The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
CELL SOURCE, INC. AND SUBSIDIARY
Note 2 - Going Concern and Management Plans
During the three months ended March 31, 2018, the Company had not generated any revenues, had a net loss of approximately $712,000 and had used cash in operations of approximately
$710,000
. As of March 31, 2018, the Company had a working capital deficiency of approximately
$5,327,000 and
an accumulated deficit of approximately $15,265,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within twelve months
from the date these financial statements are issued
.
The Company’s primary source of operating funds since inception has 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
The Company’s significant accounting policies and applicable recently released accounting standards are disclosed in Note 3, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the years ended December 31, 2017 and 2016. Since December 31, 2017, there have been no material changes to the Company’s significant accounting policies, except as noted below.
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 months ended March 31, 2018 and 2017
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:
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
11,915,481
|
|
|
|
11,865,481
|
|
Convertible notes
|
|
|
1,520,732
|
|
|
|
1,658,707
|
|
Convertible preferred stock
|
|
|
6,504,570
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,940,783
|
|
|
|
13,524,188
|
|
Convertible notes are assumed to be converted at the rate of $0.75 per common share, which is the conversion price as of March 31, 2018. However, such conversion rates are subject to adjustment under certain circumstances,
as discussed in the audited consolidated financial statements of the Company as of December 31, 2017 and for the year then ended which were included in the Co
mpany's Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 filed with the SEC on July 25, 2018.
Recent Accounting Standards
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 makes 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 adopted ASU 2016-15 effective January 1, 2018 with no material impact on its condensed consolidated cash flows and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2017-09”). ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective basis in the annual and interim periods beginning after December 15, 2017.
The Company adopted ASU 2017-09 effective January 1, 2018 with no material impact on its condensed
consolidated financial statements or disclosures.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity of financial reporting for non-employee share-based payments. Currently, the accounting requirements for non-employee and employee share-based payments are significantly different. ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity — Equity-Based Payments to Nonemployees”. The amendments to ASU 2018 - 07 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09, (Topic 606), “Revenue from Contracts with Customers”. The Company is currently evaluating ASU 2018-07 and its impact on its condensed
consolidated financial statements or 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.
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 March 31, 2018 and December 31, 2017, and, as of those dates, the carrying value of all amounts approximates fair value.
The Company estimated the fair value of its restricted common stock during the three months ended March 31, 2018 based upon: i) a third-party valuation of its common stock as of December 31, 2017; ii) observations of subsequent sales of its Preferred Stock (which is convertible into common stock)
; and iii) the thinly traded volume and closing prices of its common stock.
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 derivatives by the above fair value hierarchy levels as of March 31, 2018 and December 31, 2017 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 - Warrants
|
|
$
|
79,346
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,346
|
|
Derivative liability
|
|
|
542,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
542,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2018
|
|
$
|
621,746
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
621,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - Warrants
|
|
$
|
79,262
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,262
|
|
Derivative liability
|
|
|
628,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
628,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
$
|
707,462
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
707,462
|
|
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 and warrants deemed to be derivative liabilities according to the Company’s sequencing policy in accordance with ASC 815-40-35-12.
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.73% - 2.69
|
%
|
|
|
0.76% - 1.93
|
%
|
Expected term (years)
|
|
|
0.25 - 5.00
|
|
|
|
0.25 - 4.76
|
|
Expected volatility
|
|
|
110
|
%
|
|
|
110
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock 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 three months ended March 31, 2018:
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
Compensation
|
|
|
Liabilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
$
|
79,262
|
|
|
$
|
628,200
|
|
|
$
|
707,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
-
|
|
|
|
49,600
|
|
|
|
49,600
|
|
Change in fair value
|
|
|
84
|
|
|
|
(135,400
|
)
|
|
|
(135,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2018
|
|
$
|
79,346
|
|
|
$
|
542,400
|
|
|
$
|
621,746
|
|
The Company’s significant financial instruments such as cash, accounts payable, accrued expenses and notes payable were deemed to approximate fair value due to their short-term nature. See Note 5,
Notes Payable
for details associated with the issuance of warrants which were deemed to be derivative liabilities.
Note 5 – Notes Payable
a)
|
On February 21, 2018, the Company issued two notes payable in the aggregate principal amount of $400,000 and warrants for the purchase of a total of 240,000 shares of common stock at $0.75 per share for a period of five years. These notes did not accrue interest, matured on May 21, 2018 and had an effective interest rate of 40% per annum. The warrants were 100% vested upon issuance, valued at $39,700 on the date of issuance, and recorded as a debt discount. The discount was amortized to expense over the term of those notes.
|
b)
|
On February 26, 2018, the Company issued a note payable in the aggregate principal amount of $100,000 and a warrant for the purchase of a total of 60,000 shares of common stock at $0.75 per share for a period of five years. The note did not accrue interest, matured on May 26, 2018 and had an effective interest rate of 40% per annum. The warrant was 100% vested upon issuance, valued at $9,900 on the date of issuance, and recorded as a debt discount. The discount was amortized to expense over the term of the note.
|
During the three months ended March 31, 2018 and 2017, the Company recorded interest expense of $30,265 and $73,726, respectively and interest expense for related party debt of $740 and $740, respectively.
During the three months ended March 31, 2018 and 2017, the Company recorded amortization of debt discount of $137,974 and $174,380, respectively, and amortization of debt discount for related party debt of $18,493 and $2,300, respectively.
As of March 31, 2018 and the date of this filing, notes payable with face values totaling $2,113,000 and $2,973,000, respectively, were past due. Such notes continue to accrue interest, however no penalties have been accrued since none of the holders have issued a notice of default. The Company is in negotiations with those holders to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
Note 6 – Stockholders’ Deficiency
On March 3, 2018, the Company raised $50,000 through the sale of 6,667 shares of Series A Preferred Stock at $7.50 per share.
During the three months ended March 31, 2018 and 2017, the Company accrued and recorded Series A Preferred Stock dividends of $107,496 and $20,064, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.
During the three months ended March 31, 2018 and 2017, the Company recorded $0 and $23,503 of stock-based compensation expense related to warrants with a charge to expense and a corresponding increase in additional paid-in capital. As of March 31, 2018, there was no unrecognized stock-based compensation expense.
Note 7 – Related Party Transactions
In 2011, the Company entered into a Research and License Agreement with Yeda for Veto Cell technology. As Yeda is a founder and a significant shareholder of the Company, it is a related party.
In connection with certain March 2018 amendments to the agreement, the provision for the payment of $200,000 in connection with reaching an equity financing threshold was permanently eliminated and the research budget was reduced such that the agreement now requires the following payments by the Company:
Three Months Ending:
|
|
|
Total
|
|
|
|
|
|
|
March 31, 2018
|
|
|
$
|
200,000
|
|
June 30, 2018
|
|
|
|
150,000
|
|
September 30, 2018
|
|
|
|
50,000
|
|
December 31, 2018
|
|
|
|
50,000
|
|
March 31, 2019
|
|
|
|
25,000
|
|
June 30, 2019
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
$
|
500,000
|
|
In addition, the parties amended the milestones and related completion dates. If the Company fails to achieve any of the milestones by the dates set forth in the agreement, Yeda is entitled to terminate the license upon written notice to the Company. To date, the Company has been deemed to have met all of the milestones and the next milestone in the agreement is January 1, 2022. Either Yeda or the Company may terminate the agreement and the license after the commitment of a material breach by the other party and in certain other instances as detailed in the agreement.
During the three months ended March 31, 2018 and 2017, the Company recorded research and development expense of $225,139 and $200,000, respectively, in connection with the agreement with Yeda.
Note 8 – Subsequent Events
On August 3 and October 10, 2018, the Company received advances totaling $1,000,000 from an investor who indicated plans to invest such funds in Series A Preferred Stock under the terms of the Private Placement Memorandum (“PPM”). The terms of the PMM are described in Note 10 to the audited financial statements included in the Company's Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 filed with the Securities and Exchange Commission on July 25, 2018.
On August 21, 2018 and pursuant to the terms of the Series A Preferred Stock Certificate of Designation, the Board approved the issuance of 431,313 shares of common stock as payment-in-kind at the rate of $0.75 per share to satisfy accrued preferred dividend liability of $323,484.
On September 30, 2018, the Board approved the extension of the PPM for the sale of Series A Preferred Stock through November 28, 2018.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
The following discussion and analysis of the condensed consolidated results of operations and financial condition of Cell Source, Inc. ("CSI", “Cell Source”, the “Company”, “us,” “we,” “our,”) as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 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 years ended December 31, 2017 and 2016 as filed with the Securities and Exchange Commission (“SEC”)
on July 25, 2018.
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 years ended December 31, 2017 and 2016 filed with the SEC
on July 25, 2018.
Overview
We are a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance. Our technology platform has been extensively tested by in vitro studies and confirmed in animal trials. We continue to move forward towards clinical trials as more fully discussed in our Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 which was filed with the SEC on July 25, 2018.
Consolidated Results of Operations
Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017
Research and Development
Research and development expense was
$302,755 and
$331,674 for
the
three months
ended
March 31
, 2018 and 2017, respectively, a decrease of $28,919, or 9%, primarily related to decreases in patent-related expenses.
General and Administrative
Selling, general and administrative expense was $357,357 and $151,922 for the
three months
ended
March 31
, 2018 and 2017, respectively, an increase of $205,435, or 135%, primarily related to increases in external consulting and professional fees in the 2018 period, which was due in part by our financing activities in 2017 which allowed us to increase operations.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
three months
ended
March 31
, 2018 and 2017 was a gain of $135,400 and a gain of $126,180, respectively, which represents the changes in fair value of the warrants and conversion options that were deemed to be derivative liabilities. Such changes in fair value were attributable to decreases in the price of the Company's common stock during those periods as well as the warrants and conversion options drawing closer to their expiration dates.
Interest Expense
Interest expense for the three months ended March 31, 2018 and 2017 was $31,005 and $74,466, respectively, a decrease of $43,461, or 58%, as a result of a reduction in notes payable.
Amortization of Debt Discount
Amortization of debt discount was $156,467 and
$176,680
for the three months ended
March 31
, 2018 and 2017
, respectively, which is associated with warrants and conversion options issued in connection with notes payable.
Loss on Exchange of Notes Payable for Preferred Shares
During the three months ended March 31, 2017, we recognized $534,165 of losses on exchanges of notes payable for preferred shares. The losses recognized represent the excess value of the preferred shares as compared to the carrying value of the notes payable.
Liquidity and Going Concern
Our cash balances and working capital deficiencies as of March 31, 2018 and December 31, 2017 were as follows:
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
211,074
|
|
|
$
|
371,048
|
|
Working capital deficiency
|
|
$
|
(5,327,054
|
)
|
|
$
|
(4,557,374
|
)
|
During the three months ended March 31, 2018, the Company had not generated any revenues, had a net loss of approximately $712,000, and used cash in operations of approximately
$710,000
. As of March 31, 2018, the Company had a working capital deficiency of approximately
$5,327,000 and
an accumulated deficit of approximately $15,265,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within twelve months
from the date these financial statements are issued
.
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 three months ended March 31, 2018 and 2017, our sources and uses of cash were as follows:
Net Cash Used in Operating Activities
We experienced negative cash flows from operating activities for the
three months
ended March 31, 2018 and 2017 in the amounts of $709,974 and $334,258, respectively. The net cash used in operating activities for the three months ended March 31, 2018 was primarily due to cash used to fund a net loss of $712,184, adjusted for net non-cash expenses in the aggregate amount of $21,067, and
by $
18,857
of net cash used to fund changes in the levels of operating assets and liabilities.
The net cash used in operating activities for the three months ended March 31, 2017 was primarily due to cash used to fund a net loss of $1,142,727, adjusted for net non-cash expenses in the aggregate amount of $608,383,
partially offset by $
200,086
of net cash provided due to changes in the levels of operating assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the
three months
ended March 31, 2018 and 2017 was $550,000 and $348,255, respectively. The net cash provided by financing activities during the three months ended March 31, 2018 was attributable to $500,000 of proceeds from the issuance of notes payable and $50,000 of proceeds received from the issuance of Series A preferred stock. The net cash provided by financing activities during the three months ended March 31, 2017 was attributable to $348,255 of proceeds from the issuance of Series A preferred stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies, see Note 3,
Summary of Significant Accounting Policies,
in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Recent Accounting Standards
For a description of our recently issued and adopted accounting pronouncements, see Note 3,
Summary of Significant Accounting Policies
, in Part 1, Item 1 of this Quarterly Report on Form 10-Q.