Note 2 – Going Concern and Management Plans
The Company has not generated any revenues, has recurring net losses, a working capital deficiency as of September 30, 2016 of approximately $7,832,000, and used cash in operations of approximately $1,344,000 and $1,459,000 for the nine months ended September 30, 2016 and 2015, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying unaudited 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 ability of the Company to continue its 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. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the condensed consolidated financial statements.
There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The Company’s financial statements are consolidated and include the accounts of CSI and Cell Source Limited. All significant intercompany transactions have been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most significant estimates, among other things, are used in accounting for allowances for deferred income taxes, contingencies, as well as the recording and presentation of its common stock and related warrant issuances. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Loss Per Share
The Company computes basic net loss per share by dividing net loss by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable. Weighted average shares outstanding for the three and nine months ended September 30, 2016 and 2015 includes the weighted average impact of warrants to purchase an aggregate of 2,043,835 shares of common stock because their exercise price was determined to be nominal.
The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
11,814,324
|
|
|
|
8,674,324
|
|
|
Convertible notes
|
|
|
2,636,900
|
|
|
|
193,333
|
|
|
Total
|
|
|
14,451,224
|
|
|
|
8,867,657
|
|
Deferred Financing Costs
The Company has recorded deferred financing costs as a result of fees incurred by the Company in conjunction with its debt financing activities. These costs are amortized using the interest method over the shorter of (a) the term of the related debt or (b) the expected conversion date of the debt into equity instruments. During the nine months ended September 30, 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” and, as a result, the Company reclassified deferred financing costs for all periods presented such that costs are included as a discount to convertible notes payable on the accompanying condensed consolidated balance sheets.
As of September 30, 2016 and December 31, 2015, there was $48,296 and $152,932, respectively, of unamortized deferred financing costs which were included as a discount to convertible notes payable as well as $20,000 of unamortized deferred financing costs associated with an equity offering that had yet to close as of September 30, 2016 which were included within non-current assets on the accompanying condensed consolidated balance sheets. See Note 6 – Notes Payable – Summary – for details associated with amortization of deferred financing costs which are included within amortization of debt discount on the condensed consolidated statements of operations.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 – Summary of Significant Accounting Policies - Continued
Derivative Financial Instruments
The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815.
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants 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. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.
The Black-Scholes option pricing model was used to estimate the fair value of the warrants and conversion options. The 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 model to be materially the same. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the warrants.
Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.
Recent Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its condensed consolidated financial statements or disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15).
ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its
condensed
consolidated cash flows and related disclosures.
The Company has evaluated all new accounting standards that are in effect and may impact its condensed consolidated financial statements and does not believe that there are any other new accounting standards that have been issued that might have a material impact on its financial position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2016 presentation. These reclassifications have no impact on the previously reported net loss.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value
The Company determines the estimated fair value of amounts presented in these condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of September 30, 2016 and December 31, 2015, and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value of its common stock during the three and nine months ended September 30, 2016. To determine the value of its common stock, the Company considered the following three possible valuation methods (1) the income approach, (2) the market approach and the (3) cost approach to estimate its enterprise value.
The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:
Level 1 - Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 - Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 - Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
The following table summarizes the valuation of the Company’s derivative liabilities and accrued compensation by the above fair value hierarchy levels as of September 30, 2016 and December 31, 2015 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
104,033
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
104,033
|
|
|
Derivative liability
|
|
|
3,332,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,332,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016
|
|
$
|
3,436,933
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,436,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
60,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,000
|
|
|
Derivative liability
|
|
|
3,279,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,279,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
$
|
3,339,600
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,339,600
|
|
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value – Continued
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants with “down-round protection”, as the Company is unable to determine if it will have sufficient authorized common stock to settle such arrangements, warrants deemed to be derivative liabilities according to the Company’s sequencing policy in accordance with ASC 815-40-35-12, the conversion option of convertible notes payable and accrued obligations to issue a warrant and common stock.
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.29% - 1.28
|
%
|
|
|
0.33% - 1.53
|
%
|
|
|
0.21% - 1.28
|
%
|
|
|
0.33% - 1.71
|
%
|
|
Expected term (years)
|
|
|
0.04 - 5.00
|
|
|
|
0.25 - 5.00
|
|
|
|
0.04 - 5.00
|
|
|
|
0.25 - 5.00
|
|
|
Expected volatility
|
|
|
150% - 152
|
%
|
|
|
166
|
%
|
|
|
150% - 159
|
%
|
|
|
166% - 172
|
%
|
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock has not been publicly traded for a sufficiently long period of time or with significant volume, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
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, 2016:
|
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
|
Compensation
|
|
|
Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
$
|
60,000
|
|
|
$
|
3,279,600
|
|
|
$
|
3,339,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
(1,072
|
)
|
|
|
(695,200
|
)
|
|
|
(696,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants and conversion options
|
|
|
-
|
|
|
|
748,500
|
|
|
|
748,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of obligations
|
|
|
45,105
|
|
|
|
-
|
|
|
|
45,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016
|
|
$
|
104,033
|
|
|
$
|
3,332,900
|
|
|
$
|
3,436,933
|
|
The Company’s significant financial instruments such as cash, other current assets, accounts payable, accrued expenses and notes payable were deemed to approximate fair value due to their short term nature.
See Note 6 – Notes Payable for details associated with the issuance of warrants and conversion options which were deemed to be derivative liabilities.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued research and development
|
|
$
|
192,423
|
|
|
$
|
186,815
|
|
|
Accrued legal fees
|
|
|
221,164
|
|
|
|
216,956
|
|
|
Accrued other professional fees
|
|
|
131,241
|
|
|
|
75,164
|
|
|
Accrued director compensation
|
|
|
12,000
|
|
|
|
12,000
|
|
|
Accrued Scientific Advisory Board compensation
|
|
|
70,000
|
|
|
|
31,000
|
|
|
Accrued interest, current portion
|
|
|
217,748
|
|
|
|
25,139
|
|
|
Other accrued expenses
|
|
|
111,008
|
|
|
|
39,411
|
|
|
Accounts payable and accrued expenses, current portion
|
|
|
955,584
|
|
|
|
586,485
|
|
|
Non-current portion of accrued interest
|
|
|
-
|
|
|
|
4,474
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
955,584
|
|
|
$
|
590,959
|
|
Note 6 – Notes Payable
Non-Convertible Notes
On March 8, 2016, the Company issued six-month notes payable in the aggregate principal amount of $600,000 which bear interest at a rate of 10% per annum. In connection with the note issuances, the Company issued immediately vested warrants to purchase an aggregate of 300,000 shares of common stock at an exercise price of $0.75 per share with an issuance date fair value of $93,400, which were recorded as a debt discount.
In connection with the Company’s sequencing policy, the warrants were determined to be derivative liabilities. See Note 4 – Fair Value for additional details.
The warrants contain a provision that provides the Company with an option, prior to the expiration date, to redeem all of the warrants then outstanding upon not less than thirty (30) days nor more than (60) days notice to the applicable holder, at a redemption price of $0.01 per share, subject to the conditions that: (i) there is an effective registration statement covering the resale of the underlying shares of common stock and (ii) the common stock has traded for twenty (20) consecutive days with a closing price of at least $2.50 per share with an average trading volume of 100,000 shares per day. The warrants expire on March 25, 2019.
On May 10, 2016, the Company issued a six-month note payable in the principal amount of $53,000 which bears interest at 6% per annum, payable at maturity.
On July 20, 2016, the Company issued a six-month note payable in the principal amount of $200,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 150,000 shares of common stock at an exercise price of $0.75 per share.
In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $53,000 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
On August 4, 2016, the Company issued a six-month note payable in the principal amount of $100,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 75,000 shares of common stock at an exercise price of $0.75 per share.
In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $26,500 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
On August 16, 2016, the Company issued a six-month note payable in the principal amount of $50,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 37,500 shares of common stock at an exercise price of $0.75 per share.
In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $13,200 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Notes Payable – Continued
Non-Convertible Notes
– Continued
On August 25, 2016, the Company issued a six-month note payable in the principal amount of $60,000 which bears interest at 10% per annum, payable at maturity. In connection with the note issuance, the Company issued to the purchaser an immediately-vested, five-year warrant to purchase 45,000 shares of common stock at an exercise price of $0.75 per share.
In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $15,900 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note.
During the nine months ended September 30, 2016, the Company extended the maturity dates at maturity of non-convertible notes payable in the aggregate principal amount of $500,000 to various dates through September 30, 2016. In connection with the note extensions, the Company issued the purchasers an aggregate of 500,000 shares of common stock.
The issuance date fair value of an aggregate of $200,000 was recorded as a debt discount and was amortized over the extended terms of the notes.
See Note 4 – Fair Value for details related to the fair value of warrants and Note 8 – Related Parties for details related to non-convertible notes held by the Company’s Chief Executive Officer (“CEO”) and a director of the Company.
Convertible Notes
Other Convertible Notes
In January 2016, the Company issued a convertible note payable in the principal amount of $250,000 to an investor who advanced the funds to the Company in January 2015. The note matures on July 27, 2016 and bears interest at a rate of 10% per annum, beginning from the date the funds were advanced. The note shall be automatically converted into shares of the Company’s common stock upon the earlier of (i) the closing of an offering of equity securities pursuant to which the Company receives an aggregate of at least $5,000,000 in gross proceeds (“Qualified Financing”); or (ii) the maturity date. In the event the note is converted upon the occurrence of a Qualified Financing (the “QF Conversion Shares”), the conversion price of the note shall be the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) the quotient obtained by dividing $35,000,000 by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the Qualified Financing. The QF Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing on which the Company generates aggregate gross proceeds under the Qualified Financing of at least $5,000,000. In addition, upon conversion of the note following the occurrence of a Qualified Financing, the holder shall automatically receive five-year warrants to purchase that number of shares of common stock into which the note is convertible and such warrants shall have an exercise price equal to the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) $0.75. In the event the note is automatically converted upon the maturity date, the conversion price of the note shall be equal to the quotient obtained by dividing $20,000,000 by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the maturity date (the “Maturity Conversion Price”). In addition, in the event of an automatic conversion of the note upon the maturity date, the holder shall automatically receive five-year warrants to purchase that number of common stock into which the note is convertible and such warrants shall have an exercise price equal to the Maturity Conversion Price.
In connection with the Company’s sequencing policy, the conversion option of the note was determined to be a derivative liability. The $179,000 issuance date fair value was recorded as a debt discount and will be amortized over the term of the note. See Note 4 – Fair Value for additional details.
During the nine months ended September 30, 2016, the Company extended the maturity dates at maturity of other convertible notes payable in the aggregate principal amount of $145,000 to January 24, 2017. In connection with the extensions, the Company issued the purchasers immediately-vested, three-year warrants to purchase an aggregate of 72,500 shares of common stock at an exercise price of $0.75 per share.
In connection with the Company’s sequencing policy, the warrants were determined to be derivative liabilities. The $21,800 issuance date fair value was recorded as a debt discount and will be amortized over the extended term of the notes.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Notes Payable – Continued
Convertible Notes
- Continued
10% Convertible Note Offering
During the nine months ended September 30, 2016, the Company closed on an aggregate of $390,000 in principal amount of convertible notes to investors (the”10% Convertible Notes”). The 10% Convertible Notes bear interest at a rate of 10% per annum and are payable eighteen (18) months from the date of issuance (the “Maturity Date”). The 10% Convertible Notes shall be automatically converted into shares of the Company’s common stock upon the earlier of (i) the closing of an offering of equity securities pursuant to which the Company receives an aggregate of at least $5,000,000 in gross proceeds (“Qualified Financing”); (ii) the closing of a strategic transaction (including but not limited to the Company’s entry into a joint venture or partnership agreement or the sublicensing of the Company’s intellectual property) pursuant to which the Company, directly or indirectly, receives, or expects to receive within eighteen months, cash, assets or other consideration with a total aggregate value of at least $4,000,000 (“Strategic Transaction”); or (iii) the Maturity Date of the 10% Convertible Notes.
In the event the 10% Convertible Notes are converted upon the occurrence of a Qualified Financing (the “QF Conversion Shares”), the conversion price of the 10% Convertible Notes shall be the lesser of (i) seventy percent (70%) of the price per share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing; or (ii) $0.75. The QF Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing on which the Company generates aggregate gross proceeds under the Qualified Financing of at least $5,000,000. In the event the 10% Convertible Notes are converted upon the occurrence of a Strategic Transaction (the “ST Conversion Shares”), the conversion price of the 10% Convertible Notes shall be equal to $0.75. In addition, upon conversion of the 10% Convertible Notes following the occurrence of a Qualified Financing or a Strategic Transaction, each holder of a 10% Convertible Note shall automatically receive five-year warrants to purchase that number of shares of common stock into which the 10% Convertible Notes are convertible and such warrants shall have an exercise price equal to one hundred ten percent (110%) of the per-share or per unit (assuming the unit includes one share of common stock or the price per unit divided by the number of shares of common stock underlying such unit) at which the Company sells its securities in a Qualified Financing or $0.825 in the case of a Strategic Transaction, as applicable. The ST Conversion Shares shall be subject to a prohibition from any sale, pledge or transfer for a period of six (6) months from the date of the closing of a Strategic Transaction. In the event the 10% Convertible Notes are automatically converted upon the Maturity Date, the conversion price of the 10% Convertible Notes shall be equal to the quotient obtained by dividing $15 million by the aggregate number of outstanding shares of the common stock, measured on a fully-diluted basis, excluding certain shares, on the date immediately preceding the Maturity Date (the “Maturity Conversion Price”). In addition, in the event of an automatic conversion of the 10% Convertible Notes upon the Maturity Date, the holder shall automatically receive five-year warrants to purchase that number of common stock into which the 10% Convertible Notes are convertible and such warrants shall have an exercise price equal to the Maturity Conversion Price.
In connection with the Company’s sequencing policy, the conversion options of the notes were determined to be derivative liabilities. The $327,700 aggregate issuance date fair value was recorded as a debt discount and will be amortized over the term of the notes. See Note 4 – Fair Value for additional details.
Summary
During the three and nine months ended September 30, 2016, the Company recorded interest expense related to notes payable of $62,905 and $181,462 respectively. During the three and nine months ended September 30, 2015, the Company recorded interest expense related to notes payable of $9,074 and $15,830, respectively.
During the three and nine months ended September 30, 2016, the Company recorded amortization of debt discount of $463,060 and $1,061,736, respectively. During the three and nine months ended September 30, 2015, the Company recorded amortization of debt discount of $118,425 and $197,925, respectively.
As of the date of filing, notes payable with an aggregate principal balance of $1,953,000 were past due, however, no penalties or additional interest are associated with the notes payable as a result. Accrued interest related to these notes payable was an aggregate of $138,744 as of September 30, 2016. The Company has not satisfied this debt and is in negotiations with the noteholders to extend the maturity dates of such notes or convert the principal and accrued interest into equity.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 – Advances Payable
See Note 6 – Notes Payable – Convertible Notes – Other Convertible Notes for details associated with the issuance of a note that previously was classified as an advance payable.
Note 8 – Related Parties
For the three and nine months ended September 30, 2016, the Company recorded a charge to operations of $205,957 and $604,777, respectively, related to its research and license agreement with Yeda. For the three and nine months ended September 30, 2015, the Company recorded a charge to operations of $200,000 and $600,000, respectively, related to its research and license agreement with Yeda. As of September 30, 2016 and December 31, 2015, approximately $200,000 and $208,000 has been accrued and is payable to Yeda, respectively
.
On March 29, 2016, the Company exercised its option pursuant to an October 3, 2011 exclusive option agreement with Yeda, as amended, such that the Company attempted to negotiate an agreement with Yeda whereby the Company would exclusively license certain organ regeneration technology from Yeda. On September 22, 2016, the Company notified Yeda of its decision to not exclusively license certain organ regeneration technology from Yeda.
During the nine months ended September 30, 2016, the Company repaid a note payable in the principal amount of $50,000 to the Company’s CEO.
On July 20, 2016, the Company extended the maturity date of a non-convertible note payable to a director of the Company in the principal amount of $100,000 to January 24, 2017. In connection with the extension, the Company issued the purchaser an immediately-vested, three-year warrant to purchase 60,000 shares of common stock at an exercise price of $0.75 per share.
In addition, in connection with the terms of the original note, because the principal amount of the note was not repaid by July 20, 2016, the Company shall pay a cash penalty of $5,000 to the holder. In connection with the Company’s sequencing policy, the warrant was determined to be a derivative liability. The $18,000 issuance date fair value was recorded as a debt discount and will be amortized over the extended term of the note.
As of September 30, 2016 and December 31, 2015, there were outstanding notes payable to the Company’s CEO in the aggregate principal amount of $50,000 and $100,000, respectively. As of September 30, 2016 and December 31, 2015, there was an outstanding note payable to a director of the Company in the principal amount of $100,000.
Note 9 – Commitments and Contingencies
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 potentially 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.
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, 2016 and December 31, 2015, the Company has not accrued any amounts for contingencies.
CELL SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 – Stockholders’ Deficiency
Stock-Based Compensation
During the three and nine months ended September 30, 2016, the Company recognized $23,627 and $115,589
, respectively,
of stock-based compensation expense related to warrants.
During the three and nine months ended September 30, 2015, the Company recognized $90,159 and $56,759, respectively, of stock-based compensation expense related to common stock and warrants.
As of September 30, 2016, there was $68,661 of unrecognized stock-based compensation expense that will be recognized over approximately 0.7 years.
Note 11 – Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would require adjustment or disclosure in the condensed consolidated financial statements.
Series A Convertible Preferred Stock Offering
On October 26, 2016, the Company closed on the sale of $
102,425 of its Series A Convertible Preferred Stock (“Preferred Stock”) at a purchase price of $7.50 per share.
On November 14, 2016, the Company filed a Certificate of Designation (“COD”) with the Secretary of the State of Nevada setting forth the preferences, rights and limitation of the Preferred Stock.
Pursuant to the COD, the Preferred Stock may be converted at the option of the holder into such number of shares of the Company’s common stock (“Conversion Shares”) equal to the number of shares of Preferred Stock to be converted, multiplied by the Stated Value of $7.50, divided by the conversion price in effect at the time of the conversion. The conversion price is $0.75 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions. In addition, the Preferred Stock will automatically convert into common stock at the earlier of (a) any of the Company’s treatment candidates receiving Food and Drug Administration or European Medicines Agency approval or (b) five years from the final closing of the offering. Holders of Preferred Stock are entitled to cumulative 9% dividends which are payable semi-annually, commencing on December 30, 2016, in the Company’s sole discretion either in common stock or in cash.
Pursuant to a royalty agreement with the holders of the Preferred Stock, the Company will pay to the holders, in the aggregate, a royalty based on their pro rata ownership of the Preferred Stock equal to 6% of net revenue for treatments sold directly by the Company and 6% of cash received by the Company pursuant to Cell Source treatment licensing or partnering agreements. The royalty payments will terminate when the patents underlying the treatments expire or the sub-licensee discontinues commercial use.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the consolidated results of operations and financial condition of Cell Source, Inc. ("CSI", “Cell Source” or the “Company”) as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016
and 2015 should be read in conjunction with our condensed consolidated financial statements and the notes thereto that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to CSI. 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, 2015 filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2016.
Our wholly-owned subsidiary, Cell Source Israel was founded in 2011 as a privately held company located in Tel Aviv, Israel. Our business is based on over ten (10) years of prominent research at the Weizmann Institute from whom we license patented and patent pending technology. Our exclusive, world-wide license provides us with access to certain discoveries, inventions and other intellectual property generated by Professor Yair Reisner, formerly Head of the Immunology Department at the Weizmann Institute, together with others. Professor Reisner leads a team at the Weizmann Institute to continue the development of these technologies in order to facilitate the transition of those technologies from the laboratory to clinical trials. Our Scientific Advisory Board is chaired by Dr. Terry Strom, Professor of Medicine and Surgery at Harvard Medical School and Director of The Transplant Institute at Beth Israel Deaconess Medical Center, the founding President of the American Society of Transplantation, from which he received a Lifetime Achievement Award, and past President of the Clinical Immunology Society. Its other members include Dr. Robert Negrin, Director of Bone and Marrow Transplantation and Professor of Medicine at Stanford University who is a past President of the American Society of Bone and Marrow Transplantation and the International Society of Cellular Therapy; Dr. Steven Burakoff, Director of the Tisch Cancer Institute at Mount Sinai
Medical Center, Professor of Cancer Medicine at the Icahn School of Medicine, past Professor of Medicine at Harvard Medical School and Director of the NYU Cancer Institute, who won the American Association of Immunologists Lifetime Achievement Award; Dr. Herman Waldman, Department Head and Professor Emeritus of Pathology and Head of the Therapeutic Immunology Group at Oxford Medical School, former Cambridge Immunology Professor and SCRIP Lifetime Achievement Award winner; and Dr. Hermann Einsele, Professor and Director of Internal Medicine at Julius Maximilian University, Würzburg, Germany, a former visiting professor at the Fred Hutchinson Cancer Research Center in Seattle, Director of the German and member of the European Blood and Marrow Transplantation Groups.
Our lead prospective product is our patented Veto Cell immune system management technology, which is an immune tolerance biotechnology that enables the selective blocking of immune responses. The Company’s target indications include: lymphoma, multiple myeloma and BCLL (a form of leukemia), facilitating transplantation acceptance (initially bone marrow transplantation and subsequently organ transplantation), and ultimately treating a variety of non-malignant diseases.
Cell Source, under its exclusive license with Yeda Research & Development Ltd., the commercial arm of the Weizmann Institute of Science, has recently filed two new provisional patent applications that extend the usage of Veto Cell technology as a critical enabler for other cell therapy treatments. One patent application highlights, based on preclinical data, the ability of Veto Cells to accompany other cell therapy treatments and help them overcome rejection and avoid Graft vs. Host Disease (GvHD) in an allogeneic (using a third party donor) treatment setting. The other patent application involves a genetically modified Veto Cell that can have sustained survival in the patient’s body while avoiding rejection and GvHD. Both of these applications holds the potential to make CAR-T cells, which to date been effective primarily in an autologous (patient’s own cells) setting, succeed in an allogeneic setting. What follows is a description of the significance of these two new patent applications:
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Gene modified cell therapy is considered to be one of the most promising cancer treatment approaches in decades, with companies like Kite Pharma and JUNO Therapeutics having recently attained multi-billion dollar valuations after having successfully treated relatively small numbers of patients in Phase I and II clinical trials.
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While gene modified treatments such as CAR-T have shown remarkable results in cancer treatment trials, their published successes to date have been mostly limited to “autologous” blood cell cancer treatments using the patient’s own cells. There are concerns that this type of “personalized” treatment may not have favorable economics on a large scale basis.
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The ideal more lucrative commercial path for CAR-T and similar genetically engineered cell therapies is to become “allogeneic” or off-the-shelf product with drug-like distribution economics and to treat a broad spectrum of cancers including solid tumors.
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Preclinical data show that Veto cells can help genetically modified T-cells from the same donor to overcome rejection issues (among the problems exhibited to date by CAR-T therapy in an allogeneic setting), hence significantly increasing their persistence (longevity) and thus their efficacy in eradicating cancer. Based on this preclinical data, Cell Source believes that Veto cells could potentially enable the use of Off-the-shelf CAR-T cells directed against malignant cells.
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Cell Source has filed patent applications for combining Veto cells with genetically modified T cells and is currently exploring active collaboration with CAR-T cell providers to move Veto and CAR-T combined cell therapy towards the clinic.
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Cell Source is actively exploring collaborations with larger biopharmaceutical firms where Veto Cell technology can significantly enhance the efficacy of cell therapy treatments for a variety of indications. This may allow Cell Source to complement the development of its own treatment candidates with parallel development with partners, thus multiplying the potential impact of this technology in the clinic.
Furthermore, Cell Source recently filed a provisional patent application for an Anti-viral Veto cell. Below is an explanation of the potential for this application:
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Other than primary disease (typically blood cell cancer) the leading causes of death in unrelated donor bone marrow transplants are GvHD (Graft vs. Host Disease, where the donor bone marrow rejects the host or recipient) – responsible for 20% of deaths after unrelated donor transplants - and infections – responsible for a further 17% of those transplants.
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It is well established that GvHD can be prevented by T cell depletion of the bone marrow transplant. However, this procedure is also is associated with an increased rate of graft rejection. Preclinical studies clearly suggest that this problem can be overcome by adding Veto cells to the bone marrow transplant. However, viruses such as CMV and EBV remain a major threat to patients post-transplant.
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Cell Source has developed a next generation Veto cell that not only facilitates mismatched transplants but also protects the transplant recipient against these common viruses.
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Combining GVHD prevention by using T cell depleted transplants with anti-rejection action as well as virus prevention, Veto cell could potentially significantly increase survival rates post-transplant.
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Based on preclinical data, veto cells can also be used to facilitate organ transplants (e.g. kidney transplant combined with a bone marrow transplant) with partially mismatched donors and either reduce or eliminate the need for lifelong daily anti-rejection treatment currently given to even fully matched donor organ recipients.
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Cell source has filed a patent application for its Anti-viral Veto cells and is currently in discussions with leading transplant centers in both the US and Europe with a view to commencing human clinical trials.
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Prior to commercializing its products, the Company must conduct human clinical trials and obtain FDA approval and/or approvals from comparable foreign regulatory authorities.
Generally speaking, as a preclinical biotechnology firm, Cell Source needs to go through several necessary steps in order to commercialize its products and commence revenue generation. These steps are per product, but can run in parallel for multiple products, which are each in different stages of the development “pipeline”, so that, for example, when a certain product is already in a human clinical trial, another product may still be in preclinical development and a third may be awaiting regulatory approval to commence human trials. These can also take place in parallel, and varied stages, for the same product in different geographic jurisdictions. The typical steps per product (and range of time frame for each) are:
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1.
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Complete development of human treatment protocol (2-5 years)
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2.
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Apply for and receive approval to commence human trials (9-18 months)
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3.
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Recruit patients (1-6 months)
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4.
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Conduct Phase I trials showing safety of product (1-2 years)
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5.
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Apply for and receive approval to conduct trials showing product efficacy (6-12 months)
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6.
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Data collecting and analysis (6-12 months)
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7.
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Conduct Phase II efficacy trials (2-3 years)
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8.
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Data collecting and analysis (6-12 months)
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9.
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Apply for and receive approval to conduct trials showing efficacy in larger numbers of patients (6-12 months)
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10.
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Conduct Phase III efficacy trials with larger numbers of patients (2-4 years)
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11.
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Data collecting and analysis (6-12 months)
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12.
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Apply for and receive approval for production scale manufacturing facilities (6-12 months)
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13.
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Contract third party or establish own production facilities (6-30 months)
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14.
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Contract third party or establish own distribution platform (6-18 months)
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15.
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Commence manufacturing and distribution (6-12 months)
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Please note that steps 12-15 can be conducted in parallel with some of the steps above. In the case of Cell Source and other firms that treat terminal patients with either rare diseases or those for which there is currently no effective treatment, or where preclinical studies indicate a reasonable expectation to increase life expectancy and survival rates by a substantive margin, several of these steps can be combined and or shortened, subject to regulatory discretion. For example, Phase I and II (safety and efficacy) can be combined in a single concurrent step; approvals for subsequent steps can be accelerated; in some countries patients can already be treated commercially after the end of Phase II, foregoing the requirement for Phase III data as a prerequisite.
Although we have provided estimated timeframes for each step above, no assurances can be made that such timeframes are accurate or that they would not be delayed for one or more reasons. At any stage of a human clinical trial, there could be problems with either safety or efficacy of treatment. In these instances the Company could be required to reformulate the treatment and proceed with additional patients, which could involve a delay of months or years, depending on whether we would have to seek approval from the very beginning of the approval process. There can also be a delay of up to 1 to 2 years between phases of a human clinical trial, as the regulator may wish to take additional time to review the approval of a subsequent stage. Furthermore, if a significant modification to the treatment is required, the application process begins again from the very first stage. If the treatment is not effective at all or if it’s harmful to patients, even after modifications are made, it is possible that the trials may be halted completely and the product candidates permanently withdrawn. While the timescales presented here are representative of the typical experience, there is no assurance that there will not be significant delays at any stage or step in the process or a complete failure of trials.
The specific detailed next steps the Company must take to get the treatments or products to market include the following:
We have not submitted any drug applications to the FDA and do not have anything pending for approval with the FDA. Cell Source itself has not had any contact with any regulator anywhere regarding treatment approvals or clinical trials associated with regulatory approvals. We are aware that a hospital in Italy in May, 2014 independently requested and in September, 2014 received approval to conduct a trial with the same protocol that we plan to use, but we are not mentioned in the application nor in the approval. However, we may indirectly benefit from the outcome of the trial, if successful, although we are not the sponsor of this trial. There are no written or verbal agreements between the hospital and Cell Source regarding the use of the technology. That said, Cell Source is aware and in favor of the hospital plans to use the technology and would of course find a positive initial outcome encouraging. Since the treatment is being done on compassionate grounds as a non-commercial clinical trial, there is no legal requirement for the hospital to obtain approval to use the treatment protocol. The hospital has successfully treated a cancer patient using the Megadose Drug Combination technology that Cell Source exclusively licenses from Yeda Research & Development Ltd., commercial arm of the Weizmann Institute of Science. While Cell Source is not a sponsor of the trial, the results provide a positive initial indication with respect to the technology. The patient received a bone marrow transplantation from a haploidentical or “mismatched” donor under a reduced intensity conditioning regimen (i.e., a relatively low level of immune suppression treatment). There was successful initial engraftment of the transplantation in the absence of GVHD.
For the Veto Cell application for reducing rejection in Bone Marrow Transplants, Cell Source expects to commence Phase I/II human clinical trials in the US and EU starting sometime in 2018. Cell Source anticipates that Phase I/II studies will last until 2020 or 2021. These would be followed by completion of Phase II and Phase III, which would last another 2-3 years each, so that full approval, if successful, would be expected sometime in 2026. In Germany there is a possibility of approval for commercial use on a “compassionate grounds” basis at the end of Phase II, which could take place by 2024. In the US, Cell Source plans to commence the IND approval process with the FDA in 2017, which could last until between 2022 and 2025. Cell Source also aspires to enter into a collaboration with respect to combining CAR-T cell therapy with Veto Cell therapy and commence pre-clinical proof of concept trials in 2017. If successful, this could lead to a commencement of a combined FDA trial in 2018 or 2019 and could last until 2026 or 2027.
It is possible that Cell Source treatments could qualify for any or all of Fast Track, Breakthrough Therapy, Accelerated Approval and Priority Review designation under the FDA, which would hasten their approval if successful.
The costs for each step of development, in terms of clinical trials, are delineated below:
Cell Source estimates the cost of clinical trials alone to be up to $5-10 million in each of the coming two years and another $25-50 million in order to reach commercialization for both the Anti-rejection Veto Cell and the Veto Cell + CAR-T cell products. This would mean that Cell Source will need to secure one or more significant capital infusions in order to reach the point that meaningful revenues could be generated.
Cell Source will require additional financing for any and all of the steps described above.
Recent Developments
Notes Payable
During the three months ended September 30, 2016, we issued six-month notes payable in the aggregate principal amount of $410,000 which bear interest at a rate of 10% per annum, payable at maturity. In connection with the note issuances, we issued to the purchasers immediately-vested, five-year warrants to purchase an aggregate of 307,500 shares of common stock at an exercise price of $0.75 per share.
Series A Convertible Preferred Stock Offering
On October 26, 2016, we closed on the sale of $102,425 of our Series A Convertible Preferred Stock (“Preferred Stock”) at a purchase price of $7.50 per share.
On November 14, 2016, we filed a Certificate of Designation (“COD”) with the Secretary of the State of Nevada setting forth the preferences, rights and limitation of the Preferred Stock.
Pursuant to the COD, the Preferred Stock may be converted at the option of the holder into such number of shares of our common stock (“Conversion Shares”) equal to the number of shares of Preferred Stock to be converted, multiplied by the Stated Value of $7.50, divided by the conversion price in effect at the time of the conversion. The conversion price is $0.75 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions. In addition, the Preferred Stock will automatically convert into common stock at the earlier of (a) any of our treatment candidates receiving Food and Drug Administration or European Medicines Agency approval or (b) five years from the final closing of the offering. Holders of Preferred Stock are entitled to cumulative 9% dividends which are payable semi-annually commencing on December 30, 2016 in our sole discretion either in common stock or in cash.
Pursuant to a royalty agreement with the holders of the Preferred Stock, we will pay to the holders, in aggregate, a royalty based on their pro rata ownership of the Preferred Stock equal to 6% of net revenue for treatments sold directly by us and 6% of cash received by us pursuant to Cell Source treatment licensing or partnering agreements. The royalty payments will terminate when the patents underlying the treatments expire or the sub-licensee discontinues commercial use.
Consolidated Results of Operations
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
The following table presents selected items in our unaudited condensed consolidated statements of operations for the three months ended September 30, 2016 and 2015, respectively:
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For The Three Months Ended
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September 30,
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2016
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2015
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Revenues
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$
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-
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|
$
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-
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Operating Expenses
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Research and development
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133,866
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118,551
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Research and development - related party
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205,957
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200,000
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Selling, general and administrative
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261,914
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230,587
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Total Operating Expenses
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601,737
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|
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549,138
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Loss From Operations
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|
|
(601,737
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)
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|
|
(549,138
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)
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Other Income (Expense)
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Change in fair value of derivative liabilities
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324,350
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|
|
|
3,200
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Interest expense
|
|
|
(62,905
|
)
|
|
|
(9,074
|
)
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Amortization of debt discount
|
|
|
(463,060
|
)
|
|
|
(118,425
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)
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|
|
|
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|
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Total Other Expense
|
|
|
(201,615
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)
|
|
|
(124,299
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)
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Net Loss
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|
$
|
(803,352
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)
|
|
$
|
(673,437
|
)
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Research and Development
Research and development expense was $339,823 and $318,551 for the three months ended September 30, 2016 and 2015, respectively, an increase of $21,272, or 7%
, primarily associated with increased expenses associated with key patents.
Selling, General and Administrative
Selling, general and administrative expense was $261,914 and $230,587 for the three months ended September 30, 2016 and 2015, respectively, an increase of $31,327, or 14%. The increase was primarily due to increased external consulting costs as compared to the prior period.
Change in Fair Value of Derivative Liability
The change in fair value of derivative liability for the three months ended September 30, 2016 and 2015 was a gain of $324,350 and $3,200, respectively, which represents the change in fair value of the warrants that were deemed to be derivative liabilities during the respective periods. The primary reason for the increase as compared to the 2015 period is due to the expiration of a conversion option during the 2016 period.
Interest Expense
Interest expense was $62,905 and $9,074 for the three months ended September 30, 2016 and 2015, respectively, an increase of $53,831, or 593%. The increase was due to the issuance of new notes payable subsequent to September 30, 2015 with interest rates ranging from 6% to 10% per annum.
Amortization of Debt Discount
Amortization of debt discount was $463,060 and $118,425 for the three months ended September 30, 2016 and 2015, respectively, an increase of $344,635 or 291%. The increase was primarily due to costs associated with warrants, common stock and conversion options issued in connection with notes payable and the costs incurred in connection with our debt offerings.
Nine months Ended September 30, 2016 Compared to Nine months Ended September 30, 2015
The following table presents selected items in our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2016 and 2015, respectively:
|
|
|
For The Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
357,454
|
|
|
|
295,770
|
|
|
Research and development - related party
|
|
|
604,777
|
|
|
|
600,000
|
|
|
Selling, general and administrative
|
|
|
814,351
|
|
|
|
807,365
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,776,582
|
|
|
|
1,703,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(1,776,582
|
)
|
|
|
(1,703,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
695,200
|
|
|
|
115,900
|
|
|
Interest expense
|
|
|
(181,462
|
)
|
|
|
(15,830
|
)
|
|
Amortization of debt discount
|
|
|
(1,061,736
|
)
|
|
|
(197,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Expense) Income
|
|
|
(547,998
|
)
|
|
|
(97,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,324,580
|
)
|
|
$
|
(1,800,990
|
)
|
Research and Development
Research and development expense was $962,231 and $895,770 for the nine months ended September 30, 2016 and 2015, respectively, an increase of $66,461, or 7%, primarily associated with increased expenses associated with key patents.
Selling, General and Administrative
Selling, general and administrative expense was $814,351 and $807,365 for the nine months ended September 30, 2016 and 2015, respectively, an increase of $6,986, or 1%.
Change in Fair Value of Derivative Liability
The change in fair value of derivative liability for the nine months ended September 30, 2016 and 2015 was a gain of $695,200 and $115,900, respectively, which represents the change in fair value of the warrants that were deemed to be derivative liabilities during the respective periods. The primary reason for the increase as compared to the 2015 period is due to the expiration of a conversion option during the 2016 period.
Interest Expense
Interest expense was $181,462 and $15,830 for the nine months ended September 30, 2016 and 2015, respectively, an increase of $165,632, or 1046%. The increase was due to the issuance of new notes payable subsequent to September 30, 2015 with interest rates ranging from 6% to 10% per annum.
Amortization of Debt Discount
Amortization of debt discount was $1,061,736 and $197,925 for the nine months ended September 30, 2016 and 2015, respectively, increase of $863,811, or 436%. The increase was primarily due to costs associated with warrants and conversion options issued in connection with notes payable and the costs incurred in connection with our debt offerings.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,638
|
|
|
$
|
6,944
|
|
|
Working capital deficiency
|
|
$
|
(7,831,895
|
)
|
|
$
|
(5,711,374
|
)
|
We have not generated any revenues since our inception, we have recurring net losses, we have a working capital deficiency as of September 30, 2016 of approximately $7,832,000 and we have used cash in operations of approximately $1,344,000 and $1,459,000 during the nine months ended September 30, 2016 and 2015, respectively. These conditions raise substantial doubt about our ability to continue as a going concern. Based on our current resources, we will not be able to continue to operate without additional immediate funding.
Our ability to continue our operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. We may need to incur additional liabilities with certain related parties to sustain our existence. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of our financial statements.
There can be no assurances that we will be successful in generating additional cash from equity or debt financings or other sources to be used for operations. Should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail certain or all operational activities and/or contemplate the sale of our assets, if necessary.
During the nine months ended September 30, 2016 and 2015, 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, 2016 and 2015 in the amounts of $1,343,731 and $1,458,614, respectively. The net cash used in operating activities for the nine months ended September 30, 2016 was primarily due to cash used to fund a net loss of $2,324,580, adjusted for net non-cash expenses in the aggregate amount of $482,770, partially offset by $498,079 of net cash provided by changes in the levels of operating assets and liabilities
, primarily as a result of increases in accounts payable and accrued expenses, due to cash constraints during the period
.
The net cash used in operating activities for the nine months ended September 30, 2015 was primarily due to cash used to fund a net loss of $1,800,990, adjusted for net non-cash expenses in the aggregate amount of $139,429 partially offset by $202,947 of net cash provided due to changes in the levels of operating assets and liabilities, primarily as a result of increases in accounts payable and accrued expenses, due to cash constraints during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2016 and 2015 was $1,338,425 and $1,445,000, respectively. The net cash provided by financing activities during the nine months ended September 30, 2016 was attributable to $1,453,000 of proceeds from the issuance of notes payable, partially offset by repayments of $50,000 of notes payable, $44,575 of debt issuance costs and $20,000 of deferred financing costs associated with an equity offering that had yet to close as of September 30, 2016.
The net cash provided by financing activities during the nine months ended September 30, 2015 was attributable to $995,000 of proceeds from the issuance of notes payable and $450,000 of proceeds received in connection with a convertible note offering prior to closing.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
There are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (“SEC”) on April 14, 2016. Please refer to that document for disclosures regarding the critical accounting policies related to our business.
Recent Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are currently evaluating ASU 2016-09 and its impact on our condensed consolidated financial statements or disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15).
ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 requires adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the effect that adopting this new accounting guidance will have on our
condensed
consolidated cash flows and related disclosures.
We have evaluated all new accounting standards that are in effect and may impact our condensed consolidated financial statements and do not believe that there are any other new accounting standards that have been issued that might have a material impact on our financial position or results of operations.