During the three months ended March 31, 2022, the Company had not generated any
revenues, had a net loss of approximately $1,293,000 and had used cash in
operations of approximately $1,028,000. As of March 31, 2022, the Company had a
working capital deficiency of approximately $9,997,000 and an accumulated
deficit of approximately $32,471,000. As of March 31, 2022 and through the date
of this filing, notes payable with principal amounts totaling $1,554,912 and
$1,408,000, respectively were past due and are classified as current liabilities
on the condensed consolidated balance sheet as of March 31, 2022. The Company
will continue to incur net operating losses to fund operations. 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. Subsequent to March 31, 2022 and as more fully described in Note 9,
Subsequent Events, the Company received aggregate proceeds of $150,000 from the
issuance of convertible notes payable.
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,
2021, 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.
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
March 31,
2022 2021
Options 6,182,004 6,182,004
Warrants 11,964,079 8,966,388
Convertible notes [1] [2] 3,074,310 1,708,020
Convertible preferred stock 17,976,380 13,421,950
Total 39,196,773 30,278,362
[1] Convertible notes are assumed to be converted at the rate of $0.75 per common
share, which is the conversion price as of March 31, 2022 and 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 March 31,
2022 and 2021.
8
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 three months ended
March 31, 2022 and 2021:
Schedule of Changes in Fair Value of Liabilities Measured at Fair Value on a
Recurring Basis
Accrued Accrued
Interest Compensation Total
Balance - January 1, 2022 $ 402,344 $ 61,306 $ 463,650
Change in fair value 33,609 (412 ) 33,197
Accrual of warrant obligation 114,727 - 114,727
Issuance of warrants - - -
Balance - March 31, 2022 $ 550,680 $ 60,894 $ 611,574
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 $ 584,143Financial 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 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 Assumptions Used for Valuation of Level 3 Liabilities
For the Three Months Ended
March 31,
2022 2021
Risk-free interest rate 2.42%-2.44 % 0.64%-0.92 %
Expected term (years) 4.00-5.00 4.00-5.00
Expected volatility 90 % 90 %
Expected dividends 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 March 31, 2022 and December 31, 2021, the Company had an obligation to
issue 154,495 shares of common stock to service providers that had a fair value
of $52,528, 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.
9
Note 5 - Notes Payable
As of March 31, 2022 and through the date of this filing, notes and convertible
notes payable with principal amounts totaling $1,554,912 and $1,408,000,
respectivelywere past due and are classified as current liabilities on the
condensed consolidated balance sheet as of March 31, 2022. Such notes continue
to accrue interest and all relevant penalties have been accrued as of March 31,
2022. 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 certain 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 March 31, 2022 and 2021, the Company recorded
interest expense of $166,765 and $280,887, respectively, and amortization of
debt discount of $73,138 and $122,763, respectively. As of March 31, 2022 and
December 31, 2021, the Company had $1,406,317 and $1,182,225, 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 three months ended March 31, 2022, the Company issued convertible
notes payable in the aggregate principal amount of $95,000 which have maturity
dates ranging from August 2, 2022 through September 22, 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 at a conversion
price of $7.50per share. 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 56,000 shares of common stock at an exercise price $1.25 per
share. The warrants had an issuance date relative fair value of $8,043 which
will be amortized over the term of the notes.
In March 2022, an aggregate of $1,375,698 of principal outstanding under
convertible notes automatically converted into an aggregate of 183,422 shares of
Series C Convertible Preferred Stock and the Company elected to convert an
aggregate of $57,399 of interest accrued under such notes into an aggregate of
76,530 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. 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 $0.34per share commitment date closing market price of
the common stock.
Convertible Notes Payable - Related Parties
On March 10, 2022, the Board of Directors of the Company appointed George
Verstraete as a member of the Board.
The Company and Mr. Verstraete entered into a promissory note agreement dated
March 10, 2022, whereby Mr. Verstraete, at his discretion, can loan up to
$6,000,000 to the Company. The holder has agreed to loan an aggregate of
$2,500,000 to the Company under the note. The note bears interest at a rate of
10% per annum and will mature twelve months from the date of issuance. Mr.
Verstraete has the right, at his option, to convert the note into shares of the
Company's Series B Convertible Preferred Stock at a conversion price of $7.50
per share at any time after the creation and sale of the Series B Convertible
Preferred Stock. Interest accruing under the note will be payable upon the
maturity of the note and may be paid at the Company's option in either cash or
shares of the Company's common stock (calculated based upon $0.75 per share for
purposes of calculating the number of shares of common stock to be issued). For
each $500,000 advanced under the note, Mr. Verstraete will be issued a warrant
to purchase 400,000 shares of the Company's Common Stock at an exercise price of
$1.25 per share. Each warrant will have a five year term. As of March 31, 2022,
the Company had received $1,000,000 under the note. In connection with the
issuance, the Company accrued an obligation to issue five-year immediately
vested warrants to purchase an aggregate of 800,000 shares of common stock at an
exercise price $1.25 per share. The warrants had an issuance date relative fair
value of $114,727 which will be amortized over the term of the notes. See Note
9, Subsequent Events - Convertible Notes Payable - Related Partiesfor additional
details of an additional $1,000,000 advanced under the note subsequent to March
31, 2022.
10
Note 6 - Stockholders' Deficiency
Preferred Stock Dividends
During the three months ended March 31, 2022 and 2021, the Company accrued
additional preferred dividends related to Series A and Series C Convertible
Preferred Stock of $324,917 and $223,391, respectively.
Series C Convertible Preferred Stock
See Note 5, Notes Payable - Convertible Notes Payable for details associated
with conversions of notes payable into 183,422shares of Series C Convertible
Preferred Stock.
Common Stock
See Note 5, Notes Payable - Convertible Notes Payable for details associated
with conversions of accrued interest into 76,530shares of common stock.
Stock Warrants
See Note 5, Notes Payable for additional details associated with the issuance of
stock warrants.
Stock-Based Compensation
During the three months ended March 31, 2022, the Company recognized stock-based
compensation expense of $4,960 (consisting of $5,372 of expense related to
warrants and $(412) of expense related to common stock which has been included
within accrued compensation) which was included within general and
administrative expenses. During the three months ended March 31, 2021, the
Company recognized stock-based compensation expense of $237,772 (consisting of
$31,372 of expense related to warrants (of which, $31,276 has been included
within stockholders' deficiency and $96 has been included within accrued
compensation) and $206,400 of expense related to options (included within
stockholder's deficiency), which was included within general and administrative
expenses. There was no unrecognized stock-based compensation expense as of March
31, 2022.
Note 7 - Related Party Transactions
As of March 31, 2022 and December 31, 2021, the Company was required to issue
warrants to purchase an aggregate of 1,431,500 and 1,356,500, 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 $269,194 and $249,389 associated with the fair
value of the obligations as of March 31, 2022 and December 31, 2021,
respectively, which amount is included in accrued interest - related parties on
the condensed consolidated balance sheets.
See Note 5, Notes Payable - Convertible Notes Payable - Related Parties for
details of the issuance of a convertible note to a director of the Company.
11
Note 8 - Commitments and Contingencies
Yeda Research and License Agreement
During the three months March 31, 2022 and 2021, the Company recorded research
and development expenses of approximately $14,500 and $35,000, respectively,
related to its Research and License Agreement with Yeda (the "Agreement"). As of
March 31, 2022 and December 31, 2021, the Company had $0 of accrued research and
development expenses pursuant to the Agreement with Yeda.
MD Anderson Sponsored Research Agreements
The Company recognized $429,505 and $200,764 of research and development
expenses during the three months ended March 31, 2022 and 2021, 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 March 31, 2022 and December
31, 2021, the Company had $316,514 and $411,773, respectively, of accrued
research and development expenses pursuant to the agreements with MD Anderson.
Litigation
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, which includes the principal amount due under the promissory
note plus additional penalties and interest. 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 appealed both denials and the appeal was denied. While the Company's
motions were pending, the plaintiff has commenced steps to collect judgment.
During the year ended December 31, 2021, $103,088 was released to an officer of
the court and has been accounted for as partial note repayment, such that, as of
March 31, 2022, there was $146,912 outstanding under the note. During the year
ended December 31, 2021, a third party, on behalf of the Company, deposited the
remaining unpaid judgement with the court, which will be used to resolve the
underlying note.
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.
Aside from the matters discussed elsewhere in this note and Note 9, Subsequent
Events- Litigation, there are no other known contingencies through the date of
this filing.
12
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.
Convertible Notes Payable
Subsequent to March 31, 2022, the Company issued convertible notes payable in
the aggregate principal amount of $300,000 which have maturity dates ranging
from October 1, 2022 through February 11, 2023. 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 at a conversion price of $7.50
per share. 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 240,000 shares
of common stock at an exercise price $1.25 per share.
Convertible Notes Payable - Related Parties
Subsequent to March 31, 2022, Mr. Verstraete, advanced the Company an additional
$1,000,000 under a convertible promissory note dated March 10, 2022.
Additionally, subsequent to March 31, 2022, the Company and Ms. Soave entered
into an agreement to amend a previously issued convertible note dated October
28, 2019 in the aggregate principal amount of up to $6,000,000, whereby the
maturity date of the note was extended to April 28, 2023.
See Note 5, Notes Payable - Convertible Notes Payable - Related Parties for
additional details.
Notes Payable
Subsequent to March 31, 2022, the Company issued a note payable in the principal
amount of $168,093 which has a maturity date of June 16, 2022. The note accrues
interest at 10% per annum and the interest shall be payable, at the Company's
election, either in cash or in common stock at $0.75 per share. In connection
with the issuance, the Company issued a five-year immediately vested warrant to
purchase 200,000shares of common stock at an exercise price $0.75 per share.
Convertible Preferred Stock Dividends
Subsequent to March 31, 2022, the Company issued 796,629 shares of common stock
at $0.75 per share in satisfaction of $597,472 of dividends payable on shares of
Series A and Series C Convertible Preferred Stock.
Conversion of Convertible Notes Payable
Subsequent to March 31, 2022, an aggregate of $355,000 of principal outstanding
under convertible notes automatically converted into an aggregate of 47,333
shares of Series C Convertible Preferred Stock at a conversion price
of $7.50 per share and the Company elected to pay an aggregate of $14,014 of
interest accrued under such notes by the issuance of an aggregate
of 18,684 shares of common stock at $0.75 per share.
Litigation
In August 2022, a holder of 360,000 shares of the Company's common stock filed a
complaint against the Company, its President and legal counsel in the United
States District Court, Southern District of New York, claiming unspecified
damages for an alleged wrongful refusal to authorize the Company's transfer
agent to remove restrictive legends from the shares held by the shareholder. The
Company has filed a motion to dismiss the complaint which is pending. The
complaint against the Company's legal counsel was dismissed by the Court and the
Company's President has not been served.
Stock Options
Subsequent to March 31, 2022, the Company granted five-year immediately vested
stock options to purchase an aggregate of 750,000 shares of common stock at an
exercise price of $1.00 per share to two directors of the Company.
13
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 March 31, 2022 and for the three months
ended March 31, 2022 and 2021 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, 2021 as filed with the Securities and Exchange Commission ("SEC") on April
15, 2022.
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, 2021, filed with the SEC on April 15, 2022.
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.
14
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.
? 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 ½ 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.
Board of Director Changes
On May 6, 2022, Itamar Shimrat resigned his position as a director of the
Company. Mr. Shimrat's resignation was not the result of any disagreement with
the Company and he will continue in his positions as President and Chief
Executive Officer. Mr. Shimrat's resignation as director follows an evaluation
of the structure of the Board of Directors and a determination that it is in the
best interest of the Company to have a Board of Directors comprised of an odd
number of members to reduce the possibility of a deadlock.
On July 18, 2022, each of Ben Friedman and David Zolty resigned his position as
a director of the Company. Neither Mr. Friedman's nor Mr. Zolty's resignation
was the result of any disagreement with the Company.
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 condensed consolidated results of
operations and financial position as of March 31, 2022.
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 condensed consolidated 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.
15
Condensed Consolidated Results of Operations
Three Months Ended March 31, 2022 Compared with the Three Months Ended March 31,
2021
Research and Development
Research and development expense was $479,005 and $271,239 for the three months
ended March 31, 2022 and 2021, respectively, an increase of $207,766, or 77%.
This increase is attributable to increased quarterly payments under the
sponsored research agreement with MD Andersen. Furthermore, we enrolled an
additional patient during the 2022 period which resulted in research and
development expense being recognized in the 2022 period. We anticipate reaching
an enrollment level that will requires us to make a milestone payment to MD
Andersen during fiscal 2022.
General and Administrative
General and administrative expense, which is associated with external consulting
and professional fees, payroll and stock-based compensation expenses, was
$573,667 and $850,117 for the three months ended March 31, 2022 and 2021,
respectively, a decrease of $276,450, or 33%. The decrease was due to a
reduction in consulting and other professional fees during the 2022 period.
Interest Expense
Interest expense for the three months ended March 31, 2022 and 2021 was $166,765
and $280,887, respectively, a decrease of $114,122, or 41%. The decrease was due
to less interest-bearing notes outstanding during the period.
Amortization of Debt Discount
Amortization of debt discount was $73,138 and $122,763 for the three months
ended March 31, 2022 and 2021, respectively, a decrease of $49,625, or 40%. This
decrease is primarily associated with a decreased amount and fair value of
warrants issued in connection with convertible notes payable during the 2022
period.
Gain on Forgiveness of Accrued Interest
During the three months ended March 31, 2021, we recognized a gain on
forgiveness of accrued interest of $49,983 in connection with the repayment of
certain notes payable.
Loss on Extinguishment of Notes Payable
During the three months ended March 31, 2021, we recognized $49,718 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:
March 31, 2022 December 31, 2021
Cash $ 131,999 $ 93,095
Working capital deficiency $ (9,997,117 ) $ (9,826,135 )
During the three months ended March 31, 2022, we had not generated any revenues,
had a net loss of approximately $1,293,000 and had used cash in operations of
approximately $1,028,000. As of March 31, 2022, we had a working capital
deficiency of approximately $9,997,000 and an accumulated deficit of
approximately $32,471,000. As of March 31, 2022 and through the date of this
filing, notes payable with principal amounts totaling $1,554,912 and $1,408,000,
respectively were past due and are classified as current liabilities on the
condensed consolidated balance sheet as of March 31, 2022. 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
March 31, 2022, we received aggregate proceeds of $150,000 from 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.
16
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 three months ended March 31, 2022 and 2021, 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 three
months ended March 31, 2022 and 2021 in the amounts of approximately $1,028,000
and $1,114,000, respectively. The net cash used in operating activities for the
three months ended March 31, 2022 was primarily due to cash used to fund a net
loss of approximately $1,293,000, adjusted for non-cash expenses in the
aggregate amount of approximately $112,000, partially offset by $153,000 of net
cash provided by changes in the levels of operating assets and liabilities. The
net cash used in operating activities for the three months ended March 31, 2021
was primarily due to cash used to fund a net loss of approximately $1,525,000,
adjusted for net non-cash expenses in the aggregate amount of approximately
$541,000, and $131,000 of net cash used in changes in the levels of operating
assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31,
2022 and 2021 was approximately $1,067,000 and $972,000, respectively. The net
cash provided by financing activities during the three months ended March 31,
2022 was attributable to $1,000,000 of proceeds from the issuance of convertible
notes to a related party director and $95,000 of proceeds from the issuance of
convertible notes payable, partially offset by the repayments of the insurance
financing liability in the amount of $28,000. The net cash provided by financing
activities during the three months ended March 31, 2021 was attributable to
approximately $1,197,000 of proceeds from the issuance of convertible notes
payable, partially offset by the repayments of notes payable and convertible
notes payable in the amount of $225,000.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of financial statements and related disclosures must be 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 and are amortized as interest
expense over the term of the related debt instrument.
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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).
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,
which was considered in management's estimation of fair value during the three
months ended March 31, 2022. 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 per share as of December 31, 2021, 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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