Note 2 - Going Concern and Management Plans
During the six months ended June 30, 2017, the Company had not generated any revenues, had
a
net
loss
of approximately $1,965,000, and used cash in operations of approximately
$1,147,000
. As of June 30, 2017, the Company had a working capital deficiency of approximately
$5,255,000 and
an accumulated deficit of approximately $13,435,000. 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.
Subsequent to June 30, 2017 and as more fully described in Note 8,
Subsequent Events
, the Company received an aggregate of approximately $2,050,000 through the issuance of short term notes payable and the issuance of Series A Convertible Preferred Stock.
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, 2016, 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 six
months ended
June 30
, 2017 and 2016
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:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
11,615,481
|
|
|
|
11,374,324
|
|
Convertible notes
|
|
|
1,651,804
|
|
|
|
3,203,450
|
|
|
|
|
13,267,285
|
|
|
|
14,577,774
|
|
Convertible notes are assumed to be converted at the rate of $0.75 per common share, which is the conversion price as of June 30, 2017. However, such conversion rates are subject to adjustment under certain circumstances, which may result in the issuance of common shares greater than the amount indicated.
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 June 30, 2017 and December 31, 2016, 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 six months ended June 30, 2017 based upon observations of the sales of Preferred Stock convertible into common stock as well as the thinly traded volume and closing prices of its common stock. The Company obtained a third-party valuation of its common stock, which was also considered in management’s estimation of the fair value of its restricted common stock during the six monthes ended June 30, 2017.
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 June 30, 2017 and December 31, 2016 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
|
|
$
|
79,273
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,273
|
|
Derivative liabilities
|
|
|
893,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
893,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2017
|
|
$
|
972,873
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
972,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
79,178
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,178
|
|
Derivative liabilities
|
|
|
1,175,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,175,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
$
|
1,254,578
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,254,578
|
|
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 an accrued obligation to issue warrants to certain founders of Cell Source Limited, which such warrants were issued as of June 30, 2017.
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.03% - 1.89
|
%
|
|
|
0.26% - 0.86
|
%
|
|
|
0.76% - 1.93
|
%
|
|
|
0.21% - 1.04
|
%
|
Expected term (years)
|
|
|
0.25 - 4.51
|
|
|
|
0.04 - 4.19
|
|
|
|
0.25 - 4.76
|
|
|
|
0.04 - 5.00
|
|
Expected volatility
|
|
|
110
|
%
|
|
|
152
|
%
|
|
|
110
|
%
|
|
|
152% -159
|
%
|
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 six months ended June 30, 2017:
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
Compensation
|
|
|
Liabilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
$
|
79,178
|
|
|
$
|
1,175,400
|
|
|
$
|
1,254,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants and conversion options
|
|
|
-
|
|
|
|
21,880
|
|
|
|
21,880
|
|
Change in fair value
|
|
|
95
|
|
|
|
(303,680
|
)
|
|
|
(303,585
|
)
|
Balance - June 30, 2017
|
|
$
|
79,273
|
|
|
$
|
893,600
|
|
|
$
|
972,873
|
|
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.
Note 5 – Notes Payable
a)
Notes Payable
On March 8, 2017, a note with principal and accrued interest balances of $300,000 and $30,000, respectfully, was exchanged for 66,000 shares of the Company's Series A Preferred Stock. The relative value of these instruments and the accounting for this transaction is described below in Note 6
, Stockholders’ Deficiency.
On March 8, 2017, a series of related notes with combined principal and accrued interest balances of $300,000 and $19,167, respectively, were exchanged for 63,833 shares of the Company's Series A Preferred Stock. The relative value of these instruments and the accounting for this transaction is described below in Note 6
, Stockholders’ Deficiency.
b)
Convertible Notes Payable
On January 19, 2017, a note with the principal and accrued interest balances of $250,000 and $50,000, respectively, was exchanged for 60,000 shares of the Company's Series A Preferred Stock. The relative value of these instruments and the accounting for this transaction is described below in Note 6
, Stockholders’ Deficiency.
|
On May 18, 2017, the Company issued a series of convertible notes in the total principal amount of $135,000 together with 9,000 shares of Series A Preferred Stock valued at $67,500. These notes do not accrue interest and mature on May 18, 2018. The value of the Series A Preferred Stock was recorded as a debt discount and amortized to expense over the term of the notes.
|
On May 18 and 24, 2017, a series of related notes with the principal and accrued interest balances of $332,500 and $49,875, respectively, was exchanged for 76,475 shares of the Company's Series A Preferred Stock. The relative value of these instruments and the accounting for this transaction is described below in Note 6
, Stockholders’ Deficiency.
c)
Convertible Notes Payable Due to Related Parties
On May 18, 2017, the Company issued a series of convertible notes to related parties in the total principal amount of $225,000 together with 15,000 shares of Series A Preferred Stock valued at $112,500. These notes do not accrue interest and mature on May 18, 2018. The value of the Series A Preferred Stock was recorded as a debt discount and amortized to expense over the term of the notes.
During the three months ended June 30, 2017 and 2016, the Company recorded interest expense of $36,941 and $55,120, respectively and interest expense for related party debt of $748 and $112, respectively. During the six months ended June 30, 2017 and 2016, the Company recorded interest expense of $110,667 and $117,069, respectively and interest expense for related party debt of $1,488 and $1,488, respectively.
During the three months ended June 30, 2017 and 2016, the Company recorded amortization of debt discount of $115,251 and $320,742, respectively, and amortization of debt discount for related party debt of $8,836 and $4,546, respectively. During the six months ended June 30, 2017 and 2016, the Company recorded amortization of debt discount of $289,631 and $585,430, respectively, and amortization of debt discount for related party debt of $11,136 and $13,246, respectively.
As of June 30, 2017, approximately $1,748,000 of indebtedness represented by outstanding promissory notes was past due. However, as of that date and thorough the date of this filing, none of the holders have issued a notice of default. See Note 8,
Subsequent Events
, for additional details.
Note 6 – Stockholders’ Deficiency
On various dates from January 1, 2017 to June 30, 2017, the Company raised $800,693 through the sale of 106,759 shares of Series A Preferred Stock at $7.50 per share and, after transaction costs of $54,543, received net proceeds of $746,150.
On January 11, 2017, the Company issued 23,834 shares of Series A Preferred Stock valued at $178,746 in exchange for an advance liability of $119,166. As the value of the shares issued exceeded the recorded advance liability, the difference of $59,580 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for preferred shares.
On January 19, 2017, the Company issued 60,000 shares of Series A Preferred Stock valued at $450,000 in exchange for a convertible note payable with principal and accrued interest balances of $250,000 and $50,000, respectively. As the value of the shares issued exceeded the recorded principal and accrued interest, the difference of $150,000 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for preferred shares.
On March 8, 2017, the Company issued 66,000 shares of Series A Preferred Stock valued at $495,000 in exchange for a note payable with principal and accrued interest balances of $300,000 and $30,000, respectively. As the value of the shares issued exceeded the recorded principal and accrued interest, the difference of $165,000 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for preferred shares.
On March 8, 2017, the Company issued 63,833 shares of Series A Preferred Stock valued at $478,748 in exchange for a series of related notes payable with combined principal and accrued interest balance of $300,000 and $19,167, respectively. As the value of the shares issued exceeded the recorded principal and accrued interest, the difference of $159,585 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for preferred shares.
On May 18, 2017, the Company issued 24,000 shares of Series A Preferred Stock valued at $180,000 in connection with the issuance of a series of convertible notes payable and convertible notes payable due to related parties in the total principal amount of $360,000.
On May 18 and 24, 2017, the Company issued 76,475 shares of Series A Preferred Stock valued at $573,565 in exchange for a convertible note payable with principal and accrued interest balances of $332,500 and $49,875, respectively. As the value of the shares issued exceeded the recorded principal and accrued interest, the difference of $191,190 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for preferred shares.
During the three and six months ended June 30, 2017, the Company accrued and recorded Series A Preferred Stock dividends of $56,305 and $76,369, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.
During the three months ended June 30, 2017 and 2016, the Company recorded $20,780 and $23,092 of stock-based compensation expense related to warrants. During the six months ended June 30, 2017 and 2016, the Company recorded $44,283 and $91,962 of stock-based compensation expense related to warrants. Such expense is recorded with a corresponding increase in additional paid-in capital. As of June 30, 2017, there was no unrecognized stock-based compensation expense that will be recognized over the subsequent quarters.
Note 7 – Related Party Transactions
In 2011, the Company entered into a Research and License Agreement (the "Agreement") with Yeda Research and Development Company Limited for Veto Cell technology. As Yeda is a founder and a significant shareholder of the Company, it is a related party.
Prior to fiscal 2016, the Company had accrued a $200,000 liability to Yeda in accordance with the terms of the original Agreement as it had achieved the equity financing threshold of $2,000,000 (the "Threshold"). In connection with the November 28, 2016 amendment to the Agreement, the Threshold amount was raised to $10,000,000 (the “Revised Threshold”) and, as a result, the $200,000 liability to Yeda was eliminated as of December 31, 2016. As the Company had not yet achieved the Revised Threshold as of
June 30
, 2017, no liability was recorded as of that date. In connection with the March 30, 2018 amendment to the Agreement, the provision for the payment of $200,000 was permanently eliminated
and the annual research budget was reduced to $500,000
.
Note 8 – Subsequent Events
Notes Payable
On December 28, 2017, the maturity date of a note with principal and accrued interest balances of $100,000 and $9,041, respectively, was extended to January 31, 2018. In connection with that extension, the Company issued 2,500 shares of Series A Preferred Stock and 25,000 shares of common stock to the noteholder.
On December 28, 2017, the maturity date of a note with principal and accrued interest balances of $250,000 and $63,863, respectively, was extended to March 31, 2018. In connection with that extension, the Company issued 5,000 shares of Series A Preferred Stock and 125,000 shares of common stock to the noteholder.
Convertible Notes Payable
On August 15, 2017, the maturity dates of a series of related convertible notes with combined principal and accrued interest balances of $125,000 and $21,096, respectively, were extended to February 15, 2018. In connection with that extension, the Company issued 93,750 shares of common stock to the noteholders.
On October 3, 2017, a convertible note with principal and accrued interest balances of $100,000 and $15,417, respectively, was exchanged for 15,389 shares of the Company's Series A Preferred Stock.
Bridge Notes
On February 21 and 26, 2018, the Company issued a series of bridge notes in the total principal amount of $500,000 together with warrants to purchase 300,000 shares of common stock at $0.75 per share through May 26, 2023. These notes do not accrue interest and matured between May 21 and 26, 2018.
The value of the warrants was recorded as a debt discount and amortized to expense over the term of the notes.
Past Due Notes Payable, Convertible Notes Payable,
Convertible Notes Payable Due to Related Parties, and Bridge Notes
As of the date of this filing, approximately $2,973,000 of indebtedness represented by outstanding promissory notes was past due. However, as of the date of this filing, none of the holders have issued a notice of default.
Series A Preferred Stock
On various dates from July 1, 2017 to December 31, 2017, the Company sold 200,000 shares of Series A Preferred Stock at $7.50 per share and received aggregate net proceeds of $1,494,434.
On October 3, 2017, the Company issued 15,389 shares of Series A Preferred Stock valued at $115,418 in exchange for a convertible note payable with principal and accrued interest balances of $100,000 and $15,417, respectively.
On December 28, 2017, the Company issued 2,500 shares of Series A Preferred Stock valued at $18,750 to the holder of a note with a principal balance of $100,000 in connection with the extension of the maturity date of that note to January 31, 2018.
On December 28, 2017, the Company issued 5,000 shares of Series A Preferred Stock valued at $37,500 to the holder of a note with a principal balance of $250,000 in connection with the extension of the maturity date of that note to March 31, 2018.
On March 3, 2018, the Company sold 6,667 shares of Series A Preferred Stock at $7.50 per share and received proceeds of $50,000.
Common Stock
On August 15, 2017, the Company issued 93,750 shares of common stock valued at $23,438 to the holders of a series of related notes with combined principal and accrued interest balances of $125,000 and $21,096, respectively, in connection with the extension of the maturity dates of those notes to February 15, 2018.
On December 4, 2017, the Company issued 176,230 shares of common stock valued at $132,173 in connection with the partial payment of Series A Preferred Stock accrued dividends pursuant to the terms of the Series A Preferred Stock Certificate of Designation.
On December 28, 2017, the Company issued 25,000 shares of common stock valued at $6,250 to the holder of a note with a principal balance of $100,000 in connection with the extension of the maturity date of that note to January 31, 2018.
On December 28, 2017, the Company issued 125,000 shares of common stock valued at $31,250 to the holder of a note with a principal balance of $250,000 in connection with the extension of the maturity date of that note to March 31, 2018.
On December 28, 2017, the Company issued 250,000 shares of common stock valued at $62,500 in connection with the exchange of warrants which provide for the purchase of up to 250,000 shares of common stock through
December 28, 2022
at $0.75 per share.
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 June 30, 2017 and for the three
and six
months ended June 30, 2017 and 2016 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”) concurrently with this filing.
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 concurrently with this filing.
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 concurrently with this filing.
Consolidated Results of Operations
Three Months Ended June 30, 2017 Compared with the Three Months Ended June 30, 2016
Research and Development
Research and development expense was
$338,571 and
$308,987 for
the
three months
ended
June 30
, 2017 and 2016, respectively, an increase of $29,584, or 10%, primarily associated with
increased research expenses
associated
with
a university.
Selling, General and Administrative
Selling, general and administrative expense was $308,053 and $221,179 for the
three months
ended
June 30
, 2017 and 2016, respectively, an increase of $86,874, or 39%, related to increases in professional fees.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
three months
ended
June 30
, 2017 and 2016, was a gain of $177,500 and a gain of $209,000, respectively, which represents the change in fair value of the warrants and conversion options that were deemed to be derivative liabilities.
Interest Expense
Interest expense for the three months ended June 30, 2017 and 2016 was $37,689 and $55,232, respectively, a decrease of $17,543, or 32%, associated with notes payable.
Amortization of Debt Discount
Amortization of debt discount was $124,087 and
$325,288
for the three months ended
June 30
, 2017 and 2016
, 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 June 30, 2017, we recognized $191,190 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.
Six Months Ended June 30, 2017 Compared with the Six Months Ended June 30, 2016
Research and Development
Research and development expense was
$670,245 and
$622,408 for
the
six months
ended
June 30
, 2017 and 2016, respectively, an increase of $47,837, or 8%.
Selling, General and Administrative
Selling, general and administrative expense was $459,975 and $552,437 for the
six months
ended
June 30
, 2017 and 2016, respectively, a decrease of $92,462, or 17%, primarily related to a decrease in legal and professional fees.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
six months
ended
June 30
, 2017 and 2016, was a gain of $303,680 and a gain of $370,850, respectively, which represents the change in fair value of the warrants and conversion options that were deemed to be derivative liabilities.
Interest Expense
Interest expense for the six months ended June 30, 2017 and 2016 was $112,155 and $118,557, respectively, a decrease of $6,402, or 5%.
Amortization of Debt Discount
Amortization of debt discount was $300,767 and
$598,676
for the six months ended
June 30
, 2017 and 2016
, 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 six months ended June 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
We measure our liquidity in a number of ways, including the following:
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,561
|
|
|
$
|
3,735
|
|
Working capital deficiency
|
|
$
|
(5,255,350
|
)
|
|
$
|
(6,243,356
|
)
|
During the six months ended June 30, 2017, the Company had not generated any revenues, had
a
net
loss
of approximately $1,965,000 and used cash in operations of approximately
$1,147,000
. As of June 30, 2017, the Company had a working capital deficiency of approximately
$5,255,000 and
an accumulated deficit of approximately $13,435,000. Subsequent to June 30, 2017, the Company received an aggregate of approximately $2,050
,
000 through the issuance of short term notes payable and the issuance of Series A Convertible Preferred Stock. 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 six months ended June 30, 2017 and 2016, 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
six months
ended June 30, 2017 and 2016 in the amounts of $1,146,867 and $951,633, respectively. The net cash used in operating activities for the six months ended June 30, 2017 was primarily due to cash used to fund a net loss of $1,964,817, adjusted for net non-cash expenses in the aggregate amount of $767,132,
partially offset by $
50,818
of net cash provided due to changes in the levels of operating assets and liabilities.
The net cash used in operating activities for the six
months
ended June 30, 2016 was primarily due to cash used to fund a net loss of $1,521,228, adjusted for net non-cash expenses in the aggregate amount of $320,218, partially offset by $249,377 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
six months
ended June 30, 2017 and 2016 was $1,160,693 and $948,425, respectively. The net cash provided by financing activities during the six months ended June 30, 2017 was attributable to $135,000 of proceeds from the issuance of notes payable, $225,000 of proceeds from the issuance of notes payable-related party and $800,693 of proceeds received from the issuance of Series A preferred stock. The net cash provided by financing activities during the six months ended June 30, 2016 was attributable to $1,043,000 of proceeds from the issuance of notes payable, partially offset by repayments of $50,000 of related party notes payable and $44,575 of debt issuance costs.
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.