weighted
average shares outstanding for the three months ended March 31, 2021 and 2020
includes the weighted average impact of warrants to purchase an aggregate of 0
and 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,
2021 2020
Options 6,182,004 3,782,004
Warrants 8,966,388 4,125,810
Convertible notes [1] [2] 1,708,020 2,555,477
Convertible preferred stock 13,421,950 12,584,160
Total 30,278,362 23,047,451
[1] 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, 2021. However, as
further described in Note 5, Notes Payable, such conversion rates are subject to
adjustment under certain circumstances, which may result in the issuance of
common shares greater than the amount indicated.
[2] Excludes shares of common stock underlying convertible notes that are
expected to become convertible into shares of Series B and Series C Convertible
Preferred Stock since such stock had not been designated by the Company as of
March 31, 2021.
8
Note 4 - Fair Value
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, 2021:
Accrued Accrued
Interest Compensation Total
Balance - January 1, 2021 $ 539,836 $ 84,953 $ 624,789
Change in fair value 41,607 97 41,704
Issuance of warrants (82,350 ) - (82,350 )
Balance - March 31, 2021 $ 499,093 $ 85,050 $ 584,143Financial 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 accrued
obligations 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 Months Ended
March 31,
2021 2020
Risk-free interest rate 0.64%-0.92 % 0.33%-1.55 %
Expected term (years) 4.00-5.00 0.52 - 5.00
Expected volatility 90 % 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 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.
As of March 31, 2021 and December 31, 2020, the Company had an obligation to
issue 154,495 shares of common stock to service providers that had a fair value
of $72,613, which was a component of accrued compensation on the condensed
consolidated balance sheet.
See Note 6 - Stockholders' Deficiency - Stock Warrants for additional details
associated with the issuance of warrants.
Note 5 - Notes Payable
As of March 31, 2021 and through the date of this filing, notes and convertible
notes payable with principal amounts totaling $1,558,000 and $1,858,000,
respectively, were past due and are classified as current liabilities on the
condensed consolidated balance sheet as of March 31, 2021. Such notes continue
to accrue interest and all relevant penalties have been accrued as of March 31,
2021. 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.
During the three months ended March 31, 2021 and 2020, the Company recorded
interest expense of $280,887 and $87,649, respectively, and amortization of debt
discount of $122,763 and $8,302, respectively. As of March 31, 2021 and December
31, 2020, the Company had $964,122 and $997,244, 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.
9
Convertible Notes Payable
During the three months ended March 31, 2021, the Company issued convertible
notes payable in the aggregate principal amount of $697,250 which have maturity
dates ranging from July 7, 2021 through September 24, 2021. The notes accrue
interest at 8% per annum and are convertible into the Company's Series C
Convertible Preferred Stock (the "Series C Preferred Stock") at a conversion
price of $7.50. The notes shall become convertible (i) at the holder's option
beginning on the date that the Company first issues any shares of its Series C
Preferred Stock or (ii) automatically on the maturity date. It is anticipated
that the Series C Preferred Stock shall convert into the Company's common stock
at a fixed rate of ten (10) shares of common stock for each share of Series C
Preferred Stock. In connection with the issuances, the Company issued five-year
immediately vested warrants to purchase an aggregate of 557,800 shares of common
stock at an exercise price $1.25 per share. The warrants had an issuance date
relative fair value of $114,617 which will be amortized over the term of the
notes.
On January 28, 2021, the Company issued a convertible note payable in the amount
of $647,222 which matures on July 28, 2021 in exchange for another note in the
principal amount of $555,556 that accrued interest at 13% per annum and had
accrued interest of $41,948. The new note accrues interest at 8% per annum and
such interest is payable at maturity, at the Company's option, in cash or as
payment-in-kind in common stock at a rate of $0.75 per share. The note shall
become convertible, (i) beginning on the date that the Company first issues any
shares of its Series C Preferred Stock, at the holder's option into Series C
Preferred Stock at a price of $7.50 per share or (ii) automatically on the
maturity date into either Series C Preferred Stock at a price of $7.50 per share
or common stock at price of $0.75 per share. If the Company fails to designate
the Series C Preferred Stock by July 28, 2021, the note will be automatically
converted into common stock at a price of $0.75 per share. In connection with
the issuance of the convertible note, the Company issued a five-year immediately
vested warrant to purchase 517,778 shares of common stock at an exercise price
$1.25 per share. The warrants had an issuance date fair value of $106,183 that
was recognized immediately. The Company determined the transaction was an
extinguishment and, as a result, recognized a loss on extinguishment of notes
payable of $49,718 on the condensed consolidated statement of operations during
the three months ended March 31, 2021.
On March 2, 2021, the Company amended a previously issued convertible note in
the principal amount of $2,000,000 to increase the total principal amount
allowed to be borrowed under the note from $2,000,000 to $4,000,000. In
connection with the amendment, the Company received an additional $500,000 of
proceeds, such that as of March 31, 2021, an aggregate of $2,500,000 of proceeds
were outstanding under the note. Furthermore, the Company issued five-year
immediately vested warrants for the purchase of 800,000 shares of common stock
at an exercise price of $1.25 per share, of which, the fair value of the
obligation to issue warrants to purchase 400,000 shares of common stock was
accrued for as December 31, 2020 and the remaining warrants to purchase 400,000
shares of common stock were issued in connection with the $500,000 of proceeds
received during the three months ended March 31, 2021. The warrants had an
issuance date fair value of $164,700 which will be amortized over the term of
the note.
On March 11, 2021, the Company entered into convertible note purchase agreements
with two noteholders whereby the Company agreed to repurchase an aggregate of
$125,000 of convertible notes payable for the same amount in cash, at which time
the notes were cancelled. In connection with the repayment, the parties agreed
that the Company was no longer required to pay accrued interest associated with
the notes payable in the amount of $49,983. As a result, the Company recognized
a gain on forgiveness of accrued interest of $49,983 on its condensed
consolidated statement of operations during the three months ended March 31,
2021.
Notes Payable
During the three months ended March 31, 2021, the Company paid $100,000 to a
noteholder as a partial repayment of principal, such that the note had $150,000
outstanding as of March 31, 2021 after the partial repayment.
Note 6 - Stockholders' Deficiency
Series A Convertible Preferred Stock
During the three months ended March 31, 2021 and 2020, the Company accrued
additional preferred dividends of $223,391 and $211,305, respectively.
Stock Warrants
On January 5, 2021, the Company issued 125,000 five-year immediately vested
warrants to a note holder in satisfaction of certain noteholder rights with an
exercise price $0.95 per share. The warrant had an issuance date fair value of
$33,545 which was recognized immediately.
During the three months ended March 31, 2021, the Company issued 125,071 shares
of common stock pursuant to a cashless warrant exercise by a noteholder of
warrants to purchase 221,275 shares of common stock at an exercise price of
$0.75 per share.
See Note 5 - Notes Payable for additional details associated with the issuance
of stock warrants.
10
Stock Options
On March 8, 2021, the Company granted 1,350,000 five-year immediately vested
options under the Company's Equity Incentive Plan to the Chief Executive Officer
of the Company (of which, 750,000 were granted for service as Chief Executive
Officer and 600,000 were granted for service as a director) with an exercise
price $1.00 per share. The options had a grant date fair value of $218,600 which
was recognized during the three months ended March 31, 2021.
Stock-Based Compensation
During the three months ended March 31, 2021, the Company recognized stock-based
compensation expense of $237,772 (consisting of $31,372 of expense related to
warrants (of which, $31,276 has been included within stockholders' deficiency
and $96 has been included within accrued compensation) and $206,400 of expense
related to options (included within stockholder's deficiency), which was
included within general and administrative expenses.
During the three months ended March 31, 2020, the Company recognized stock-based
compensation expense of$4,528 (consisting of expense related to warrants of
$(98) (included within accrued compensation) and $4,626 related to common stock
(of which, $(1,792) included within accrued compensation and $6,418 included
within stockholders' deficiency), which was included within general and
administrative expenses.
As of March 31, 2021, there was $106,090 of unrecognized stock-based
compensation expense to be recognized over a weighted average period of 0.75
years.
Note 7 - Related Party Transactions
As of March 31, 2021 and December 31, 2020, the Company was required to issue
warrants to purchase an aggregate of 1,131,500 and 1,056,500, 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 $315,472 and $291,708 associated with the fair
value of the obligations as of March 31, 2021 and December 31, 2020,
respectively, which amount is included in accrued interest - related parties on
the condensed consolidated balance sheets. See Note 8 - Commitments and
Contingencies - Yeda Research and License Agreement for additional details.
Note 8 - Commitments and Contingencies
Yeda Research and License Agreement
During the three months March 31, 2021 and 2020, the Company recorded research
and development expenses of approximately $35,000 and $62,000, respectively,
related to the Agreement. As of March 31, 2021 and December 31, 2020, the
Company had $14,419 and $136,919, respectively, of accrued research and
development expenses pursuant to the Agreement with Yeda, which are included
within accrued expenses - related parties on the condensed consolidated balance
sheets.
MD Anderson Sponsored Research Agreements
The Company recognized $200,764 and $237,545 of research and development
expenses during the three months ended March 31, 2021 and 2020, respectively,
associated with services provided by The University of Texas M.D. Anderson
Cancer Center ("MD Anderson") under the two agreements with MD Anderson dated
November 2018 and February 2019, respectively. As of March 31, 2021 and December
31, 2020, the Company had $337,859 and $462,785, 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.
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 merits of any
legal proceedings or unasserted claims, as well as the merits of the amount of
relief sought or expected to be sought therein.
11
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 condensed 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
judgment was heard on July 12, 2019 and the Company did not oppose the motion.
Judgment was entered in October 2019 in the amount of $267,680 and the Company's
motion to vacate was denied in February 2021. The Company has appealed the
denial and is vigorously pursuing a motion to renew and reargue the motion to
vacate so that it can present factual defenses to the plaintiff's claims. The
plaintiff has commenced steps to collect judgment. As of March 31, 2021, the
Company has classified $99,588 as restricted cash which represents amounts held
in a holding account in connection with the matter.
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, 2021 and December 31, 2020, the Company had not accrued any
amounts for contingencies.
Note 9 - 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.
Convertible Notes Payable
In April 2021, the Company amended two convertible notes in the aggregate
principal amount of $150,000 with maturity dates in April 2021 to extend the
maturity dates by six months and to increase the interest rate from 8% per annum
to 10% per annum. In addition, the conversion feature of the note was amended to
change the shares into which the notes may be converted from Series B Preferred
Stock to Series C Preferred Stock.
On April 30, 2021, the Company issued a convertible note payable in the amount
of $100,000 which matures on October 30, 2021. The note accrues interest at 8%
per annum and is convertible into the Company's Series C Convertible Preferred
Stock at a conversion price of $7.50. The note shall be become convertible at
(i) the holder's option beginning on the date that the Company first issues any
shares of its Series C Preferred Stock (ii) automatically on the maturity date.
It is anticipated that the Series C Preferred Stock shall convert into the
Company's common stock at a fixed rate of ten shares of common stock for each
share of Series C Preferred Stock. In connection with the issuance of the
convertible note, the Company issued a five-year immediately vested warrant to
purchase 80,000 shares of common stock at an exercise price $1.25 per share.
12
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, 2021 and for the three months
ended March 31, 2021 and 2020 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, 2020 as filed with the Securities and Exchange Commission ("SEC") on April
15, 2021.
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, 2020 filed with the SEC on April 15, 2021.
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 and initial clinical data
show that Cell Source's Veto Cell technology 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.
13
? 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 by the end 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.
COVID-19
In March 2020, the World Health Organization declared COVID-19, a novel strain
of coronavirus, a pandemic. During 2020 and continuing into 2021, the global
economy has been, and continues to be, affected by COVID-19. While we continue
to see signs of economic recovery as certain governments began to gradually ease
restrictions, provide economic stimulus and vaccine distribution accelerated,
the rate of recovery on a global basis has been affected by resurgence of the
virus or its variants in certain jurisdictions causing reinstatement of
restrictions in certain jurisdictions. We continue to monitor the effects of
COVID-19 and its impact on our operations, financial position, cash flows and
our industry in general. We considered the impact of COVID-19 on our business
and operational assumptions and estimates, and determined there were no material
adverse impacts on our results of operations and financial position at March 31,
2021.
The full extent of the future impact of COVID-19 on our operations and financial
condition is uncertain. Accordingly, COVID-19 could have a material adverse
effect on our business, results of operations, financial condition and prospects
during 2021 and beyond, including the timing and ability to initiate and/or
complete current and/or future preclinical studies and/or clinical trials,
disrupt our regulatory activities, and/or have other adverse effects on our
clinical development.
Condensed Consolidated Results of Operations
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31,
2020
Research and Development
Research and development expense was $271,239 and $319,212 for the three months
ended March 31, 2021 and 2020, respectively, a decrease of $47,973, or 15%,
which such decrease was primarily attributable to a reduction in research
performed by Yeda during the 2021 period.
14
General and Administrative
General and administrative expense, which is associated with external consulting
and professional fees, payroll and stock-based compensation expenses, was
$850,117 and $414,120 for the three months ended March 31, 2021 and 2020,
respectively, an increase of $435,997, or 105%, which such increase was
primarily related to additional expenses as follows: approximately $233,000 in
non-cash stock-based compensation expenses in connection with stock option
grants, approximately $66,000 of legal fees, $57,000 in accounting fees, and
approximately $80,000 of other consulting and marketing fees.
Interest Expense
Interest expense for the three months ended March 31, 2021 and 2020 was $280,887
and $87,649, respectively, an increase of $193,238, or 220%, primarily as a
result of increases in convertible notes payable outstanding during the 2021
period as well as the fair value of warrants issued as interest.
Amortization of Debt Discount
Amortization of debt discount was $122,763 and $8,302 for the three months ended
March 31, 2021 and 2020, respectively, which is associated with warrants and
original issuance discounts issued in connection with convertible notes payable.
Gain on Forgiveness of Accrued Interest
During the three months ended March 31, 2021, we recognized a gain on
forgiveness of accrued interest of $49,983 in connection with the repayment of
certain notes payable.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the three months ended
March 31, 2020 was a gain of $16,977 due to the reduction in fair value of
warrants and conversion options as a result of drawing closer to their
expiration dates.
Loss on Extinguishment of Notes Payable
During the three months ended March 31, 2021 and 2020, we recognized $49,718 and
$1,441 of loss on extinguishment of notes payable.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
March 31, 2021 December 31, 2020
Cash $ - $ 241,619
Restricted cash $ 103,088 $ 3,500
Working capital deficiency $ (9,141,882 ) $ (7,950,882 )During the three months ended March 31, 2021, we had not generated any revenues,
had a net loss of approximately $1,525,000 and had used cash in operations of
approximately $1,114,000. As of March 31, 2021, we had a working capital
deficiency of approximately $9,142,000 and an accumulated deficit of
approximately $27,231,000. Subsequent to March 31, 2021, we received proceeds of
$100,000 through the issuance of convertible notes payable. These conditions
raise substantial doubt about our ability to continue as a going concern for at
least one year from 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.
15
During the three months ended March 31, 2021 and 2020, 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, 2021 and 2020 in the amounts of $1,114,281 and $618,386,
respectively. The net cash used in operating activities for the three months
ended March 31, 2021 was primarily due to cash used to fund a net loss of
approximately $1,525,000, adjusted for net non-cash expenses in the aggregate
amount of $541,000, and $131,000 of net cash used in changes in the levels of
operating assets and liabilities. The net cash used in operating activities for
the three months ended March 31, 2020 was primarily due to cash used to fund a
net loss of $814,000, adjusted for net non-cash income in the aggregate amount
of $16,000, partially offset by $180,000 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 three months ended March 31,
2021 and 2020 was $972,250 and $607,000, respectively. The net cash provided by
financing activities during the three months ended March 31, 2021 was
attributable to $1,197,250 of proceeds from the issuance of convertible notes
payable, offset by the repayments of notes payable and convertible notes payable
in the amount of $225,000. The net cash provided by financing activities during
the three months ended March 31, 2020 was attributable to $575,000 of proceeds
received from the issuance of convertible notes payable and $100,000 of proceeds
from the issuance of Series A preferred stock, partially offset by a $68,000
repayment of a convertible note payable.
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 quarterly 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.
16
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).
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, 2020, which was considered in management's estimation of fair
value during the three months ended March 31, 2021. 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.
17
© Edgar Online, source Glimpses
CELL SOURCE, INC. 
