This Management Discussion and Analysis ("MD&A") contains "forward-looking statements," which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management's future plans or objectives or to our future economic and financial performance. In some cases, you can identify these statements by terminology such as "may," "should," "plans," "believe," "will," "anticipate," "estimate," "expect," "project" or "intend," including their opposites or similar phrases or expressions.

You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should not be regarded as a representation by the Company or any other person that the events or plans of the Company will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this MD&A. Except as may be required under applicable securities laws, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this MD&A or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe under "Risk Factors" in this Annual Report on Form 10-K. Actual results may differ materially from any forward-looking statement.





Overview

We are a cell therapy company focused on immunotherapy. Since our inception, we have been involved with the development of proprietary immune system management technology licensed from Yeda, the commercial arm of the Weizmann Institute. We have recently shifted the focus of our research and development efforts to MD Anderson.





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This technology addresses one of the most fundamental challenges within human immunology: how to tune the immune response such that it tolerates selected desirable foreign cells, but continues to attack all other (undesirable) targets. In simpler terms, a number of potentially life-saving treatments have limited effectiveness today because the patient's immune system rejects them. For example, while HSCT - hematopoietic stem cell transplantation (e.g. bone marrow transplantation) has become a preferred therapeutic approach for treating blood cell cancer, most patients do not have a matched family donor. Although matched unrelated donors and cord blood can each provide an option for such patients, haploidentical stem cell transplants (sourced from partially mismatched family members) are rapidly gaining favor as a treatment of choice. This is still a risky and difficult procedure primarily because of potential conflicts between host and donor immune systems and also due to viral infections that often follow even successful HSCT while the compromised new immune system works to reconstitute itself by using the transplanted stem cells. Today, rejection is partially overcome using aggressive immune suppression treatments that leave the patient exposed to many dangers by compromising their immune system.

The unique advantage of Cell Source technology lies in the ability to induce sustained tolerance of transplanted cells (or organs) by the recipient's immune system in a setting that requires only mild immune suppression, while avoiding the most common post-transplant complications. The scientific term for inducing such tolerance in a transplantation setting is chimerism, where the recipient's immune system tolerates the co-existence of the (genetically different) donor type and host (recipient) type cells. Attaining sustained chimerism is an important prerequisite to achieving the intrinsic GvL (graft versus leukemia) effect of HSCT and supporting the reconstitution of normal hematopoiesis (generation of blood cells, including those that protect healthy patients from cancer) in blood cancer patients. Preclinical data and initial clinical data show that Cell Source's Veto Cell technology (currently in a clinical trial in the US) can provide superior results in allogeneic (donor-derived) HSCT by allowing for haploidentical stem cell transplants under a mild conditioning regimen, while avoiding the most common post-transplant complications. Combining this with CAR (Chimeric Antigen Receptor) T cell therapy as a unified VETO CAR-T treatment, we will be able to treat patients in relapse as well as those in remission and use the cancer killing power of CAR-T to protect the patient while their immune system fully reconstitutes, thus providing an end-to-end solution for blood cancer treatment by potentially delivering a fundamentally safer and more effective allogeneic HSCT: prevention of relapse; avoidance GvHD; prevention of viral infections; and enhanced persistence of GvL effect. This means that the majority of patients will be able to find a donor, and will have access to a potentially safer procedure with higher long term survival rates than what either donor-derived HSCT or autologous CAR-T each on their own currently provide.

The ability to induce permanent chimerism (and thus sustained tolerance) in patients - which allows the transplantation to overcome rejection without having to compromise the rest of the immune system - may open the door to effective treatment of a number of severe medical conditions, in addition to blood cancers, which are characterized by this need. These include:





  ? The broader set of cancers, including solid tumors, that can potentially be
    treated effectively using genetically modified cells such as CAR-T cell
    therapy, but also face efficacy and economic constraints due to limited
    persistence based on immune system issues (i.e., the need to be able to safely
    and efficiently deliver allogeneic CAR-T therapy). Inducing sustained
    tolerance to CAR-T cells may bring reduced and cost and increased efficacy by
    allowing for off-the-shelf (vs. patient-derived) treatments with more
    persistent cancer killing capability.

  ? Organ failure and transplantation. A variety of conditions can be treated by
    the transplantation of vital organs. However, transplantation is limited both
    by the insufficient supply of available donor organs and the need for
    lifelong, daily anti-reject treatments post-transplant. Haploidentical organ
    transplants, with sustained chimerism, have the potential to make life saving
    transplants accessible to the majority of patients, with the prospect of
    improved life quality and expectancy.

  ? Non-malignant hematological conditions (such as type one diabetes and sickle
    cell anemia) which could, in many cases, also be more effectively treated by
    stem cell transplantation if the procedure could be made safer and more
    accessible by inducing sustained tolerance in the stem cell transplant
    recipient.




Human Capital Resources

Other than our Chief Executive Officer, we currently do not have any full-time employees, but retain the services of independent contractors/consultants on a contract-employment basis.





Recent Developments

Preclinical Results and Clinical Results

After two years of intensive collaboration with Professor Zelig Eshhar, the inventor of CAR-T cell therapy, preclinical data confirmed that Veto Cells can markedly extend persistence of genetically modified T cells from the same donor and that genetically modified Veto Cells can effectively inhibit tumors expressing an antigen recognized by the transgenic T cell receptor. Furthermore, human Veto Cells transfected with CAR exhibit anti-tumor activity in-vitro without losing their veto activity. These preclinical results have formed the basis of our current development of a clinical protocol for allogeneic VETO CAR-T HSCT combined therapy for blood cancer treatment. Cell Source plans to submit this protocol for approval by the end of 2022. The Phase 1/2 clinical trial at the University of Texas MD Anderson Cancer Center, using Cell Source's Anti-viral Veto Cells, has successfully completed the first treatment cohort, with 3 patients each receiving a haploidentical HSCT under reduced intensity conditioning with Veto Cells. This first in human dose optimization trial has thus far shown that the initial dose is in fact the optimal dose, as all three patients had successful stem cell engraftment after 42 days, in the absence of GvHD. Cell Source is now continuing the trial as it proceeds with the next cohorts of patients, using the same dose level.





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COVID-19

The novel coronavirus ("COVID-19") pandemic continues to impact global economic conditions. The Company is closely monitoring the outbreak of COVID-19 and its impact on the Company's operations, financial position, cash flows and its industry in general. The Company considered the impact of COVID-19 on its business and operational assumptions and estimates, and determined there were no material adverse impacts on the Company's results of operations and financial position as of December 31, 2021.

Similarly, the economic uncertainty caused by the COVID-19 pandemic has made and may continue to make it difficult for the Company to forecast operating results, including the timing and ability of the Company to initiate and/or complete current and/or future preclinical studies and/or clinical trials, disrupt the Company's regulatory activities, and/or have other adverse effects on the Company's clinical development. The duration and extent of the impact from the COVID-19 pandemic depend on future developments that cannot be accurately predicted at this time, and if the Company is not able to respond to and manage the impact of such events effectively, the Company's business may be harmed.

There can be no assurance that precautionary measures, whether adopted by the Company or imposed by others, will be effective, and such measures could negatively affect the Company's financial condition, cash flows, and results of operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Consolidated Results of Operations

Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020





Research and Development

Research and development expense was $1,323,408 and $998,554 for the years ended December 31, 2021 and 2020, respectively, an increase of $324,854, or 33%. The increase was primarily attributable to clinical trial milestones reached during the second and third quarters of 2021 related to the enrollment of patients, which resulted in additional expense recognized related to our agreement with MD Anderson as well as an increase in the budget for sponsored research there. This was partially offset by less expense recognized related to the research agreement with Yeda during the 2021 period as compared to the 2020 period.





General and Administrative

General and administrative expense was $2,695,164 and $2,639,482 for the years ended December 31, 2021 and 2020, respectively, an increase of $55,682, or 2%. General and administrative expenses are primarily comprised of compensation, legal, and other professional fees.





Interest Expense

Interest expense for the years ended December 31, 2021 and 2020 was $629,201 and $636,156, respectively, a decrease of $6,955, or 1%. The decrease was a result of the change in fair value of the Company common stock, offset by the increased amount of interest-bearing convertible notes payable outstanding during the 2021 period as compared to the 2020 period.

Amortization of Debt Discount

Amortization of debt discount was $731,502 and $301,250 for the years ended December 31, 2021 and 2020, respectively, an increase of $430,252, or 143%. The increase is primarily associated with the increased amount and fair value of warrants issued in connection with convertible notes payable during the 2021 period.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities for the year ended December 31, 2020 was a gain of $16,977 due to the reduction in fair value of warrants and conversion options as a result of drawing closer to their expiration dates. There was no such gain or loss in the 2021 period.

Gain on Forgiveness of Accrued Interest

During the year ended December 31, 2021, we recognized a gain on forgiveness of accrued interest of $49,983 in connection with the repayment of certain notes payable. There was no such gain or loss in the 2020 period.





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Gain on Exchange of Accrued Interest for Common Stock

During the year ended December 31, 2020, we recognized a $132,502 gain on exchange of accrued interest for common stock, which represents the excess carrying value of the accrued interest as compared to the issuance date fair value of the common stock. There was no such gain or loss in the 2021 period.

Loss on Extinguishment of Notes Payable

During the years ended December 31, 2021 and 2020, we recognized $143,143 and $134,202, respectively, of loss on extinguishment of notes payable in connection with the extension, repayment, and conversion of notes payable.

Liquidity and Going Concern

We measure our liquidity in a number of ways, including the following:





                                     December 31,
                                 2021             2020

Cash                         $     93,095     $    241,619

Working capital deficiency $ (9,826,135 ) $ (7,950,882 )

During the year ended December 31, 2021, we had not generated any revenues, had a net loss of $5,472,435 and had used cash in operations of $3,378,682. As of December 31, 2021, we had a working capital deficiency of $9,826,135 and an accumulated deficit of $31,178,428. As of December 31, 2021 and through the date of this filing, notes payable with principal amounts totaling $1,554,912 and $1,329,912, respectively, were past due and are classified as current liabilities on the consolidated balance sheet as of December 31, 2021.We will continue to incur net operating losses to fund operations. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year from the date these financial statements are issued. Subsequent to December 31, 2021, we received proceeds of $1,245,000 through the issuance of convertible notes payable.

We are currently funding our operations on a month-to-month basis. 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 years ended December 31, 2021 and 2020, 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 years ended December 31, 2021 and 2020 in the amounts of $3,378,682 and $2,774,631, respectively. The net cash used in operating activities for the year ended December 31, 2021 was primarily due to cash used to fund a net loss of $5,472,435, adjusted for net non-cash expenses in the aggregate amount of $1,392,513, partially offset by $701,240of net cash provided by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year ended December 31, 2020 was primarily due to cash used to fund a net loss of $4,560,165, adjusted for net non-cash expenses in the aggregate amount of $1,362,196, partially offset by $423,338 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 years ended December 31, 2021 and 2020 was $3,226,658 and $2,991,842, respectively. The net cash provided by financing activities during the year ended December 31, 2021 was attributable to $3,907,820 of proceeds from the issuance of convertible notes payable, offset by the repayments of notes payable in the amount of $203,088, $60,500 of repayments of advances payable, $125,000 of repayments of convertible notes payable and $292,574 of repayment of financing liability. The net cash provided by financing activities during the year ended December 31, 2020 was attributable to $728,347 of proceeds from the issuance of Series A preferred stock, $2,547,500 of proceeds from the issuance of convertible notes payable, $100,000 of proceeds from the issuance of notes payable, $114,000 of proceeds from advances payable, $1,995 of proceeds from a warrant exercise, offset by the repayments of notes payable in the amount of $200,000, $154,000 of repayments of advances payable and $146,000 of repayments of convertible notes payable.





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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below.

The following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our accounting policies are more fully described in Note 3 - Summary of Significant Accounting Policies, in our financial statements included elsewhere in this annual report.





Convertible Instruments

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and any related freestanding instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Embedded conversion options and any related freestanding instruments are recorded as a discount to the host instrument and are amortized as interest expense over the term of the related debt instrument.

If the instrument is determined to not be a derivative liability, the Company then evaluates for the existence of a beneficial conversion feature by comparing the commitment date fair value to the effective conversion price of the instrument.

The Black-Scholes option pricing model was used to estimate the fair value of the Company's warrants and embedded conversion options. The Black-Scholes option pricing model includes subjective input assumptions that can materially affect the fair value estimates.

Fair Value of Financial Instruments

The Company measures the fair value of financial assets and liabilities based on ASC 820 "Fair Value Measurements and Disclosures" ("ASC 820"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for identical assets or liabilities;

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable; and

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).





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The carrying amounts of the Company's financial instruments, such as cash, other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amounts of Company's credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates, are comparable to rates of returns for instruments of similar credit risk.





Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and is then recognized over the period the services are required to be provided in exchange for the award, usually the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.

Because the Company's common stock historically was not actively traded on a public market, the fair value of the Company's restricted equity instruments is estimated by management based on observations of the sales prices of both restricted and freely tradable common stock, or instruments convertible into common stock based on the option pricing model discussed below. The Company obtained a third-party valuation of its common stock as of December 31, 2021 and 2020, which was considered in management's estimation of fair value during the years ended December 31, 2021 and 2020. The third-party valuation was performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The estimates used by management are considered highly complex and subjective. The Company anticipates that once its shares become more actively traded, the use of such estimates will no longer be necessary to determine the fair value of its common stock.

The independent appraisals utilized the option pricing method, or OPM, as the most reliable method with the following steps being applied:





  ? Establishment of total enterprise or equity value;
  ? Analysis of equity rights for each class of security;
  ? Selection of appropriate model for valuation purposes;
  ? Determination of key valuation inputs; and
  ? Computation of the fair value of the subject security.

Under the OPM, it was determined the Company's common stock had a fair value of $0.34 and $0.47 per share as of December 31, 2021 and 2020, respectively, which included a discount for lack of marketability of 30%. Furthermore, the independent appraisal determined the Company's expected volatility was 90% by evaluating historical and implied volatilities of guideline companies.

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