Note 2 - Going Concern and Management Plans
During the six months ended June 30, 2019, the Company had not generated any revenues, had a net loss of approximately
$2,411,000 and had used cash in operations of approximately
$1,289,000
. As of June 30, 2019, the Company had a working capital deficiency of approximately
$5,154,000 and
an accumulated deficit of approximately $19,082,000. Subsequent to June 30, 2019 and as more fully described in Note 9,
Subsequent Events
, the Company received aggregate proceeds of $118,000 through the issuance of a short-term convertible note and note payable and aggregate proceeds of
$47,500 through the sale of 6,333 shares of Series A Convertible Preferred Stock at $7.50 per share. 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 is currently funding its operations on a month-to-month basis. While there can be no assurance that it
will be successful, the Company is in active negotiations to raise additional capital. The Company’s primary 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
Since the date of the Annual Report on
Form 10-K for the year ended December 31, 2018, there have been no material changes to the Company’s significant accounting policies.
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, 2019 and 2018
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
6,409,157
|
|
|
|
11,915,481
|
|
Convertible notes
|
|
|
1,073,921
|
|
|
|
1,535,189
|
|
Convertible preferred stock
|
|
|
11,554,260
|
|
|
|
6,504,570
|
|
Total
|
|
|
19,037,338
|
|
|
|
19,955,240
|
|
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, 2019. 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, 2019 and December 31, 2018, 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, 2019 based upon observations of the recent 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 as of December 31, 2017, which was also considered in management’s estimation of the fair value of its restricted common stock during the three and six months ended June 30,
2019.
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, 2019 and December 31, 2018 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 - common stock
|
|
$
|
37,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,500
|
|
Accrued compensation - warrants
|
|
|
45,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,997
|
|
Accrued compensation - warrants - related party
|
|
|
91,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,464
|
|
Derivative liabilities
|
|
|
351,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
351,300
|
|
Balance - June 30, 2019
|
|
$
|
526,261
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
526,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation - common stock
|
|
$
|
37,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,500
|
|
Accrued compensation - warrants
|
|
|
24,741
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,741
|
|
Accrued compensation - warrants - related party
|
|
|
55,083
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,083
|
|
Derivative liabilities
|
|
|
200,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,500
|
|
Balance - December 31, 2018
|
|
$
|
317,824
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
317,824
|
|
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 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 and common stock.
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, 2019:
|
|
Accrued
|
|
|
Derivative
|
|
|
|
|
|
|
Compensation
|
|
|
Liabilities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
$
|
117,324
|
|
|
$
|
200,500
|
|
|
$
|
317,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants and conversion options
|
|
|
-
|
|
|
|
7,400
|
|
|
|
7,400
|
|
Extinguishment of conversion option
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
Warrant modification
|
|
|
-
|
|
|
|
229,400
|
|
|
|
229,400
|
|
Accrued compensation - warrants
|
|
|
21,460
|
|
|
|
-
|
|
|
|
21,460
|
|
Accrued compensation - warrants - related party
|
|
|
36,844
|
|
|
|
-
|
|
|
|
36,844
|
|
Change in fair value
|
|
|
(667
|
)
|
|
|
(85,000
|
)
|
|
|
(85,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2019
|
|
$
|
174,961
|
|
|
$
|
351,300
|
|
|
$
|
526,261
|
|
As of June 30, 2019, the Company had an obligation to issue 150,000 shares of common stock to a service provider. The
shares had a fair value of $37,500, which was a component of accrued compensation on the condensed consolidated balance sheet.
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.17%-2.18
|
%
|
|
|
1.93%-2.73
|
%
|
|
|
1.17%-2.44
|
%
|
|
|
1.93%-2.73
|
%
|
Expected term (years)
|
|
|
0.05-5.00
|
|
|
|
0.25-4.66
|
|
|
|
0.02-5.00
|
|
|
|
0.25-5.00
|
|
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.
Note 5 – Notes Payable and Convertible Notes Payable
During the three months ended June 30, 2019 and 2018, the Company recorded interest expense of $55,917 and $30,586,
respectively, and interest expense for related party debt of $554 and $748, respectively. During the six months ended June 30, 2019 and 2018, the Company recorded interest expense of $132,784 and $60,851, respectively, and interest expense for
related party debt of $1,294 and $1,488, respectively.
During the three months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $6,529 and
$35,125, respectively, and amortization of debt discount for related party debt of $0 and $9,863, respectively. During the six months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $6,529 and $173,099,
respectively, and amortization of debt discount for related party debt of $0 and $28,356, respectively.
As of June 30, 2019 and through the date of this filing, notes payable with principal amounts totaling $1,983,000 were
past due and are classified as current liabilities on the condensed consolidated balance sheet as of June 30, 2019. Such notes continue to accrue interest and all relevant penalties have been accrued as of June 30, 2019. Of such past due notes
payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Note 8,
Commitments and Contingencies – Litigation
for additional details. The Company is in negotiations with all holders of notes payable to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
As of June 30, 2019 and December 31, 2018, the Company had $251,206 and $302,974, respectively, of accrued interest
and penalties related to notes payable, which is included with accrued interest and accrued interest – related parties on the condensed consolidated balance sheets.
Notes Payable
On March 31, 2019, holders of notes with aggregate principal amounts of $400,000 and aggregate late payment penalties
of $40,000 exchanged those notes for 70,400 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6
, Stockholders’ Deficiency - Series A Convertible Preferred Stock,
this difference of $88,000 was recorded in the condensed consolidated statement
of operations as a loss on exchange of notes payable for Series A Convertible Preferred Stock.
On May 15, 2019, the Company issued a
note payable in the principal amount of $70,000. The note did not accrue interest and matured on May 25, 2019. The note was repaid in full on May 22, 2019. In connection with the note issuance, the Company issued a five-year immediately vested
warrant for the purchase of 35,000 shares of common stock at $0.75 per share. The warrant had an issuance date fair value of $5,800, which was recorded as a debt discount and was amortized over the term of the note.
Convertible Notes Payable
On March 31, 2019, holders of notes with aggregate principal amounts of $290,000 and aggregate accrued interest of
$97,784 exchanged those notes for 74,967 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6,
Stockholders’ Deficiency - Series A Convertible Preferred Stock
, this difference of $174,470 was recorded in the condensed consolidated statements
of operations as a loss on exchange of notes payable for Series A Convertible Preferred Stock.
On May 20, 2019, the Company issued a convertible note payable in the principal amount of $103,000 for cash proceeds
of $100,000 which matures on November 20, 2019. The note accrues interest at 8% per annum, of which, twelve months of interest was guaranteed. The note also includes certain prepayment penalties that provide for payments ranging from 115% to
140% of the then outstanding principal and interest. The note is convertible at the option of the holder into common stock at either (i) $0.75 per share or (ii) in the event of a default, at 75% of the volume-weighted average price in the ten
consecutive trading days prior to the conversion date. The conversion option had an issuance date fair value of $1,600 and, together with the original issuance discount of $3,000, was recorded as a debt discount and was amortized to expense over
the term of the note. In accordance with the Company's sequencing policy, this conversion option was determined to be a derivative liability. On June 27, 2019, a third-party repaid the note in full on behalf of the Company, which payment included
a 20% prepayment penalty for an aggregate total payment of $133,488, which has been recorded as accrued expenses on the Company’s condensed consolidated balance sheet as of June 30, 2019. The Company determined the transaction was a note
extinguishment and recorded a loss on extinguishment of debt of $1,504 in the condensed consolidated statements of operations.
Note 6 – Stockholders’ Deficiency
Series A Convertible Preferred Stock
On January 27, 2019, the Board of Directors extended the expiration date of the Private Placement Memorandum (“PPM”)
to March 31, 2019 and has authorized two sixty-day extensions beyond that date at management's discretion, under which the Company continues to raise up to $7,500,000 via the sale of up to 1,000,000 shares of Series A Convertible Preferred Stock
at $7.50 per share. On March 27, 2019, the Board of Directors extended the expiration date of the PPM to May 30, 2019. On May 30, 2019, the Board of Directors further extended the expiration date of the PPM to July 29, 2019.
On March 31, 2019, in connection with the
exchange of various notes payable, accrued interest and late payment penalties totaling $827,784, the Company issued 145,367 shares of Series A Convertible Preferred Stock under the terms of the PPM with a total value of $1,090,254, as more
fully described in Note 5,
Notes Payable and Convertible Notes Payable
. As the value of those shares exceeded the carrying value of the note payable, accrued interest and late payment penalties, the difference of $262,470 was recorded in the condensed consolidated statement of operations during the
three and six months ended June 30, 2019 as a loss on exchange of notes payable for Series A Convertible Preferred Stock.
On various dates from January 7, 2019 through June 12, 2019, the Company received proceeds of $1,123,269 through the
sale of 149,768 shares of Series A Convertible Preferred Stock at $7.50 per share.
During the three and six months ended June 30, 2019, the Company accrued and recorded Series A Preferred Stock
dividends of $188,973 and $337,008, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital. During the three and six months ended June 30, 2018, the Company accrued and recorded Series A
Preferred Stock dividends of $109,464 and $216,960, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.
During the three months ended June 30, 2019, the Company issued 401,860 shares of common stock valued at $0.75 per
share for aggregate value of $301,379, pursuant to the terms of the Series A Convertible Preferred Stock Certificate of Designation, in connection with the partial payment of accrued dividends for Series A Convertible Preferred Stock, as more
fully described in the Series A Convertible Preferred Stock section of this footnote.
Stock-Based Compensation
During the three and six months ended June 30, 2019, the Company recognized expense of $24,629 and $57,636,
respectively, of stock-based compensation related to warrants. During the three and six months ended June 30, 2018, the Company did not recognize any stock-based compensation expense. As of June 30, 2019, there was no unrecognized stock-based
compensation expense.
Stock
Warrants
On June 25, 2019, the Company extended the expiration date of a warrant to purchase 1,600,000 shares of common stock at an
exercise price of $0.75 per share originally from June 27, 2019 to June 27, 2023. As a result of the modification, the Company recognized warrant modification expense of $229,400 during the three and six months ended June 30, 2019.
Note 7 – Related Party Transactions
In 2011, the Company entered into a Research and License Agreement (the “Agreement”) with Yeda for Veto Cell
technology. As Yeda is a founder and a significant shareholder of the Company, it is a related party.
During the three months ended June 30, 2019
and 2018, the Company recorded research and development expense of $25,000 and $77,485, respectively, and during the six months ended June 30, 2019 and 2018, the Company recorded research and development expense of $50,000 and $302,624,
respectively, in connection with the agreement with Yeda.
On January 7, 2018, the Company received
proceeds of $50,000 from the Chairman of the Board through the sale of 6,667 shares of
Series A Convertible Preferred Stock at $7.50 per share, which amount is included in the issuances disclosed in Note 6,
Stockholders’ Deficiency.
Note 8 – Commitments and Contingencies
MD Anderson Agreements
On February 19, 2019, as amended on April 4, 2019 and August 13, 2019, the Company entered into an agreement
with The University of Texas M.D. Anderson Cancer Center (“MD Anderson”) for the latter to perform cell production and conduct Phase I/II human clinical trials. In connection with that agreement, the Company committed to fund such work in the
amount of approximately $2,038,000 over a two-year period beginning that same date, with payments becoming due as certain specified milestones are met by MD Anderson.
The Company recognized $297,015 and $981,270 of research and development expenses during the three and six months
ended June 30, 2019, respectively, associated with services provided by MD Anderson in the periods, under the two agreements with MD Anderson dated November 2018 and February 2019. The Company did not recognize any expense pursuant to the
agreements with MD Anderson for the three and six months ended June 30, 2018. As of June 30, 2019, the Company had $383,063 of accrued research and development expenses pursuant to the agreements with MD Anderson, which are included within
accrued expenses on the condensed consolidated balance sheet.
Litigation
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may
result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims,
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the
amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
In January 2019, the holder of a promissory note in the principal amount of $250,000 due on March 16, 2016
instituted a collection action in the Supreme Court of the State of New York, County of New York. A motion for summary judgement was heard on July 12, 2019 and the Company did not oppose the motion. The Company has had discussion with respect
to entering into an agreement providing for a payment plan with the holder of the note, but no agreement has yet been reached.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the
guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. As of June 30, 2019 and December 31, 2018,
the Company has not accrued any amounts for contingencies.
Note 9 – Subsequent Events
Notes Payable and Convertible Notes Payable
On July 2, 2019, the Company issued a convertible note payable in the principal amount of $68,000. The note accrues
interest at 12% per annum and matures on July 2, 2020.
On July 29, 2019, the Company issued a note
payable in the principal amount of $50,000. The note does not accrue interest and matures on January 29, 2020. In connection with the note issuance, the Company issued to the noteholder a five-year immediately vested warrant for the purchase of
50,000 shares of common stock at $0.75 per share.
Series A Convertible Preferred Stock
On various dates between July 24 and July 29, 2019, the Company received aggregate proceeds of $47,500 through the
sale of 6,333 shares of Series A Convertible Preferred Stock at $7.50 per share.
On July 29, 2019, the Board of Directors extended the expiration date of the PPM to September 30, 2019 and has authorized two
sixty-day extensions beyond that date at management's discretion, under which the Company continues to raise up to $7,500,000 via the sale of up to 1,000,000 shares of Series A Convertible Preferred Stock at $7.50 per share.
Stock Warrants
On July 20, 2019, the Company extended the expiration dates of a certain warrants to purchase an aggregate of
377,500 shares of common stock at an exercise price of $0.75 per share from July 2019 to July 2023.
Adoption of Equity Incentive Plan and Grant of Option
On August 13, 2019, the Company’s Board of Directors approved the adoption of the Company’s 2019 Equity Incentive
Plan (the “Plan”). A total of 7,900,000 shares of common stock are reserved for issuance under the Plan, which permits the Board of Directors to issue stock options, stock appreciation rights, restricted stock, restricted stock units,
performance and other awards to employees, consultants and directors of the Company. As of the date of filing, the Company’s shareholders have not approved the Plan.
On the same date, the Board of Directors approved the grant under the Plan of options to purchase an aggregate of
3,782,004 shares of common stock at an exercise price of $0.75 per share to a consultant to the Company.
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, 2019 and for the three and six months ended June
30, 2019 and 2018 should be read in conjunction with our unaudited financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and the notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”)
on April 1, 2019.
This Quarterly Report
contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business
plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other
aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking
statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy
of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K
for the year ended December 31, 2018 filed with the SEC
on April 1, 2019.
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 year ended
December 31, 2018 which was filed with the SEC on April 1, 2019.
Consolidated Results of Operations
Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018
Research and Development
Research and development expense was
$410,770
and
$109,407 for
the
three months
ended
June 30
, 2019 and 2018, respectively, an increase of $301,363, or 275%,
primarily related to the commencement of
research by MD Anderson.
Selling, General and Administrative
Selling, general and administrative expense was $319,138 and $314,500 for the three months ended June 30, 2019 and
2018, respectively, an increase of $4,638, or 1%.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
three months
ended
June 30
, 2019 and 2018 was a gain of $32,400 and a gain of $139,500, respectively,
primarily due to the warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.
Interest Expense
Interest expense for the three months ended June 30, 2019 and 2018 was $56,471 and $31,334, respectively, an increase
of $25,137, or 80%, primarily as a result of a convertible note being issued during the three months ended June 30, 2019.
Amortization of Debt Discount
Amortization of debt discount was $6,529 and
$44,988
for the three months ended
June 30
, 2019 and 2018
,
respectively,
which is associated with warrants, conversion options and original issue discounts issued in connection with notes payable.
Warrant Modification Expense
During the three months ended June 30, 2019, we recognized $229,400 of warrant modification expense related to the
extension of the expiration date of a certain warrant.
Loss on Extinguishment of Debt
During the three months ended June 30, 2019, we recognized $1,504 of loss on extinguishment of debt.
Gain on Forgiveness of Accrued Expenses
During the three months ended June 30, 2019, we recognized $38,427 of gain on forgiveness of accrued expenses. The
gain recognized represents the forgiveness of accrued payroll expenses and director fees due by a former member of the Board of Directors.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
Research and Development
Research and development expense was
$1,160,512
and
$412,162 for
the
six months
ended
June 30
, 2019 and 2018, respectively, an increase of $748,350, or 182%,
primarily related to the commencement of
research by MD Anderson.
Selling, General and Administrative
Selling, general and administrative expense was $740,428 and $671,857 for the
six months
ended
June 30
, 2019 and 2018, respectively, an increase of $68,571, or 10%,
primarily related to increases of approximately $58,000 in stock-based compensation expense in the 2019 period, approximately $29,000 of marketing fees, offset by decreases
of approximately $22,000 in travel and entertainment expenses.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the
six months
ended
June 30
, 2019 and 2018 was a gain of $85,000 and a gain of $274,900, respectively,
primarily due to the warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.
Interest Expense
Interest expense for the six months ended June 30, 2019 and 2018 was $134,078 and $62,339, respectively, an increase
of $71,739, or 115%, primarily as a result of penalties associated with certain past due notes payable and of a convertible note being issued during the six months ended June 30, 2019.
Amortization of Debt Discount
Amortization of debt discount was $6,529 and
$201,455
for the six months ended
June 30
, 2019 and 2018
,
respectively, which is associated with warrants and conversion options issued in connection with notes payable.
Warrant Modification Expense
During the six months ended June 30, 2019, we recognized $229,400 of warrant modification expense on the extension of
an expiration date of a certain warrant.
Loss on Extinguishment of Debt
During the six months ended June 30, 2019, we recognized $1,504 of loss on extinguishment of debt.
Gain on Forgiveness of Accrued Expenses
During the six months ended June 30, 2019, we recognized $38,427 of gain on forgiveness of accrued expenses. The gain
recognized represents the forgiveness of accrued payroll expenses and director fees due by a former member of the Board of Directors.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
|
|
June 30,
|
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|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
28,077
|
|
|
$
|
18,934
|
|
Working capital deficiency
|
|
$
|
(5,153,771
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)
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$
|
(4,920,171
|
)
|
During the six months ended June 30, 2019, we have not generated any revenues, had a net loss of approximately
$2,411,000 and had used cash in operations of approximately
$1,289,000
. As of June 30, 2019, we had a working capital deficiency of approximately
$5,154,000 and
an accumulated deficit of approximately $19,082,000. Subsequent to June 30, 2019, we received aggregate proceeds of $118,000 through the issuance of a
short-term convertible note and note payable and aggregate proceeds of $47,500 through the sale of 6,333 shares of Series A Convertible Preferred Stock at $7.50 per share. 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
.
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, 2019 and 2018, 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, 2019 and 2018 in the amounts of $1,289,126 and $918,509, respectively. The net cash used in operating activities for the six months ended June 30, 2019 was primarily due to cash
used to fund a net loss of $2,411,494, adjusted for net non-cash income in the aggregate amount of $434,112,
partially offset
by $688,256
of net cash provided by changes in the levels of operating assets and liabilities.
The net cash used in operating activities for the six months ended June 30, 2018 was primarily due to cash used to fund a net loss of $1,072,913, adjusted for net non-cash
income in the aggregate amount of $73,445, partially offset by $227,849 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, 2019 and 2018 was $1,298,269 and $550,000, respectively. The net cash provided by financing activities during the six months ended June 30, 2019 was attributable to $1,123,269 of proceeds received
from the issuance of Series A preferred stock, $175,000 of net proceeds from debt financings.
The net cash provided by financing activities during the six months ended
June 30, 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.
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.