CLCS 10-Q
Cell Source, Inc. (CLCS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate by
check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ |
|
|
Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any news or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 10, 2021, the registrant had shares of $0.001 par value common stock outstanding.
CELL SOURCE, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
CELL SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Restricted cash | - | |||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued expenses - related parties | ||||||||
| Accrued interest | ||||||||
| Accrued interest - related parties | ||||||||
| Accrued compensation | ||||||||
| Advances payable | ||||||||
| Advances payable - related party | ||||||||
| Notes payable | ||||||||
| Notes payable - related parties | ||||||||
| Convertible notes payable, net of debt discount of $ | ||||||||
| Convertible notes payable - related parties | ||||||||
| Financing liability for directors and officers insurance | - | |||||||
| Accrued dividend payable | ||||||||
| Total Current Liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ Deficiency: | ||||||||
| Convertible Preferred Stock, $ par value, shares authorized; | ||||||||
| Series A Convertible Preferred Stock, shares designated, shares issued and outstanding as
of September 30, 2021 and December 31, 2020; liquidation preference of $ | ||||||||
Series C Convertible Preferred Stock, shares designated, and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively; liquidation preference of $ | - | |||||||
Common Stock, $ par value, shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficiency | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
CELL SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| Research and development - related party | - | |||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expense) Income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | - | - | - | |||||||||||||
| Gain on forgiveness of accrued interest | - | - | - | |||||||||||||
| Gain on exchange of accrued interest for common stock | - | - | ||||||||||||||
| Loss on extinguishment of notes payable | - | ( | ) | ( | ) | ( | ) | |||||||||
| Total Other Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividend attributable to Series A and Series C preferred stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Applicable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss Per Common Share - Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Common Shares Outstanding - | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
CELL SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
(Unaudited)
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Convertible Preferred | Convertible Preferred | Additional | Total | |||||||||||||||||||||||||||||||||
| Stock - Series A | Stock - Series C | Common Stock | Paid- In | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||
| Issuance of common stock pursuant to cashless warrant exercise | - | - | - | - | ( | ) | - | - | ||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with exchange of convertible notes payable | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Warrants issued in satisfaction of accrued interest | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Options | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, March 31, 2021 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||
| Payment of dividends in kind | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Common stock | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, June 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Series A and C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | - | - | |||||||||||||||||||||||||||||||||
| Conversion of Series C Convertible Preferred Stock into common stock | - | - | ( | ) | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||
| Warrants issued in satisfaction of accrued interest | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Warrants modification expense | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued in satisfaction of accrued compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Common stock | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
CELL SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
(Unaudited)
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 | ||||||||||||||||||||||||||||||||||||
| Convertible Preferred | Additional | Total | ||||||||||||||||||||||||||||||||||
| Stock - Series A | Common Stock | Paid- In | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock for cash | - | - | - | |||||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| Issuance of common stock in connection with extension of notes payable | - | - | - | |||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to equity | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Common stock | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance, March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock for cash | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with extension of notes payable | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of notes payable | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of advance payable | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| Payment of dividends in kind | - | - | - | |||||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Common stock | - | - | - | |||||||||||||||||||||||||||||||||
| Warrants | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance, June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock for cash | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of common stock in exchange of accrued interest | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of notes payable | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Options | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Warrants | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
CELL SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For The Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liabilities | - | ( | ) | |||||
| Amortization of debt discount | ||||||||
| Gain on forgiveness of accrued interest | ( | ) | - | |||||
| Loss on extinguishment of notes payable | ||||||||
| Gain on exchange of accrued interest for common stock | - | ( | ) | |||||
| Non-cash interest expense - warrants | ||||||||
| Stock-based compensation: | ||||||||
| Options | ||||||||
| Warrants | ||||||||
| Common stock | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Other current assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued expenses - related parties | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Accrued interest - related parties | ||||||||
| Accrued compensation | ||||||||
| Net Cash Used In Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from advances payable | - | |||||||
| Proceeds from issuance of notes payable | - | |||||||
| Proceeds from issuance of convertible notes payable | ||||||||
| Proceeds from issuance of Series A Preferred Stock | - | |||||||
| Repayment of financing liability | ( | ) | - | |||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of convertible notes payable | ( | ) | ( | ) | ||||
| Repayment of advances payable | - | ( | ) | |||||
| Net Cash Provided By Financing Activities | ||||||||
| Net Increase In Cash and Restricted Cash | ||||||||
| Cash and Restricted Cash - Beginning of Period | ||||||||
| Cash and Restricted Cash - End of Period | $ | $ | ||||||
| Cash and restricted cash consisted of the following: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | - | - | ||||||
| $ | $ | |||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Original issue discount in connection with convertible note payable | $ | $ | ||||||
| Common stock issued in connection with payment of Series A Convertible Preferred Stock dividends in-kind | $ | $ | ||||||
| Conversion of convertible notes payable and accrued interest into Series C Preferred Stock and common stock | $ | $ | ||||||
| Reclassification of derivative liabilities to equity | $ | $ | ||||||
| Conversion of Series C Convertible Preferred Stock into common stock | $ | $ | ||||||
| Issuance of common stock pursuant to cashless warrant exercise | $ | $ | ||||||
| Common stock issued in satisfaction of accrued compensation | $ | $ | ||||||
| Financing of Directors and Officer’s insurance | $ | $ | ||||||
| Accrued interest converted into notes payable | $ | $ | ||||||
| Issuance of warrants in connection with the issuance of notes payable | $ | $ | ||||||
| Issuance of warrants in satisfaction of accrued interest | $ | $ | ||||||
| Accrual of earned preferred stock dividends | $ | ( | ) | $ | ( | ) | ||
| Issuance of placement agent warrants | $ | $ | ||||||
| Issuance of common stock as debt discount in in connection with extension of notes payable | $ | $ | ||||||
| Repayment of convertible note payable and accrued interest by third party | $ | $ | ||||||
| Warrants and conversion options issued in connection with issuance and extension of notes payable | $ | $ | ||||||
| Warrants issued in connection with issuance of advance payable | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Business Organization, Nature of Operations, Risks and Uncertainties and Basis of Presentation
Organization and Operations
Cell Source, Inc. (“Cell Source”, “CSI” or the “Company”) is a Nevada corporation formed on June 6, 2012 that is the parent company of Cell Source Limited (“CSL”), a wholly owned subsidiary which was founded in Israel in 2011 in order to commercialize a suite of inventions relating to certain cancer treatments. The Company is a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance. The Company’s lead prospective product is its patented Veto Cell immune system management technology, which is an immune tolerance biotechnology that enables the selective blocking of immune responses. CSL’s Veto Cell immune system management technology is based on technologies patented, owned, and licensed to CSL by Yeda Research and Development Company Limited, an Israeli corporation (“Yeda”) (see Note 8, Commitments and Contingencies). The Company’s target indications include: lymphoma, leukemia and multiple myeloma through the facilitation of both safer and more accessible stem cell (e.g. bone marrow) transplantation acceptance and effective allogeneic CAR-T cell therapy, treatment of end stage kidney disease and other non-malignant organ diseases through improved organ transplantation (broadened donor pool, reduced dependence on post-transplant anti-rejection therapy), and ultimately treating a variety of cancers and non-malignant diseases (e.g. sickle cell disease, diabetes).
Risks and Uncertainties
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 the Company continues 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. The Company continues to monitor the effects of COVID-19 and its impact on the Company’s operations, financial position, cash flows and its industry in general. The Company considered the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company’s results of operations and financial position at September 30, 2021.
The full extent of the future impact of COVID-19 on the Company’s operations and financial condition is uncertain. Accordingly, COVID-19 could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2021 and beyond, including the timing and ability of the Company to initiate and/or complete current and/or future preclinical studies and/or clinical trials, disrupt the Company’s regulatory activities, and/or have other adverse effects on the Company’s clinical development. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial position of the Company as of September 30, 2021 and the condensed consolidated results of its operations and cash flows for the three and nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2020 and for the year then ended which were included in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021.
Note 2 - Going Concern and Management Plans
During the nine months ended September 30, 2021, the
Company had not generated any revenues, had a net loss of approximately $
| 8 |
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.
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 nine months ended September 30, 2021 and 2020 includes the weighted average impact of warrants to purchase an aggregate of and shares, respectively, of common stock because their exercise price was determined to be nominal.
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible notes [1] [2] | ||||||||
| Convertible preferred stock | ||||||||
| Total | ||||||||
| [1] |
| [2] |
Reclassifications
Certain prior period balance sheet amounts have been reclassified to conform to the fiscal 2021 presentation. These reclassifications have no impact on the previously reported net loss.
| 9 |
Recently Issued Accounting Standards
On May 3, 2021, the Financial Accounting Standards Board (the “FASB”) issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating this new standard and its impact on the Company’s condensed consolidated financial statements and related disclosures.
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 nine months ended September 30, 2021:
| Accrued | Accrued | |||||||||||
| Interest | Compensation | Total | ||||||||||
| Balance - January 1, 2021 | $ | $ | $ | |||||||||
| Change in fair value | ||||||||||||
| Issuance of warrants | ( | ) | ( | ) | ||||||||
| Balance - March 31, 2021 | ||||||||||||
| Change in fair value | ( | ) | ||||||||||
| Accrual of warrant obligation | ||||||||||||
| Accrual of common stock obligation | ||||||||||||
| Balance - June 30, 2021 | ||||||||||||
| Change in fair value | ||||||||||||
| Issuance of common stock | ( | ) | ( | ) | ||||||||
| Issuance of warrants | ( | ) | ( | ) | ||||||||
| Balance - September 30, 2021 | $ | $ | $ | |||||||||
Financial liabilities 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 Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Risk-free interest rate | %- | % | % - | % | %- | % | % - | % | ||||||||
| Expected term (years) | - | - | - | - | ||||||||||||
| Expected volatility | % | % | % | % | ||||||||||||
| Expected dividends | % | % | % | % | ||||||||||||
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 September 30, 2021 and December 31, 2020, the
Company had an obligation to issue shares of common stock to service providers that had a fair value of $
See Note 6, Stockholders’ Deficiency – Common Stock and Stock Warrants for additional details associated with the issuance of common stock and warrants.
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Note 5 – Notes Payable
As of September 30, 2021 and through the date of
this filing, notes and convertible notes payable with principal amounts totaling $
During the three months ended
September 30, 2021 and 2020, the Company recorded interest expense of $
Convertible Notes Payable
During the nine months ended September 30, 2021,
the Company issued convertible notes payable in the aggregate principal amount of $
On January 28, 2021, the Company issued a convertible
note payable in the amount of $
On March 2, 2021, the Company amended a previously
issued convertible note in the principal amount of $
On March 11, 2021, the Company entered into convertible
note purchase agreements with two noteholders whereby the Company agreed to repurchase an aggregate of $
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On April 27, 2021, the Company amended the following
terms of two convertible notes in the aggregate principal amount of $
During the nine months ended September 30, 2021,
convertible notes payable in the aggregate principal amount $
Through June 30, 2021, the Company had not designated
the Series C Preferred Stock. As a result, the Company did not analyze the notes for a potential beneficial conversion feature as
the definition of a firm commitment had not been met since the notes were not yet convertible. On July 26, 2021, the required Certificate
of Designation was filed (see Note 6 – Stockholders’ Deficiency – Series C Convertible Preferred Stock). Accordingly,
a firm commitment was achieved. The Company analyzed the notes for a beneficial conversion feature and determined that there was none
because the notes have an effective conversion price of $per share of underlying common stock, which exceeds the $
Notes Payable
During the nine months ended September 30, 2021, the
Company paid $
See Note 8, Commitments and Contingencies – Litigation for details associated with the partial repayment of a note payable during the nine months ended September 30, 2021.
Note 6 – Stockholders’ Deficiency
Preferred Stock Dividends
During the three months ended
September 30, 2021 and 2020, the Company accrued additional preferred dividends related to Series A and Series C Preferred Stock of $
During the nine months ended September 30, 2021, the
Company issued shares of common stock at the stated value of $ per share for aggregate value of $
Series C Convertible Preferred Stock
On July 26, 2021, the Company’s Board of Directors approved the designation of shares of the authorized shares of preferred stock as Series C Convertible Preferred Stock, par value $ per share. On July 26, 2021, the Company filed the Certificate of Designation with the State of Nevada related to the Series C Preferred Stock. The Series C Preferred stock has a stated value of $ per share.
Conversion. Each share of Series
C Preferred Stock is convertible into shares of common stock (subject to adjustment as provided in the related certificate of designation
of preferences, rights and limitations) at the option of the holder at any time. The number of shares of common stock which are issuable
upon conversion of the Series C Preferred Stock shall be equal to the number of shares of Series C Preferred Stock to be converted, multiplied
by the stated value of $ per share, divided by the conversion price in effect at the time of conversion, initially at $
Mandatory Conversion. On the earlier of (i) July 27, 2025 or (ii) any of the Company’s treatment candidates receiving approval from the U.S. or European agencies, all of the outstanding shares of Series C Preferred Stock will automatically convert to common stock.
Liquidation Preference. In the event of the liquidation, dissolution or winding-up of the Company, the Series C Preferred Stock will rank senior to common stock and any other class of capital stock which does not expressly rank senior to or pari passu with the Series C Preferred Stock and will rank pari passu with the Series A and Series B Preferred Stock.
Voting Rights.
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Dividends.
During the three months ended September 30, 2021,
shares of Series C Preferred Stock were converted into shares of common stock at the shareholder’s election. The
Company analyzed the Series C Preferred Stock for a beneficial conversion feature and determined that there was none because the Series
C Preferred Stock has an effective conversion price of $
See Note 5, Notes Payable – Convertible Notes Payable for details associated with note conversions.
Common Stock
During the nine months ended September 30, 2021, the Company issued shares of immediately vested common stock to a service provided with a grant date fair value of $ which was recognized immediately.
During the three months ended September 30, 2021,
the Company issued shares of common stock to a consultant in satisfaction of accrued compensation with an issuance date fair value
of $
During the three months ended September 30, 2021, the
Company issued shares of common stock to consultants which had an issuance date fair value of $
See Note 5, Notes Payable – Convertible Notes Payable for details associated with accrued interest conversions into common stock.
See elsewhere in this note, Stock Warrants for additional details.
Stock Warrants
On January 5,
2021, the Company issued
During the nine months ended
September 30, 2021, the Company issued shares of common stock pursuant to a cashless warrant exercise by a noteholder of warrants
to purchase
During the three
months ended September 30, 2021, the Company issued
In August 2021,
the Company extended the expiration date of a warrant to purchase
See Note 5, Notes Payable for additional details associated with the issuance of stock warrants.
Stock Options
On March 8, 2021, the Company granted -year immediately vested options under the Company’s Equity Incentive Plan to the Chief Executive Offer of the Company (of which, were granted for service as Chief Executive Officer and were granted for service as a director) with an exercise price $ per share. The options had a grant date fair value of $ which was recognized during the nine months ended September 30, 2021.
Stock-Based Compensation
During the three
months ended September 30, 2021, the Company recognized stock-based compensation expense of $ (consisting of $
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During
the nine months ended September 30, 2021, the Company recognized stock-based compensation expense of $ (consisting of $
During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation expense of $and $, respectively, related to common stock and warrants, which amounts were included within general and administrative expenses on the condensed consolidated statements of operations.
As of September 30, 2021, there was $ of unrecognized stock-based compensation expense to be recognized over a weighted average period of years.
Note 7 – Related Party Transactions
As
of September 30, 2021 and December 31, 2020, the Company was required to issue warrants to purchase an aggregate of
Note 8 – Commitments and Contingencies
Yeda Research and License Agreement
During
the three months September 30, 2021 and 2020, the Company recorded research and development expenses of approximately $
MD Anderson Sponsored Research Agreements
The
Company recognized $
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 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.
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In
January 2019, the holder of a promissory note in the principal amount of $
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 September 30, 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.
Series C Preferred Stock Conversion
In October 2021, a holder of Series C Preferred Stock elected to convert of such shares into shares of common stock.
Convertible Notes Payable Conversions
In
November 2021, an aggregate of $
See Note 5, Notes Payable for details associated with past due notes.
Stock Warrants
In November 2021, in connection with the conversion
of a certain convertible note payable in the principal amount of $
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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 September 30, 2021 and for the three and nine months ended September 30, 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 since 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 (recipient) 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 the result of successfully 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 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 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 cost and increased efficacy by allowing for off-the-shelf (vs. patient-derived) treatments with more persistent cancer killing capability. |
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| ● | 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. |
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, 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 form the basis of our current development of a clinical protocol for allogeneic VETO CAR-T HSCT combined therapy for blood cancer treatment. Cell Source plans to submit this protocol for approval in 2022. 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 subsequent cohorts of patients, using the same dose level.
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.
Designation of Series C Convertible Preferred Stock
On July 26, 2021, the Company’s Board of Directors approved the designation of 500,000 shares of the 10,000,000 authorized shares of preferred stock as Series C Convertible Preferred Stock, par value $0.001 per share. On July 26, 2021, the Company filed the Certificate of Designation with the State of Nevada related to the Series C Preferred Stock. The Series C Preferred stock has a stated value of $7.50 per share.
Conversion. Each share of Series C Preferred Stock is convertible into shares of common stock (subject to adjustment as provided in the related certificate of designation of preferences, rights and limitations) at the option of the holder at any time. The number of shares of common stock which are issuable upon conversion of the Series C Preferred Stock shall be equal to the number of shares of Series C Preferred Stock to be converted, multiplied by the stated value of $7.50 per share, divided by the conversion price in effect at the time of conversion, initially at $0.75 per share.
Mandatory Conversion. On the earlier of (i) July 26, 2025 or (ii) any of the Company’s treatment candidates receiving approval from the U.S. or European agencies, all of the outstanding shares of Series C Preferred Stock will automatically convert to common stock.
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Liquidation Preference. In the event of the liquidation, dissolution or winding-up of the Company, holders of Series C Preferred Stock will rank senior to common stock and any other class of capital stock which does not expressly rank senior to or pari passu with the Series C Preferred Stock and will rank pari passu with the Series A and Series B Preferred Stock.
Voting Rights. The holders of Series C Preferred Stock have the right to vote on any matter submitted to a vote of holders of common stock, voting together with the common stock as one class, on an as-converted basis.
Dividends. Holders of shares of Series C Preferred Stock will be entitled to receive cumulative dividends at an annual rate of 8% of the stated value. Dividends are payable semi-annually on June 30 and December 31, commencing on December 31, 2022, either by (i) issuance of shares of common stock at the rate of $0.75 per share of common stock or (ii) in cash.
Condensed Consolidated Results of Operations
Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020
Research and Development
Research and development expense was $459,273 and $257,546 for the three months ended September 30, 2021 and 2020, respectively, an increase of $201,727, or 78%. The increase was primarily attributable to a clinical trial milestone reached during the third quarter of 2021 which resulted in additional expense recognized related to our agreement with MD Anderson.
General and Administrative
General and administrative expense, which is associated with external consulting and professional fees, payroll and stock-based compensation expenses, was $856,059 and $908,099 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $52,040, or 6%. Such decrease was primarily attributable to decreased professional fees during the 2021 period.
Interest Expense
Interest expense for the three months ended September 30, 2021 and 2020 was $214,431 and $126,867, respectively, an increase of $87,564, or 69%. The increase was primarily 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 $269,805 and $146,109 for the three months ended September 30, 2021 and 2020, respectively, an increase of $123,696, or 85%. The increase is primarily associated with increased levels of warrants and common stock issued as debt discounts in connection with convertible notes payable in the 2021 period.
Loss on Exchange of Accrued Interest for Common Stock
During the three months ended September 30, 2021 and 2020, we recognized $0 and $132,502 of loss on extinguishment of notes payable which represents the excess carrying value of the $199,151 of accrued interest as compared to the issuance date fair value of the common stock of $66,649.
Loss on Extinguishment of Notes Payable
During the three months ended September 30, 2021 and 2020, we recognized $0 and $1,511 of loss on extinguishment of notes payable in connection with the extension and repayment of notes payable.
Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020
Research and Development
Research and development expense was $1,098,063 and $786,684 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $311,379, or 40%. The increase was primarily attributable to a clinical trial milestone reached during the second and third quarters of 2021 which resulted in additional expense recognized related to our agreement with MD Anderson as well as an increase in the budget for sponsored research there.
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General and Administrative
General and administrative expense, which is associated with external consulting and professional fees, payroll and stock-based compensation expenses, was $2,333,724 and $2,015,624 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $318,100, or 16%. The increase was primarily related to additional expenses recognized in the 2021 period as follows: approximately $97,000 of accounting fees, approximately $396,000 of legal and consulting fees, approximately $82,000 of insurance expenses, partially offset by a decrease of approximately $262,000 in stock based compensation.
Interest Expense
Interest expense for the nine months ended September 30, 2021 and 2020 was $658,163 and $308,395, respectively, an increase of $349,768, or 113%. The increase was primarily 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 $547,737 and $190,639 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $357,098, or 187%. The increase is primarily associated with increased levels of warrants and common stock issued as debt discounts in connection with convertible notes payable in the 2021 period.
Gain on Forgiveness of Accrued Interest
During the nine months ended September 30, 2021, we recognized a gain on forgiveness of accrued interest of $49,983 in connection with the repayment of certain notes payable.
Gain on Exchange of Accrued Interest for Common Stock
During the nine months ended September 30, 2020, we recognized a $132,502 gain on exchange of accrued interest for common stock which represents the excess carrying value of the $199,151 of accrued interest as compared to the issuance date fair value of the common stock of $66,649.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the nine months ended September 30, 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 nine months ended September 30, 2021 and 2020, we recognized $49,718 and $134,202 of loss on extinguishment of notes payable in connection with the extension and repayment of notes payable.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Cash | $ | 599,454 | $ | 241,619 | ||||
| Restricted cash | $ | - | $ | 3,500 | ||||
| Working capital deficiency | $ | (10,187,899 | ) | $ | (7,950,882 | ) | ||
During the nine months ended September 30, 2021, we had not generated any revenues, had a net loss of approximately $4,637,000 and had used cash in operations of approximately $2,919,000. As of September 30, 2021, we had a working capital deficiency of approximately $10,188,000 and an accumulated deficit of approximately $30,343,000. 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.
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During the nine months ended September 30, 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 nine months ended September 30, 2021 and 2020 in the amounts of approximately $2,919,000 and $2,018,000, respectively. The net cash used in operating activities for the nine months ended September 30, 2021 was primarily due to cash used to fund a net loss of approximately $4,637,000, adjusted for net non-cash expenses in the aggregate amount of approximately $1,258,000, partially offset by $460,000 of net cash provided by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the nine months ended September 30, 2020 was primarily due to cash used to fund a net loss of approximately $3,286,000, adjusted for net non-cash expenses in the aggregate amount of approximately $923,000, partially offset by $345,000 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 nine months ended September 30, 2021 and 2020 was approximately $3,274,000 and $2,045,000, respectively. The net cash provided by financing activities during the nine months ended September 30, 2021 was attributable to $3,797,820 of proceeds from the issuance of convertible notes payable, offset by the repayments of notes payable, convertible notes payable, and the insurance financing liability in the amount of $524,007. The net cash provided by financing activities during the nine months ended September 30, 2020 was attributable to $1,572,500 of proceeds from the issuance of convertible notes payable, $728,347 of proceeds from the issuance of Series A preferred stock, $100,000 of proceeds from the issuance of notes payable and $100,000 of proceeds from advances payable, offset by the repayment of a note payable in the amount of $200,000, $110,000 of repayments of advances payable and a $146,000 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.
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The Black-Scholes option pricing model was used to estimate the fair value of the Company’s warrants and embedded conversion options. The Black-Scholes option pricing model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value under the Binomial Lattice model and the Black-Scholes option pricing model to be materially the same.
Embedded conversion options within notes payable are recorded as a debt discount and are amortized as interest expense over the term of the related debt instrument.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities;
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
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 nine months ended September 30, 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.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.
In connection with the preparation of this Quarterly Report, management, with the participation of our Principal Executive and Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive and Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Except as described below, we are not involved in any pending legal proceeding or litigations and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.
In January 2019, the holder of a promissory note in the principal amount of $250,000 due on March 16, 2016 instituted a collection action in the Supreme Court of the State of New York, County of New York. On June 12, 2019, the plaintiff served a motion for summary judgment through the Secretary of State which was heard on July 12, 2019 and granted. The Company contends that it was not given sufficient notice under the applicable statute and did not have an opportunity to oppose the motion. Judgment was entered in October 2019 in the amount of $267,680. The Company brought a motion to vacate based on the jurisdictional defect of the motion in not providing the required amount of time, but that motion was denied in February 2021 without properly addressing the jurisdictional issues raised by the Company. The Company has appealed the denial and then filed a motion to Renew and Reargue the motion to vacate based on the Court's failure to address critical issues. That motion was also denied on April 15, 2021 without addressing the Company's arguments. The Company has appealed the second denial as well and is pursuing both appeals in a consolidated manner so as to resolve all issues together. While the Company's motions were pending, the plaintiff has commenced steps to collect judgment. During the nine months ended September 30, 2021, $103,088 was released to an officer of the court and has been accounted for as partial note repayment, such that, as of September 30, 2021, there was $146,912 outstanding under the note. During the nine months ended September 30, 2021, on behalf of the Company, a third party deposited the full amount of the unpaid judgment with the court, which created an automatic stay of enforcement of this matter and which will be used to resolve the underlying note in the event of an adverse outcome on appeal.
Item 1A. Risk Factors.
There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on April 15, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In August 2021, we issued a five-year warrant to purchase a total of 800,000 shares of common stock at an exercise price of $1.25 per share to a lender in accordance with the terms of a convertible note. We relied upon the exemptions provided by Section 4(2) of the Securities Act in connection with this transaction.
From July 26, 2021 through November 2021, convertible notes in the aggregate principal amount of $1,769,472 automatically converted into 235,929 shares of our Series C Convertible Preferred Stock on the maturity dates of the convertible notes. In August 2021, a holder of the Series C Preferred Stock elected to convert 5,000 of such shares into 50,000 shares of common stock. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act in connection with these transactions.
In July 2021, we issued an aggregate of 71,915 shares of our common stock to holders of convertible notes in lieu of cash interest upon the maturity of the notes. We relied upon the exception provided by Section 4(2) of the Securities Act in connection with this transaction.
In August 2021, we issued a five-year warrant to purchase 125,000 shares of common stock at an exercise price of $.75 per share to a consultant. We relied upon the exception provided by Section 4(2) of the Securities Act in connection with these transactions.
In August 2021, we extended the expiration date of a warrant to purchase 150,000 shares of our common stock at an exercise price of $0.75 per share from August 4, 2021 to August 4, 2025 and extended the expiration date of a warrant to purchase 37,500 shares of common stock at an exercise price of $0.75 per share from August 26, 2021 to August 26, 2025. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act in connection with these transactions.
In October 2021, a holder of Series C Preferred Stock elected to convert 10,000 of such shares into 100,000 shares of common stock. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act in connection with this transaction.
During the three months ended September 30, 2021, we issued 165,099 shares of common stock to consultants. We relied upon the exception provided by Section 4(2) of the Securities Act in connection with these transactions.
In November 2021, we issued 14,429 shares of Series C Preferred Stock and a five-year warrant to purchase 144,290 shares of common stock at an exercise price of $1.25 per share in connection with the conversion of a convertible note in the principal amount of $50,000. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act in connection with this transaction.
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Item 3. Defaults Upon Senior Securities.
As of September 30, 2021 and through the date of this filing, notes payable and convertible notes payable with face values totaling $2,012,162 and $5,762,162, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2021. Such notes continue to accrue interest and all relevant penalties have been accrued as of September 30, 2021. Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Item 1 above for additional details. We are in negotiations with all holders to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CELL SOURCE, INC. | ||
| Dated: November 15, 2021 | By: | /s/ Itamar Shimrat |
| Name: | Itamar Shimrat | |
| Title: | Chief
Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) | |
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