Note 2 - Going Concern and Management Plans
During the nine months ended September 30, 2018, the Company had not generated any revenues, had a net loss of approximately $1,558,000 and had used cash in operations of approximately
$1,413,000
. As of September 30, 2018, the Company had a working capital deficiency of approximately
$6,069,000 and
an accumulated deficit of approximately $16,111,000. 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.
On October 10, 2018, the Company received an advance of $500,000 from an investor who ultimately invested such funds in Series A Preferred Stock as described in Note 8,
Subsequent Events
. The Company is currently funding its operations on a month-to-month basis. While there can be no assurance that it will be successful, the Company is in active negotiations to raise additional capital.
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 filed with the SEC on July 25, 2018. 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 and nine months ended September 30, 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:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
11,915,481
|
|
|
|
11,615,481
|
|
Convertible notes
|
|
|
1,549,810
|
|
|
|
1,669,783
|
|
Convertible preferred stock
|
|
|
6,504,570
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,969,861
|
|
|
|
13,285,264
|
|
Convertible notes and convertible preferred stock are assumed to be converted at the rate of $0.75 per common share, which is the conversion price as of September 30, 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 Company'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
.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its unaudited condensed consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its financial position, results of operation and cash flows.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed financial statements. The Company anticipates its first presentation of changes in stockholders’ equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
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 September 30, 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 and nine months ended September 30, 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 September 30, 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
|
|
$
|
136,439
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
136,439
|
|
Derivative liability
|
|
|
287,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
287,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2018
|
|
$
|
423,839
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
423,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.12% - 2.91
|
%
|
|
|
1.04% - 1.77
|
%
|
|
|
1.73% - 2.91
|
%
|
|
|
0.76% - 1.93
|
%
|
Expected term (years)
|
|
|
0.08 - 4.41
|
|
|
|
0.25 - 4.25
|
|
|
|
0.08 - 5.00
|
|
|
|
0.25 - 4.76
|
|
Expected volatility
|
|
|
110
|
%
|
|
|
110
|
%
|
|
|
110
|
%
|
|
|
110
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock 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, 2018:
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
Compensation
|
|
|
Liabilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
$
|
79,262
|
|
|
$
|
628,200
|
|
|
$
|
707,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - warrants
|
|
|
57,000
|
|
|
|
49,600
|
|
|
|
106,600
|
|
Change in fair value
|
|
|
177
|
|
|
|
(390,400
|
)
|
|
|
(390,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2018
|
|
$
|
136,439
|
|
|
$
|
287,400
|
|
|
$
|
423,839
|
|
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 the 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 September 30, 2018 and 2017, the Company recorded interest expense of $30,923 and $33,445, respectively, and interest expense for related party debt of $756 and $756, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded interest expense of $
124,774
and $144,112, respectively, and interest expense for related party debt of $
49,244
and $2,244, respectively.
During the three months ended September 30, 2018 and 2017, the Company recorded amortization of debt discount of $0 and $49,502, respectively, and amortization of debt discount for related party debt of $0 and $18,904, respectively. During the nine months ended September 30, 2018 and 2017, the Company recorded amortization of debt discount of $173,099 and $339,133, respectively, and amortization of debt discount for related party debt of $28,356 and $30,040, respectively.
As of September 30, 2018 and the date of this filing, notes payable and convertible notes payable with face values totaling $2,973,000 were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2018. Such notes continue to accrue interest
and
all relevant
penalties have been accrued
as of September 30, 2018. N
one 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.
On August 3, 2018, the Company received an advance of $500,000 from an investor who indicated plans to invest such funds in Series A Preferred Stock under the terms of the Private Placement Memorandum ("PPM"), which is included in advances payable on the condensed consolidated balance sheet as of September 30, 2018. The terms of this PPM 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 SEC on July 25, 2018.
On November 6, 2018 and as more fully described in Note 8,
Subsequent Events
, this amount was invested in Series A Preferred Stock.
On August 21 and September 30, 2018, the Board approved the extension of the PPM through September 30, 2018 and November 28, 2018, respectively.
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 reduce the accrued preferred dividend liability by $323,484.
During the three months ended September 30, 2018 and 2017, the Company accrued and recorded Series A Preferred Stock dividends of $110,666 and $74,261, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.
During the nine months ended September 30, 2018 and 2017, the Company accrued and recorded Series A Preferred Stock dividends of $327,626 and $150,630, respectively, in the same manner.
During the three months ended September 30, 2018 and 2017, the Company recorded $0 and $351 of stock-based compensation expense related to warrants. During the nine months ended September 30, 2018 and 2017, the Company recorded $0 and $44,634 of stock-based compensation expense related to warrants. Such expense is recorded with a corresponding increase in additional paid-in capital. As of September 30, 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.
Through September 30, 2018, the Company has made all required payments under the amended agreement.
During the three months ended September 30, 2018 and 2017, the Company recorded research and development expense of $72,527 and $200,000, respectively, and during the nine months ended September 30, 2018 and 2017, the Company recorded research and development expense of $375,151 and $600,000, respectively, in connection with the agreement with Yeda.
Note 8 – Subsequent Events
Note 9 - Revision of Financial Statements for the Three and Six Months Ended June 30, 2018
During the course of preparing the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, the Company identified $80,000 in penalties related to certain notes payable that became past due during the three months ended June 30, 2018 and were not recorded during that period. This had the effect of understating the Company's net loss for that period and its accrued liabilities as of June 30, 2018 by the same amount.
The penalties consisted of $23,000 in interest and $57,000 representing the value of 396,000 warrants to be issued for the purchase of common stock. The value of such warrants was estimated using assumptions consistent with, and previously disclosed for, other warrant valuation calculations performed for the three months ended June 30, 2018.
The following tables reconcile as reported balances in the Quarterly Report on the Form 10-Q for the quarter ended June 30, 2018 to the as revised balances:
|
|
June 30, 2018
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Condensed Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
$
|
131,545
|
|
|
$
|
-
|
|
|
$
|
131,545
|
|
Total Assets
|
|
$
|
131,545
|
|
|
$
|
-
|
|
|
$
|
131,545
|
|
Total Current Liabilities
|
|
$
|
5,928,792
|
|
|
$
|
80,000
|
|
|
$
|
6,008,792
|
|
Total Liabilities
|
|
$
|
5,928,792
|
|
|
$
|
80,000
|
|
|
$
|
6,008,792
|
|
Total Stockholders' Deficiency
|
|
$
|
(5,797,247
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(5,877,247
|
)
|
|
|
For The Three Months Ended
June 30, 2018
|
|
|
For The Six Months Ended
June 30, 2018
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
$
|
63,178
|
|
|
$
|
(80,000
|
)
|
|
$
|
(16,822
|
)
|
|
$
|
11,106
|
|
|
$
|
(80,000
|
)
|
|
$
|
(68,894
|
)
|
Net Loss
|
|
$
|
(360,729
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(440,729
|
)
|
|
$
|
(1,072,913
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(1,152,913
|
)
|
Net Loss Applicable to Common Stockholders
|
|
$
|
(470,193
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(550,193
|
)
|
|
$
|
(1,289,873
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(1,369,873
|
)
|
Net Loss Per Share - Basic and Diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
$
|
(0.05
|
)
|
Weighted Average Number of
Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and Diluted
|
|
|
27,393,071
|
|
|
|
-
|
|
|
|
27,393,071
|
|
|
|
27,393,071
|
|
|
|
-
|
|
|
|
27,393,071
|
|
|
|
For The Six Months Ended
June 30, 2018
|
|
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Condensed Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,072,913
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(1,152,913
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
$
|
154,404
|
|
|
$
|
80,000
|
|
|
$
|
234,404
|
|
Net Cash Used In Operating Activities
|
|
$
|
(918,509
|
)
|
|
$
|
-
|
|
|
$
|
(918,509
|
)
|
In accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated this error, based on an analysis of quantitative and qualitative factors, as to whether it was material to the condensed consolidated statements of operations for the three and six months ended June 30, 2018 and if amendments of previously filed financial statements with the SEC are required. The Company has determined that the adjustment is qualitatively not material and, therefore, the error has no material impact to the condensed consolidated statements of operations for the three and six months ended June 30, 2018 or other prior periods.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
The following discussion and analysis of the condensed consolidated results of operations and financial condition of Cell Source, Inc. ("CSI", “Cell Source”, the “Company”, “us,” “we,” “our,”) as of September 30, 2018 and for the three and nine months ended September 30, 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 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 September 30, 2018 Compared with the Three Months Ended September 30, 2017
Research and Development
Research and development expense was
$128,986 and
$352,658 for
the
three months
ended
September 30
, 2018 and 2017, respectively, a decrease of $223,672, or 63%, related to approximately $127,000 of decreased research expenses associated with our agreement with Yeda as we prepare for development in order to commence human clinical trials in the US, as well as decreased patent-related expenses.
General and Administrative
General and administrative expense was $359,660 and $202,480 for the
three months
ended
September 30
, 2018 and 2017, respectively, an increase of $157,180, or 78%, 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 and file our delinquent SEC reports in 2018.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
three months
ended
September 30
, 2018 and 2017 was a gain of $115,500 and a gain of $149,200, 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 warrants and conversion options drawing closer to their expiration dates.
Interest Expense
Interest expense for the three months ended September 30, 2018 and 2017 was $31,679 and $34,201, respectively, a decrease of $2,522, or 7%, as a result of a reduction in
interest bearing
notes payable outstanding attributable to conversion of certain notes into preferred stock.
Amortization of Debt Discount
Amortization of debt discount was $0 and
$68,406
for the three months ended
September 30
, 2018 and 2017
, respectively,
which is associated with warrants and conversion options issued in connection with notes payable.
Nine Months Ended September 30, 2018 Compared with the Nine Months Ended September 30, 2017
Research and Development
Research and development expense was
$541,148 and
$1,022,903 for
the
nine months
ended
September 30
, 2018 and 2017, respectively, a decrease of $481,755, or 47%, related to approximately $225,000 of decreased research expenses associated with our agreement with Yeda as we prepare for development in order to commence human clinical trials in the US, as well as decreased patent-related expenses.
General and Administrative
General and administrative expense was $1,031,517 and $662,455 for the
nine months
ended
September 30
, 2018 and 2017, respectively, an increase of $369,062, or 56%, 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 and file our delinquent SEC reports in 2018.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
nine months
ended
September 30
, 2018 and 2017 was a gain of $390,400 and a gain of $452,880, 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 warrants and conversion options drawing closer to their expiration dates.
Interest Expense
Amortization of Debt Discount
Amortization of debt discount was $201,455 and
$369,173
for the nine months ended
September 30
, 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 nine months ended September 30, 2017, we recognized $725,355 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 September 30, 2018 and December 31, 2017 were as follows:
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,121
|
|
|
$
|
371,048
|
|
Working capital deficiency
|
|
$
|
(6,069,254
|
)
|
|
$
|
(4,557,374
|
)
|
During the nine months ended September 30, 2018, we had not generated any revenues, had a net loss of approximately $1,
55
8,000 and had used cash in operations of approximately
$1,413,000
. As of September 30, 2018, we had a working capital deficiency of approximately
$
6
,
069
,000 and
an accumulated deficit of approximately $16,
11
1,000. In October 2018, we received a $500,000 together with an additional $500,000 advance previously received in August 2018. In November 2018, advances totaling $1,000,000 were converted into an investment in Series A Preferred Stock. These conditions raise substantial doubt about our ability to continue as a going concern within twelve months
from the date these financial statements are issued
. We are currently funding our operations on a month-to-month basis. While there can be no assurance that we will be successful, we are in active negotiations to raise additional capital.
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, 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
nine months
ended September 30, 2018 and 2017 in the amounts of $1,412,927 and$1,374,237, respectively. The net cash used in operating activities for the nine months ended September 30, 2018 was primarily due to cash used to fund a net loss of $1,
55
7,738, adjusted for net non-cash income in the aggregate amount of $188,945,
partially offset by $
33
3,756
of net cash provided by changes in the levels of operating assets and liabilities.
The net cash used in operating activities for the nine months ended September 30, 2017 was primarily due to cash used to fund a net loss of $2,473,362, adjusted for net non-cash expenses in the aggregate amount of $686,689,
partially offset by $
412,436
of net cash provided by changes in the levels of operating assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the
nine months
ended September 30, 2018 and 2017 was $1,050,000 and $1,410,705, respectively. The net cash provided by financing activities during the nine months ended September 30, 2018 was attributable to $500,000 received from the issuance of notes payable, $500,000 received as an advance from an investor who indicated plans to invest such funds in Series A Preferred Stock, and $50,000 of received from the issuance of Series A preferred stock. The net cash provided by financing activities during the nine months ended September 30, 2017 was attributable to $135,000 received from the issuance of notes payable, $225,000 received from the issuance of notes payable to related parties, and $1,050,705 received 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.