During the nine months ended September 30, 2021, the Company had not generated
any revenues, had a net loss of approximately $4,637,000 and had used cash in
operations of approximately $2,919,000. As of September 30, 2021, the Company
had a working capital deficiency of approximately $10,188,000 and an accumulated
deficit of approximately $30,343,000. These conditions raise substantial doubt
about the Company's ability to continue as a going concern for at least one year
from the date these financial statements are issued.
8
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 sources of
operating funds since inception have 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,
2020, 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 applicable to
common stockholders by the weighted average number of common shares outstanding
for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share includes the dilution that would occur upon the
exercise or conversion of all dilutive securities into common stock using the
"treasury stock" and/or "if converted" methods, as applicable. Weighted average
shares outstanding for the three and nine months ended September 30, 2021 and
2020 includes the weighted average impact of warrants to purchase an aggregate
of 0 and 2,043,835 shares, respectively, of common stock because their exercise
price was determined to be nominal.
The common stock equivalents associated with the following securities are
excluded from the calculation of weighted average dilutive common shares because
their inclusion would have been anti-dilutive:
Schedule of Weighted Average Dilutive Common Shares Anti-dilutive
September 30,
2021 2020
Options 6,182,004 4,832,004
Warrants 11,201,946 6,250,676
Convertible notes [1] [2] 3,521,885 3,958,756
Convertible preferred stock 15,054,910 13,421,950
Total 35,960,745 28,463,386
[1] Convertible notes are assumed to be converted at the rate of $0.75 per
common share, which is the conversion price as of September 30, 2021.
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.
[2] Excludes shares of common stock underlying convertible notes that are
expected to become convertible into shares of Series B Convertible Preferred
Stock since such stock had not been designated by the Company as of
September 30, 2021.
Reclassifications
Certain prior period balance sheet amounts have been reclassified to conform to
the fiscal 2021 presentation. These reclassifications have no impact on the
previously reported net loss.
9
Recently Issued Accounting Standards
On May 3, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU
2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments
(Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives
and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's
Accounting for Certain Modifications or Exchanges of Freestanding
Equity-Classified Written Call Options. This new standard provides clarification
and reduces diversity in an issuer's accounting for modifications or exchanges
of freestanding equity-classified written call options (such as warrants) that
remain equity classified after modification or exchange. This standard is
effective for fiscal years beginning after December 15, 2021, including interim
periods within those fiscal years. Issuers should apply the new standard
prospectively to modifications or exchanges occurring after the effective date
of the new standard. Early adoption is permitted, including adoption in an
interim period. If an issuer elects to early adopt the new standard in an
interim period, the guidance should be applied as of the beginning of the fiscal
year that includes that interim period. The Company is currently evaluating this
new standard and its impact on the Company's condensed consolidated financial
statements and related disclosures.
Note 4 - Fair Value
The following table provides a summary of the changes in fair value, including
net transfers in and/or out, of all Level 3 liabilities measured at fair value
on a recurring basis using unobservable inputs during the nine months ended
September 30, 2021:
Schedule of Changes in Fair Value of Liabilities Measured at Fair Value on
Recurring Basis
Accrued Accrued
Interest Compensation Total
Balance - January 1, 2021 $ 539,836 $ 84,953 $ 624,789
Change in fair value 41,607 97 41,704
Issuance of warrants (82,350 ) - (82,350 )
Balance - March 31, 2021 499,093 85,050 584,143
Change in fair value 37,994 (9 ) 37,985
Accrual of warrant obligation 164,857 - 164,857
Accrual of common stock obligation - 7,097 7,097
Balance - June 30, 2021 701,944 92,138 794,082
Change in fair value 39,012 20 39,032
Issuance of common stock - (7,097 ) (7,097 )
Issuance of warrants (165,216 ) - (165,216 )
Balance - September 30, 2021 $ 575,740 $ 85,061 $ 660,801Financial liabilities 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 accrued obligations to issue warrants and common stock.
In applying the Black-Scholes option pricing model utilized in the valuation of
Level 3 liabilities, the Company used the following approximate assumptions:
Schedule of Valuation of Level 3 Liabilities
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Risk-free interest rate 0.28%-0.87 % 0.22% - 0.28 % 0.28%-0.92 % 0.15% - 1.55 %
Expected term (years) 4.00-5.00 4.00-5.00 4.00-5.00 0.52 - 5.00
Expected volatility 90 % 110 % 90 % 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 does not have significant trading 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.
As of September 30, 2021 and December 31, 2020, the Company had an obligation to
issue 154,495 shares of common stock to service providers that had a fair value
of $72,613, which was a component of accrued compensation on the condensed
consolidated balance sheets.
See Note 6, Stockholders' Deficiency - Common Stock and Stock Warrants for
additional details associated with the issuance of common stock and warrants.
10
Note 5 - Notes Payable
As of September 30, 2021 and through the date of this filing, notes and
convertible notes payable with principal amounts totaling $2,012,162 and
$5,762,162, respectively, were past due and are classified as current
liabilities on the condensed consolidated balance sheet as of September 30,
2021. Such notes continue to accrue interest and all relevant penalties have
been accrued as of September 30, 2021. 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.
During the three months ended September 30, 2021 and 2020, the Company recorded
interest expense of $214,431 and $126,867, respectively, and amortization of
debt discount of $269,805 and $146,109, respectively. During the nine months
ended September 30, 2021 and 2020, the Company recorded interest expense of
$658,163 and $308,395, respectively, and amortization of debt discount of
$547,737 and $190,639, respectively. As of September 30, 2021 and December 31,
2020, the Company had $1,258,421 and $997,244, respectively, of accrued interest
(including interest in the form of warrants (see Note 4)) and penalties related
to notes payable, which is included with accrued interest and accrued interest -
related parties on the condensed consolidated balance sheets.
Convertible Notes Payable
During the nine months ended September 30, 2021, the Company issued convertible
notes payable in the aggregate principal amount of $2,297,947 which have
maturity dates ranging from July 7, 2021 through March 21, 2022. The notes
accrue interest at 8% per annum and are convertible at any time at the option of
the holder into the Company's Series C Convertible Preferred Stock (the "Series
C Preferred Stock") at a conversion price of $7.50. The notes automatically
convert into Series C Convertible Preferred Stock on the maturity date. In
connection with the issuances, the Company issued five-year immediately vested
warrants to purchase an aggregate of 1,868,358 shares of common stock at an
exercise price $1.25 per share. The warrants had an issuance date relative fair
value of $461,269 which will be amortized over the term of the notes. A portion
of the convertible notes payable were (a) converted during nine months ended
September 30, 2021 (see elsewhere in this Note for details) and (b) converted
subsequent to September 30, 2021 (see Note 9 for details).
On January 28, 2021, the Company issued a convertible note payable in the amount
of $647,222 which matures on July 28, 2021 in exchange for another note in the
principal amount of $555,556 that accrued interest at 13% per annum and had
accrued interest of $41,948. The new note accrues interest at 8% per annum and
such interest is payable at maturity, at the Company's option, in cash or as
payment-in-kind in common stock at a rate of $0.75 per share. The note is
convertible at the holder's option into Series C Preferred Stock at a price of
$7.50 per share and automatically converts into Series C Convertible Preferred
Stock on the maturity date. In connection with the issuance of the convertible
note, the Company issued a five-year immediately vested warrant to purchase
517,778 shares of common stock at an exercise price $1.25 per share. The
warrants had an issuance date fair value of $106,183 that was recognized
immediately. The Company determined the transaction was an extinguishment and,
as a result, recognized a loss on extinguishment of notes payable of $49,718 on
the condensed consolidated statement of operations during the nine months ended
September 30, 2021. This convertible note payable was converted during the nine
months ended September 30, 2021 (see elsewhere in this Note for details).
On March 2, 2021, the Company amended a previously issued convertible note in
the principal amount of $2,000,000. In connection with this amendment, during
the three months ended March 31, 2021, the Company (i) received further proceeds
of $500,000, (ii) increased the principal amount from $2,000,000 to $4,000,000
and (iii) issued five-year immediately vested warrants for the purchase of
800,000 shares of common stock at an exercise price of $1.25 per share, of
which, warrants to purchase 400,000 shares of common stock were accrued for as
December 31, 2020, and had an issuance date fair value of $164,700 which will be
amortized over the term of the note. On June 18, 2021, the Company amended and
restated the note in the principal amount of $4,000,000. In connection with this
amendment, during the three months ended June 30, 2021, the Company (i) received
further proceeds of $1,000,000 in connection with the note by means of the
payment by the lender of outstanding obligations to third parties, (ii)
increased the principal amount from $4,000,000 to $6,000,000 and (iii) agreed to
issue a five-year immediately vested warrant to purchase 800,000 shares of
common stock with an issuance date fair value of $164,857 which will be
amortized over the term of the note. The Company may elect to convert the
amended and restated note into shares of Series B Convertible Preferred Stock at
a conversion price of $7.50 per share at any time after the creation of the
Series B Convertible Preferred Stock and before the maturity date. As of
September 30, 2021, an aggregate of $3,500,000 of proceeds were outstanding
under the note. The warrant to purchase 800,000 shares of common stock was
issued during the three months ended September 30, 2021, such that the Company
recognized the $165,216issuance date fair value by crediting additional paid-in
capital.
On March 11, 2021, the Company entered into convertible note purchase agreements
with two noteholders whereby the Company agreed to repurchase an aggregate of
$125,000 of convertible notes payable for the same amount in cash, at which time
the notes were cancelled. In connection with the repayment, the parties agreed
that the Company was no longer required to pay accrued interest associated with
the notes payable in the amount of $49,983. As a result, the Company recognized
a gain on forgiveness of accrued interest of $49,983 on its condensed
consolidated statement of operations during the nine months ended September 30,
2021.
11
On April 27, 2021, the Company amended the following terms of two convertible
notes in the aggregate principal amount of $150,000: (i) the maturity dates were
extended to October 15, 2021, (ii) the interest rate was amended from 8% per
annum to 10% per annum and (iii) the shares into which the notes may be
converted was amended from Series B Preferred Stock to Series C Preferred Stock.
The Company determined the amendment represented a debt modification.
During the nine months ended September 30, 2021, convertible notes payable in
the aggregate principal amount $1,262,222 were converted into 168,296 shares of
Series C Convertible Preferred Stock at an effective conversion price of $7.50
per share. The Company elected to convert accrued interest on the same
convertible notes payable in the aggregate amount of $53,936 into 71,915 shares
of common stock at an effective conversion price of $0.75 per share.
Through June 30, 2021, the Company had not designated the Series C Preferred
Stock. As a result, the Company did not analyze the notes for a potential
beneficial conversion feature as the definition of a firm commitment had not
been met since the notes were not yet convertible. On July 26, 2021, the
required Certificate of Designation was filed (see Note 6 - Stockholders'
Deficiency - Series C Convertible Preferred Stock). Accordingly, a firm
commitment was achieved. The Company analyzed the notes for a beneficial
conversion feature and determined that there was none because the notes have an
effective conversion price of $0.75 per share of underlying common stock, which
exceeds the $0.47 per share commitment date closing market price of the common
stock.
Notes Payable
During the nine months ended September 30, 2021, the Company paid $100,000 to a
noteholder as a partial repayment of principal such that the note had $150,000
outstanding as of September 30, 2021 after the partial repayment.
See Note 8, Commitments and Contingencies - Litigation for details associated
with the partial repayment of a note payable during the nine months ended
September 30, 2021.
Note 6 - Stockholders' Deficiency
Preferred Stock Dividends
During the three months ended September 30, 2021 and 2020, the Company accrued
additional preferred dividends related to Series A and Series C Preferred Stock
of $246,192and $226,191, respectively. During the nine months ended September
30, 2021 and 2020, the Company accrued additional preferred dividends related to
Series A and Series C Preferred Stock of $695,456 and $649,381, respectively.
During the nine months ended September 30, 2021, the Company issued 632,677
shares of common stock at the stated value of $0.75 per share for aggregate
value of $474,475, 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.
Series C Convertible Preferred Stock
On July 26, 2021, the Company's Board of Directors approved the designation of
500,000 shares of the 10,000,000 authorized shares of preferred stock as Series
C Convertible Preferred Stock, par value $0.001 per share. On July 26, 2021, the
Company filed the Certificate of Designation with the State of Nevada related to
the Series C Preferred Stock. The Series C Preferred stock has a stated value of
$7.50 per share.
Conversion. Each share of Series C Preferred Stock is convertible into shares of
common stock (subject to adjustment as provided in the related certificate of
designation of preferences, rights and limitations) at the option of the holder
at any time. The number of shares of common stock which are issuable upon
conversion of the Series C Preferred Stock shall be equal to the number of
shares of Series C Preferred Stock to be converted, multiplied by the stated
value of $7.50 per share, divided by the conversion price in effect at the time
of conversion, initially at $0.75 per share.
Mandatory Conversion. On the earlier of (i) July 27, 2025 or (ii) any of the
Company's treatment candidates receiving approval from the U.S. or European
agencies, all of the outstanding shares of Series C Preferred Stock will
automatically convert to common stock.
Liquidation Preference. In the event of the liquidation, dissolution or
winding-up of the Company, the Series C Preferred Stock will rank senior to
common stock and any other class of capital stock which does not expressly rank
senior to or pari passu with the Series C Preferred Stock and will rank pari
passu with the Series A and Series B Preferred Stock.
Voting Rights. The holders of Series C Preferred Stock have the right to vote on
any matter submitted to a vote of holders of common stock, voting together with
the common stock as one class, on an as-converted basis.
12
Dividends. Holders of shares of Series C Preferred Stock will be entitled to
receive cumulative dividends at an annual rate of 8%of the stated value.
Dividends are payable semi-annually on June 30 and December 31, commencing on
December 31, 2022, either by (i) issuance of shares of common stock at the rate
of $0.75 per share of common stock or (ii) in cash, at the Company's option.
During the three months ended September 30, 2021, 5,000 shares of Series C
Preferred Stock were converted into 50,000 shares of common stock at the
shareholder's election. The Company analyzed the Series C Preferred Stock for a
beneficial conversion feature and determined that there was none because the
Series C Preferred Stock has an effective conversion price of $0.75 per share of
underlying common stock, which exceeds the $0.47 per share commitment date
closing market price of the common stock.
See Note 5, Notes Payable - Convertible Notes Payable for details associated
with note conversions.
Common Stock
During the nine months ended September 30, 2021, the Company issued 5,405 shares
of immediately vested common stock to a service provided with a grant date fair
value of $2,540 which was recognized immediately.
During the three months ended September 30, 2021, the Company issued 15,099
shares of common stock to a consultant in satisfaction of accrued compensation
with an issuance date fair value of $7,097.
During the three months ended September 30, 2021, the Company issued 150,000
shares of common stock to consultants which had an issuance date fair value of
$70,500 which was recognized immediately.
See Note 5, Notes Payable - Convertible Notes Payable for details associated
with accrued interest conversions into common stock.
See elsewhere in this note, Stock Warrants for additional details.
Stock Warrants
On January 5, 2021, the Company issued 125,000 five-year immediately vested
warrants to a note holder in satisfaction of certain noteholder rights with an
exercise price $0.95 per share. The warrant had an issuance date fair value of
$33,545 which was recognized immediately.
During the nine months ended September 30, 2021, the Company issued 125,071
shares of common stock pursuant to a cashless warrant exercise by a noteholder
of warrants to purchase 221,275 shares of common stock at an exercise price of
$0.75 per share.
During the three months ended September 30, 2021, the Company issued 125,000
five-year immediately vested warrants to a consultant with an exercise price
$0.75 per share. The warrant had an issuance date fair value of $36,200 which
was recognized immediately.
In August 2021, the Company extended the expiration date of a warrant to
purchase 75,000 shares of common stock at an exercise price of $0.75 per share
from August 4, 2021 to August 4, 2025 and extended the expiration date of a
warrant to purchase 37,500 shares of common stock at an exercise price of $0.75
per share from August 26, 2021 to August 26, 2025. The Company determined the
transactions represented award modifications and recognized incremental expense
of $29,000 within interest expense on the condensed consolidated statement of
operations during the three and nine months September 30, 2021.
See Note 5, Notes Payable for additional details associated with the issuance of
stock warrants.
Stock Options
On March 8, 2021, the Company granted 1,350,000 five-year immediately vested
options under the Company's Equity Incentive Plan to the Chief Executive Offer
of the Company (of which, 750,000 were granted for service as Chief Executive
Officer and 600,000 were granted for service as a director) with an exercise
price $1.00 per share. The options had a grant date fair value of $218,600 which
was recognized during the nine months ended September 30, 2021.
Stock-Based Compensation
During the three months ended September 30, 2021, the Company recognized
stock-based compensation expense of $140,528 (consisting of $70,028 of expense
related to warrants (of which, $70,009 has been included within stockholders'
deficiency and $19 has been included within accrued compensation) and $70,500 of
expense related to common stock which has been included within stockholder's
deficiency) which was included within general and administrative expenses.
13
During the nine months ended September 30, 2021, the Company recognized
stock-based compensation expense of $424,272 (consisting of $137,735of expense
related to warrants (of which, $137,628 has been included within stockholders'
deficiency and $107 has been included within accrued compensation), $206,400 of
expense related to options which has been included within stockholders'
deficiency and $80,137 of expense related to common stock which has been
included within stockholders' deficiency) which was included within general and
administrative expenses.
During the three and nine months ended September 30, 2020, the Company
recognized stock-based compensation expense of $349,050 and $686,472,
respectively, related to common stock and warrants, which amounts were included
within general and administrative expenses on the condensed consolidated
statements of operations.
As of September 30, 2021, there was $38,471 of unrecognized stock-based
compensation expense to be recognized over a weighted average period of 0.24
years.
Note 7 - Related Party Transactions
As of September 30, 2021 and December 31, 2020, the Company was required to
issue warrants to purchase an aggregate of 1,281,500 and 1,056,500,
respectively, shares of common stock at an exercise price of $0.75 per share to
directors of the Company in connection with loans made to the Company in the
aggregate amount of $459,000 which required certain penalties in the form of
warrants. As a result, the Company had accrued $359,314 and $291,708 associated
with the fair value of the obligations as of September 30, 2021 and December 31,
2020, respectively, which amount is included in accrued interest - related
parties on the condensed consolidated balance sheets.
Note 8 - Commitments and Contingencies
Yeda Research and License Agreement
During the three months September 30, 2021 and 2020, the Company recorded
research and development expenses of approximately $12,500 and $0, respectively,
related to its Research and License Agreement with Yeda (the "Agreement").
During the nine months September 30, 2021 and 2020, the Company recorded
research and development expenses of approximately $60,000 and $112,000,
respectively, related to the Agreement. As of September 30, 2021 and December
31, 2020, the Company had $39,419 and $136,919, respectively, of accrued
research and development expenses pursuant to the Agreement with Yeda, which are
included within current liabilities on the condensed consolidated balance
sheets.
MD Anderson Sponsored Research Agreements
The Company recognized $411,773 and $237,546 of research and development
expenses during the three months ended September 30, 2021 and 2020,
respectively, and $925,921 and $600,017 of research and development expenses
during the nine months ended September 30, 2021 and 2020, respectively,
associated with services provided by The University of Texas M.D. Anderson
Cancer Center ("MD Anderson") under the two agreements with MD Anderson dated
November 2018 and February 2019, respectively. As of September 30, 2021 and
December 31, 2020, the Company had $211,009 and $462,785, respectively, of
accrued research and development expenses pursuant to the agreements with MD
Anderson. Subsequent to September 30, 2021, the Company and MD Anderson agreed
to extend the Sponsored Research Agreement by one year to November 27, 2022.
Under the amendment, the research budget for the additional year is
approximately $1,300,000.
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 condensed 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.
14
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. On June 12, 2019, the
plaintiff served a motion for summary judgment through the Secretary of State
which was heard on July 12, 2019 and granted. The Company contends that it was
not given sufficient notice under the applicable statute and did not have an
opportunity to oppose the motion. Judgment was entered in October 2019 in the
amount of $267,680. The Company brought a motion to vacate based on the
jurisdictional defect of the motion in not providing the required amount of
time, but that motion was denied in February 2021 without properly addressing
the jurisdictional issues raised by the Company. The Company has appealed the
denial and then filed a motion to Renew and Reargue the motion to vacate based
on the Court's failure to address critical issues. That motion was also denied
on April 15, 2021 without addressing the Company's arguments. The Company has
appealed the second denial as well and is pursuing both appeals in a
consolidated manner so as to resolve all issues together. While the Company's
motions were pending, the plaintiff has commenced steps to collect judgment.
During the nine months ended September 30, 2021, $103,088was released to an
officer of the court and has been accounted for as partial note repayment, such
that, as of September 30, 2021, there was $146,912 outstanding under the note.
During the nine months ended September 30, 2021, on behalf of the Company, a
third party deposited the full amount of the unpaid judgment with the court,
which created an automatic stay of enforcement of this matter and which will be
used to resolve the underlying note in the event of an adverse outcome on
appeal.
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 September 30, 2021 and December 31, 2020, the Company had not accrued any
amounts for contingencies.
Note 9 - Subsequent Events
The Company has evaluated events that have occurred after the balance sheet and
through the date the financial statements were issued. Based upon the
evaluation, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the
financial statements, except as disclosed below.
Series C Preferred Stock Conversion
In October 2021, a holder of Series C Preferred Stock elected to convert 10,000
of such shares into 100,000 shares of common stock.
Convertible Notes Payable Conversions
In November 2021, an aggregate of $557,250 of principal outstanding under
convertible notes automatically converted into an aggregate of 82,060 shares of
Series C Convertible Preferred Stock and the Company elected to pay an aggregate
of $26,233 of interest accrued under such notes by the issuance of an aggregate
of 34,976 shares of common stock. The aggregate note principal had a conversion
price of $7.50 per share and the common stock was valued at $0.75 per share for
purposes of the interest payment.
See Note 5, Notes Payable for details associated with past due notes.
Stock Warrants
In November 2021, in connection with the conversion of a certain convertible
note payable in the principal amount of $50,000, the Company issued a five-year
immediately vested warrant to purchase 144,290 shares of the Company's common
stock at an exercise price of $1.25 per share.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of the condensed consolidated results of
operations and financial condition of Cell Source, Inc. ("CSI", "Cell Source",
the "Company", "us," "we," "our,") as of September 30, 2021 and for the three
and nine months ended September 30, 2021 and 2020 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, 2020 as filed with the Securities and Exchange Commission
("SEC") on April 15, 2021.
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, 2020, filed with the SEC on April 15, 2021.
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 Research & Development Company Limited ("Yeda"),
the commercial arm of the Weizmann Institute. We have since shifted the focus of
our research and development efforts to MD Anderson.
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 (recipient) 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 the
result of successfully 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 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 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 cost and increased efficacy by
allowing for off-the-shelf (vs. patient-derived) treatments with more
persistent cancer killing capability.
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? 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-rejection 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 ResourcesOther 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, 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 form 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 in 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 subsequent cohorts of patients,
using the same dose level.
COVID-19
Recently, the outbreak of the novel coronavirus, or COVID-19, around the world
has adversely impacted global commercial activity and contributed to significant
volatility in financial markets and disrupted normal business operations. The
global impact of the outbreak has been rapidly evolving, and many countries have
reacted by instituting quarantines and restrictions on travel, and many
businesses and other institutions have temporarily closed or reduced work
activities at their facilities. Such actions are creating disruption in global
supply chains, and adversely impacting a number of industries, such as
transportation, hospitality and entertainment. The outbreak could have a
continued adverse impact on economic and market conditions and trigger a period
of global economic slowdown. The rapid development and fluidity of this
situation precludes any prediction as to the ultimate adverse impact of the
novel coronavirus. Nevertheless, the novel coronavirus presents material
uncertainty and its disruption of the capital markets may have a material
adverse impact on our ability to raise additional capital and may slow down the
pace at which research and clinical trials may be conducted on our behalf.
Designation of Series C Convertible Preferred Stock
On July 26, 2021, the Company's Board of Directors approved the designation of
500,000 shares of the 10,000,000 authorized shares of preferred stock as Series
C Convertible Preferred Stock, par value $0.001 per share. On July 26, 2021, the
Company filed the Certificate of Designation with the State of Nevada related to
the Series C Preferred Stock. The Series C Preferred stock has a stated value of
$7.50 per share.
Conversion. Each share of Series C Preferred Stock is convertible into shares of
common stock (subject to adjustment as provided in the related certificate of
designation of preferences, rights and limitations) at the option of the holder
at any time. The number of shares of common stock which are issuable upon
conversion of the Series C Preferred Stock shall be equal to the number of
shares of Series C Preferred Stock to be converted, multiplied by the stated
value of $7.50 per share, divided by the conversion price in effect at the time
of conversion, initially at $0.75 per share.
Mandatory Conversion. On the earlier of (i) July 26, 2025 or (ii) any of the
Company's treatment candidates receiving approval from the U.S. or European
agencies, all of the outstanding shares of Series C Preferred Stock will
automatically convert to common stock.
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Liquidation Preference. In the event of the liquidation, dissolution or
winding-up of the Company, holders of Series C Preferred Stock will rank senior
to common stock and any other class of capital stock which does not expressly
rank senior to or pari passu with the Series C Preferred Stock and will rank
pari passu with the Series A and Series B Preferred Stock.
Voting Rights. The holders of Series C Preferred Stock have the right to vote on
any matter submitted to a vote of holders of common stock, voting together with
the common stock as one class, on an as-converted basis.
Dividends. Holders of shares of Series C Preferred Stock will be entitled to
receive cumulative dividends at an annual rate of 8% of the stated value.
Dividends are payable semi-annually on June 30 and December 31, commencing on
December 31, 2022, either by (i) issuance of shares of common stock at the rate
of $0.75 per share of common stock or (ii) in cash.
Condensed Consolidated Results of Operations
Three Months Ended September 30, 2021 Compared with the Three Months Ended
September 30, 2020
Research and Development
Research and development expense was $459,273 and $257,546 for the three months
ended September 30, 2021 and 2020, respectively, an increase of $201,727, or
78%. The increase was primarily attributable to a clinical trial milestone
reached during the third quarter of 2021 which resulted in additional expense
recognized related to our agreement with MD Anderson.
General and Administrative
General and administrative expense, which is associated with external consulting
and professional fees, payroll and stock-based compensation expenses, was
$856,059 and $908,099 for the three months ended September 30, 2021 and 2020,
respectively, a decrease of $52,040, or 6%. Such decrease was primarily
attributable to decreased professional fees during the 2021 period.
Interest Expense
Interest expense for the three months ended September 30, 2021 and 2020 was
$214,431 and $126,867, respectively, an increase of $87,564, or 69%. The
increase was primarily a result of increases in convertible notes payable
outstanding during the 2021 period as well as the fair value of warrants issued
as interest.
Amortization of Debt Discount
Amortization of debt discount was $269,805 and $146,109 for the three months
ended September 30, 2021 and 2020, respectively, an increase of $123,696, or
85%. The increase is primarily associated with increased levels of warrants and
common stock issued as debt discounts in connection with convertible notes
payable in the 2021 period.
Loss on Exchange of Accrued Interest for Common Stock
During the three months ended September 30, 2021 and 2020, we recognized $0 and
$132,502 of loss on extinguishment of notes payable which represents the excess
carrying value of the $199,151 of accrued interest as compared to the issuance
date fair value of the common stock of $66,649.
Loss on Extinguishment of Notes Payable
During the three months ended September 30, 2021 and 2020, we recognized $0 and
$1,511 of loss on extinguishment of notes payable in connection with the
extension and repayment of notes payable.
Nine Months Ended September 30, 2021 Compared with the Nine Months Ended
September 30, 2020
Research and Development
Research and development expense was $1,098,063 and $786,684 for the nine months
ended September 30, 2021 and 2020, respectively, an increase of $311,379, or
40%. The increase was primarily attributable to a clinical trial milestone
reached during the second and third quarters of 2021 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.
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General and Administrative
General and administrative expense, which is associated with external consulting
and professional fees, payroll and stock-based compensation expenses, was
$2,333,724 and $2,015,624 for the nine months ended September 30, 2021 and 2020,
respectively, an increase of $318,100, or 16%. The increase was primarily
related to additional expenses recognized in the 2021 period as follows:
approximately $97,000 of accounting fees, approximately $396,000 of legal and
consulting fees, approximately $82,000 of insurance expenses, partially offset
by a decrease of approximately $262,000 in stock based compensation.
Interest Expense
Interest expense for the nine months ended September 30, 2021 and 2020 was
$658,163 and $308,395, respectively, an increase of $349,768, or 113%. The
increase was primarily a result of increases in convertible notes payable
outstanding during the 2021 period as well as the fair value of warrants issued
as interest.
Amortization of Debt Discount
Amortization of debt discount was $547,737 and $190,639 for the nine months
ended September 30, 2021 and 2020, respectively, an increase of $357,098, or
187%. The increase is primarily associated with increased levels of warrants and
common stock issued as debt discounts in connection with convertible notes
payable in the 2021 period.
Gain on Forgiveness of Accrued Interest
During the nine months ended September 30, 2021, we recognized a gain on
forgiveness of accrued interest of $49,983 in connection with the repayment of
certain notes payable.
Gain on Exchange of Accrued Interest for Common Stock
During the nine months ended September 30, 2020, we recognized a $132,502 gain
on exchange of accrued interest for common stock which represents the excess
carrying value of the $199,151 of accrued interest as compared to the issuance
date fair value of the common stock of $66,649.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the nine months ended
September 30, 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.
Loss on Extinguishment of Notes Payable
During the nine months ended September 30, 2021 and 2020, we recognized $49,718
and $134,202 of loss on extinguishment of notes payable in connection with the
extension and repayment of notes payable.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
September 30, 2021 December 31, 2020
Cash $ 599,454 $ 241,619
Restricted cash $ - $ 3,500
Working capital deficiency $ (10,187,899 ) $ (7,950,882 )
During the nine months ended September 30, 2021, we had not generated any
revenues, had a net loss of approximately $4,637,000 and had used cash in
operations of approximately $2,919,000. As of September 30, 2021, we had a
working capital deficiency of approximately $10,188,000 and an accumulated
deficit of approximately $30,343,000. 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.
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.
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During the nine months ended September 30, 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 nine months
ended September 30, 2021 and 2020 in the amounts of approximately $2,919,000 and
$2,018,000, respectively. The net cash used in operating activities for the nine
months ended September 30, 2021 was primarily due to cash used to fund a net
loss of approximately $4,637,000, adjusted for net non-cash expenses in the
aggregate amount of approximately $1,258,000, partially offset by $460,000 of
net cash provided by changes in the levels of operating assets and liabilities.
The net cash used in operating activities for the nine months ended September
30, 2020 was primarily due to cash used to fund a net loss of approximately
$3,286,000, adjusted for net non-cash expenses in the aggregate amount of
approximately $923,000, partially offset by $345,000 of net cash provided by
changes in the levels of operating assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September
30, 2021 and 2020 was approximately $3,274,000 and $2,045,000, respectively. The
net cash provided by financing activities during the nine months ended September
30, 2021 was attributable to $3,797,820 of proceeds from the issuance of
convertible notes payable, offset by the repayments of notes payable,
convertible notes payable, and the insurance financing liability in the amount
of $524,007. The net cash provided by financing activities during the nine
months ended September 30, 2020 was attributable to $1,572,500 of proceeds from
the issuance of convertible notes payable, $728,347 of proceeds from the
issuance of Series A preferred stock, $100,000 of proceeds from the issuance of
notes payable and $100,000 of proceeds from advances payable, offset by the
repayment of a note payable in the amount of $200,000, $110,000 of repayments of
advances payable and a $146,000 repayment of a convertible note payable.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and 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 quarterly 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.
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.
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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. The Company determined the fair value under the
Binomial Lattice model and the Black-Scholes option pricing model to be
materially the same.
Embedded conversion options within notes payable are recorded as a debt discount
and are amortized as interest expense over the term of the related debt
instrument.
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).
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. The Company obtained a third-party valuation of its common stock
as of December 31, 2020, which was considered in management's estimation of fair
value during the nine months ended September 30, 2021. 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 December 2020 independent appraisal 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 a fair value of
$0.47 per share, 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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