Cell Source, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

CELL SOURCE, INC. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

		September 30, 2018				December 31, 2017
		(Unaudited)
Assets
Current Assets:
Cash		$	8,121			$	371,048
Prepaid expenses			85,267				124,693
Other current assets			48,321				35,936
Total Assets		$	141,709			$	531,677
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable		$	289,032			$	201,824
Accrued expenses			861,418				821,244
Accrued interest			334,474				248,746
Accrued interest - related parties			26,554				13,310
Accrued compensation			670,943				626,758
Accrued compensation - related party			55,439				19,262
Advances payable			600,000				100,000
Notes payable, net of debt discount of $0 and $89,326, as of September 30, 2018 and December 31, 2017, respectively			1,763,000				1,173,674
Notes payable - related parties			150,000				150,000
Convertible notes payable, net of debt discount of $0 and $34,173 as of September 30, 2018 and December 31, 2017, respectively			835,000				800,827
Convertible notes payable - related parties, net of debt discount of $0 and $28,356 as of September 30, 2018 and  December 31, 2017, respectively			225,000				196,644
Derivative liabilities			287,400				628,200
Accrued dividend payable			112,703				108,562
Total Liabilities			6,210,963				5,089,051
Commitments and contingencies			-				-
Stockholders' Deficiency:
Convertible Preferred Stock, $0.001 par value, 10,000,000 shares authorized; Series A Convertible Preferred Stock, 1,335,000 shares designated, 650,457 and 643,790 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively; liquidation preference of $4,991,131 and $4,936,987 as of September 30, 2018 and December 31, 2017, respectively			650				644
Common Stock, $0.001 par value, 200,000,000 shares authorized, 25,780,549 and 25,349,236 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively			25,781				25,349
Additional paid-in capital			10,014,940				9,969,520
Accumulated deficit			(16,110,625	)			(14,552,887	)
Total Stockholders' Deficiency			(6,069,254	)			(4,557,374	)
Total Liabilities and Stockholders' Deficiency		$	141,709			$	531,677

 

 

 

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Operating Expenses:
Research and development		$	56,459			$	152,658			$	165,997			$	422,903
Research and development - related party			72,527				200,000				375,151				600,000
General and administrative			359,660				202,480				1,031,517				662,455
Total Operating Expenses			488,646				555,138				1,572,665				1,685,358
Loss From Operations			(488,646	)			(555,138	)			(1,572,665	)			(1,685,358	)
Other (Expense) Income:
Interest expense			(30,923	)			(33,445	)			(124,774	)			(144,112	)
Interest expense - related parties			(756	)			(756	)			(49,244	)			(2,244	)
Amortization of debt discount			-				(49,502	)			(173,099	)			(339,133	)
Amortization of debt discount - related parties			-				(18,904	)			(28,356	)			(30,040	)
Change in fair value of derivative liabilities			115,500				149,200				390,400				452,880
Loss on exchange of notes payable for preferred shares			-				-				-				(725,355	)
Total Other Income (Expense)			83,821				46,593				14,927				(788,004	)
Net Loss			(404,825	)			(508,545	)			(1,557,738	)			(2,473,362	)
Dividend attributable to Series A preferred stockholders			(110,666	)			(74,261	)			(327,626	)			(150,630	)
Net Loss Applicable to Common Stockholders		$	(515,491	)		$	(582,806	)		$	(1,885,364	)		$	(2,623,992	)
Net Loss Per Common Share - Basic and Diluted		$	(0.02	)		$	(0.02	)		$	(0.07	)		$	(0.10	)
Weighted Average Common Shares Outstanding -
Basic and Diluted			27,580,598				26,807,466				27,456,267				26,751,525

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(Unaudited)

 

 

		Convertible Preferred																								Total
		Stock - Series A								Common Stock								Additional				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Paid-In Capital				Deficit				Deficiency
Balance, December 31, 2017			643,790			$	644				25,349,236			$	25,349			$	9,969,520			$	(14,552,887	)		$	(4,557,374	)
Issuance of Series A Convertible  Preferred Stock for cash			6,667				6				-				-				49,994				-				50,000
Series A Convertible Preferred Stock dividends: Accrual of earned dividends			-				-				-				-				(327,626	)			-				(327,626	)
Payment of dividends in-kind			-				-				431,313				432				323,052				-				323,484
Net loss			-				-				-				-				-				(1,557,738	)			(1,557,738	)
Balance, September 30, 2018			650,457			$	650				25,780,549			$	25,781			$	10,014,940			$	(16,110,625	)		$	(6,069,254	)

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

		For The Nine Months Ended September 30,
		2018				2017
Cash Flows From Operating Activities:
Net loss		$	(1,557,738	)		$	(2,473,362	)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of derivative liabilities			(390,400	)			(452,880	)
Amortization of debt discount			201,455				369,173
Loss on exchange of notes payable for preferred shares			-				725,355
Depreciation			-				407
Stock-based compensation:
Warrants			-				44,634
Changes in operating assets and liabilities:
Prepaid expenses			39,426				17,386
Other current assets			(12,385	)			44,621
Accounts payable			87,208				35,337
Accrued expenses			40,173				42,064
Accrued expenses-related parties			-				100,000
Accrued interest			85,728				75,042
Accrued interest - related parties			13,244				2,244
Accrued compensation			80,362				95,742
Net Cash Used In Operating Activities			(1,412,927	)			(1,374,237	)
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable			500,000				135,000
Proceeds from issuance of notes payable - related party			-				225,000
Proceeds from issuance of preferred stock - Series A			50,000				1,050,705
Proceeds from cash advance			500,000				-
Net Cash Provided By Financing Activities			1,050,000				1,410,705
Net (Decrease) Increase In Cash			(362,927	)			36,468
Cash - Beginning of Period			371,048				3,735
Cash - End of Period		$	8,121			$	40,203
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest		$	18,030			$	-
Non-cash investing and financing activities:
Preferred stock issued in exchange for notes and advances payable		$	-			$	2,118,355
Reduction of additional paid-in capital for public offering issuance costs that were previously paid		$	-			$	(54,543	)
Accrual of earned preferred stock dividends		$	(327,626	)		$	(150,630	)
Common stock issued in connection with payment of Series A Convertible Preferred Stock dividends in-kind		$	323,484			$	-
Stock issued in connection with issuances and extensions of notes payable		$	-			$	143,438
Warrants and conversion options issued in connection with issuance and extension of notes payable		$	49,600			$	67,080

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

CELL SOURCE, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Business Organization, Nature of Operations and Basis of Presentation

 

Organization and Operations

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial position of the Company as of September 30, 2018 and the condensed consolidated results of its operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full year ending December 31, 2018 or any other period. It is recommended that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2017 and for the year then ended which were included in the Company's Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 filed with the Securities and Exchange Commission (“SEC”) on July 25, 2018.

Note 2 - Going Concern and Management Plans

 

The Company’s primary source of operating funds since inception has been equity and debt financings. Management’s plans include continued efforts to raise additional capital through debt and equity financings. There is no assurance that these funds will be sufficient to enable the Company to fully complete its development activities or attain profitable operations. If the Company is unable to obtain such additional financing on a timely basis or, notwithstanding any request the Company may make, if the Company’s debt holders do not agree to convert their notes into equity or extend the maturity dates of their notes, the Company may have to curtail its development, marketing and promotional activities, which would have a material adverse effect on the Company’s business, financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations and liquidate.

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

Note 3 - Summary of Significant Accounting Policies

 

Loss Per Share

 

The Company computes basic net loss per share by dividing net loss by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable. Weighted average shares outstanding for the three and nine months ended September 30, 2018 and 2017 includes the weighted average impact of warrants to purchase an aggregate of 2,043,835 shares of common stock because their exercise price was determined to be nominal.

 

The following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive: 

 

		September 30,
		2018				2017
Warrants			11,915,481				11,615,481
Convertible notes			1,549,810				1,669,783
Convertible preferred stock			6,504,570				-
Total			19,969,861				13,285,264

 

Recent Accounting Standards

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company adopted ASU 2016-15 effective January 1, 2018 with no material impact on its condensed consolidated cash flows and related disclosures.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2017-09”). ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective basis in the annual and interim periods beginning after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018 with no material impact on its condensed consolidated financial statements or disclosures.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity of financial reporting for non-employee share-based payments. Currently, the accounting requirements for non-employee and employee share-based payments are significantly different. ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity — Equity-Based Payments to Nonemployees”. The amendments to ASU 2018 - 07 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09, (Topic 606), “Revenue from Contracts with Customers”. The Company is currently evaluating ASU 2018-07 and its impact on its condensed consolidated financial statements or disclosures.

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its unaudited condensed consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its financial position, results of operation and cash flows.

 

 

The Company has evaluated all new accounting standards that are in effect and may impact its condensed consolidated financial statements and does not believe that there are any other new accounting standards that have been issued that might have a material impact on its financial position or results of operations.

Note 4 - Fair Value

 

The Company determines the estimated fair value of amounts presented in these condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of September 30, 2018 and December 31, 2017, and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value of its restricted common stock during the three and nine months ended September 30, 2018 based upon: i) a third-party valuation of its common stock as of December 31, 2017; ii) observations of subsequent sales of its Preferred Stock (which is convertible into common stock); and iii) the thinly traded volume and closing prices of its common stock.

The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:

 

Level 1

Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2

Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3

Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

 

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.

 

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs. The following table summarizes the valuation of the Company’s derivatives by the above fair value hierarchy levels as of September 30, 2018 and December 31, 2017 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

						Quoted Prices
						In Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Liabilities				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Accrued compensation - warrants		$	136,439			$	-			$	-			$	136,439
Derivative liability			287,400				-				-				287,400
Balance - September 30, 2018		$	423,839			$	-			$	-			$	423,839
Accrued compensation - warrants		$	79,262			$	-			$	-			$	79,262
Derivative liability			628,200				-				-				628,200
Balance - December 31, 2017		$	707,462			$	-			$	-			$	707,462

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants with “down-round protection” as the Company is unable to determine if it will have sufficient authorized common stock to settle such arrangements and warrants deemed to be derivative liabilities according to the Company’s sequencing policy in accordance with ASC 815-40-35-12.

 

Assumptions utilized in the valuation of Level 3 liabilities are described as follows:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2018				2017				2018				2017
Risk-free interest rate			2.12% - 2.91	%			1.04% - 1.77	%			1.73% - 2.91	%			0.76% - 1.93	%
Expected term (years)			0.08 - 4.41				0.25 - 4.25				0.08 - 5.00				0.25 - 4.76
Expected volatility			110	%			110	%			110	%			110	%
Expected dividends			0.00	%			0.00	%			0.00	%			0.00	%

 

The expected term used is the contractual life of the instrument being valued. Since the Company’s stock has not been publicly traded for a sufficiently long period of time or with significant volume, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.

 

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, 2018:

 

		Accrued				Derivative
		Compensation				Liabilities				Total
Balance - December 31, 2017		$	79,262			$	628,200			$	707,462
Accrued compensation - warrants			57,000				49,600				106,600
Change in fair value			177				(390,400	)			(390,223	)
Balance - September 30, 2018		$	136,439			$	287,400			$	423,839

The Company’s significant financial instruments such as cash, accounts payable, accrued expenses and notes payable were deemed to approximate fair value due to their short-term nature. See Note 5, Notes Payable, for details associated with the issuance of warrants which were deemed to be derivative liabilities.

Note 5 – Notes Payable

a)

On February 21, 2018, the Company issued two notes payable in the aggregate principal amount of $400,000 and warrants for the purchase of a total of 240,000 shares of common stock at $0.75 per share for a period of five years. These notes did not accrue interest, matured on May 21, 2018, and had an effective interest rate of 40% per annum.  The warrants were 100% vested upon issuance, valued at $39,700 on the date of issuance, and recorded as a debt discount. The discount was amortized to expense over the term of the notes.

b)

On February 26, 2018, the Company issued a note payable in the aggregate principal amount of $100,000 and a warrant for the purchase of a total of 60,000 shares of common stock at $0.75 per share for a period of five years. The note did not accrue interest, matured on May 26, 2018, and had an effective interest rate of 40% per annum.  The warrant was 100% vested upon issuance, valued at $9,900 on the date of issuance, and recorded as a debt discount. The discount was amortized to expense over the term of the note.

Note 6 – Stockholders’ Deficiency

On March 3, 2018, the Company raised $50,000 through the sale of 6,667 shares of Series A Preferred Stock at $7.50 per share.

On August 21 and September 30, 2018, the Board approved the extension of the PPM through September 30, 2018 and November 28, 2018, respectively.

 

On August 21, 2018 and pursuant to the terms of the Series A Preferred Stock Certificate of Designation, the Board approved the issuance of 431,313 shares of common stock as payment-in-kind at the rate of $0.75 per share to reduce the accrued preferred dividend liability by $323,484.

Note 7 – Related Party Transactions

In 2011, the Company entered into a Research and License Agreement with Yeda for Veto Cell technology. As Yeda is a founder and a significant shareholder of the Company, it is a related party.

In connection with certain March 2018 amendments to the agreement, the provision for the payment of $200,000 in connection with reaching an equity financing threshold was permanently eliminated and the research budget was reduced such that the agreement now requires the following payments by the Company:

 

During the three months ended September 30, 2018 and 2017, the Company recorded research and development expense of $72,527 and $200,000, respectively, and during the nine months ended September 30, 2018 and 2017, the Company recorded research and development expense of $375,151 and $600,000, respectively, in connection with the agreement with Yeda.

Note 8 – Subsequent Events

 

 

		For The Three Months Ended June 30, 2018												For The Six Months Ended June 30, 2018
		As Reported				Adjustment				As Revised				As Reported				Adjustment				As Revised
Condensed Consolidated Statements of Operations:
Total Other Income (Expense)		$	63,178			$	(80,000	)		$	(16,822	)		$	11,106			$	(80,000	)		$	(68,894	)
Net Loss		$	(360,729	)		$	(80,000	)		$	(440,729	)		$	(1,072,913	)		$	(80,000	)		$	(1,152,913	)
Net Loss Applicable to Common Stockholders		$	(470,193	)		$	(80,000	)		$	(550,193	)		$	(1,289,873	)		$	(80,000	)		$	(1,369,873	)
Net Loss Per Share - Basic and Diluted		$	(0.02	)						$	(0.02	)		$	(0.05	)						$	(0.05	)
Weighted Average Number of  Common Shares Outstanding
- Basic and Diluted			27,393,071				-				27,393,071				27,393,071				-				27,393,071

 

		For The Six Months Ended June 30, 2018
		As Reported				Adjustment				As Revised
Condensed Consolidated Statement of Cash Flows:
Cash Flows From Operating Activities:
Net Loss		$	(1,072,913	)		$	(80,000	)		$	(1,152,913	)
Adjustments to reconcile net loss to net cash used in operating activities		$	154,404			$	80,000			$	234,404
Net Cash Used In Operating Activities		$	(918,509	)		$	-			$	(918,509	)

 

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, 2018 and for the three and nine months ended September 30, 2018 and 2017 should be read in conjunction with our unaudited financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 as filed with the SEC on July 25, 2018.

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 filed with the SEC on July 25, 2018.

Overview

We are a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance.  Our technology platform has been extensively tested by in vitro studies and confirmed in animal trials.  We continue to move forward towards clinical trials as more fully discussed in our Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 which was filed with the SEC on July 25, 2018.

 

Consolidated Results of Operations

Three Months Ended September 30, 2018 Compared with the Three Months Ended September 30, 2017 

Research and Development

 

Research and development expense was $128,986 and $352,658 for the three months ended September 30, 2018 and 2017, respectively, a decrease of $223,672, or 63%, related to approximately $127,000 of decreased research expenses associated with our agreement with Yeda as we prepare for development in order to commence human clinical trials in the US, as well as decreased patent-related expenses.

 

General and Administrative

 

General and administrative expense was $359,660 and $202,480 for the three months ended September 30, 2018 and 2017, respectively, an increase of $157,180, or 78%, primarily related to increases in external consulting and professional fees in the 2018 period, which was due in part by our financing activities in 2017 which allowed us to increase operations and file our delinquent SEC reports in 2018.

 

Change in Fair Value of Derivative Liabilities

 

The change in fair value of derivative liabilities for the three months ended September 30, 2018 and 2017 was a gain of $115,500 and a gain of $149,200, respectively, which represents the changes in fair value of the warrants and conversion options that were deemed to be derivative liabilities. Such changes in fair value were attributable to warrants and conversion options drawing closer to their expiration dates.

Interest Expense

 

Nine Months Ended September 30, 2018 Compared with the Nine Months Ended September 30, 2017 

Research and Development

 

Research and development expense was $541,148 and $1,022,903 for the nine months ended September 30, 2018 and 2017, respectively, a decrease of $481,755, or 47%, related to approximately $225,000 of decreased research expenses associated with our agreement with Yeda as we prepare for development in order to commence human clinical trials in the US, as well as decreased patent-related expenses.

 

General and Administrative

 

General and administrative expense was $1,031,517 and $662,455 for the nine months ended September 30, 2018 and 2017, respectively, an increase of $369,062, or 56%, primarily related to increases in external consulting and professional fees in the 2018 period, which was due in part by our financing activities in 2017 which allowed us to increase operations and file our delinquent SEC reports in 2018.

 

Change in Fair Value of Derivative Liabilities

 

The change in fair value of derivative liabilities for the nine months ended September 30, 2018 and 2017 was a gain of $390,400 and a gain of $452,880, respectively, which represents the changes in fair value of the warrants and conversion options that were deemed to be derivative liabilities. Such changes in fair value were attributable to warrants and conversion options drawing closer to their expiration dates.

 

Interest Expense

 

During the nine months ended September 30, 2017, we recognized $725,355 of losses on exchanges of notes payable for preferred shares. The losses recognized represent the excess value of the preferred shares as compared to the carrying value of the notes payable.

Liquidity and Going Concern

 

Our cash balances and working capital deficiencies as of September 30, 2018 and December 31, 2017 were as follows:

 

Our ability to continue our operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. We may need to incur additional liabilities with certain related parties to sustain our existence. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of our financial statements.

 

There can be no assurances that we will be successful in generating additional cash from equity or debt financings or other sources to be used for operations. Should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail certain or all operational activities and/or contemplate the sale of our assets, if necessary.

During the nine months ended September 30, 2018 and 2017, our sources and uses of cash were as follows:

 

Net Cash Used in Operating Activities

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2018 and 2017 was $1,050,000 and $1,410,705, respectively. The net cash provided by financing activities during the nine months ended September 30, 2018 was attributable to $500,000 received from the issuance of notes payable, $500,000 received as an advance from an investor who indicated plans to invest such funds in Series A Preferred Stock, and $50,000 of received from the issuance of Series A preferred stock. The net cash provided by financing activities during the nine months ended September 30, 2017 was attributable to $135,000 received from the issuance of notes payable, $225,000 received from the issuance of notes payable to related parties, and $1,050,705 received from the issuance of Series A preferred stock.

Off-Balance Sheet Arrangements 

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

For a description of our critical accounting policies, see Note 3, Summary of Significant Accounting Policies, in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

 

Recent Accounting Standards

 

For a description of our recently issued and adopted accounting pronouncements, see Note 3, Summary of Significant Accounting Policies, in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.

In connection with the preparation of this Quarterly Report, management, with the participation of our Principal Executive and Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive and Financial Officer concluded that, as of September 30, 2018, our disclosure controls and procedures were not effective due to the material weakness described herein.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weakness:

Due to a lack of financial resources, we were unable to file our annual reports on Form 10-K for the years ended December 31, 2017 and December 31, 2016 and the quarterly reports on Form 10-Q for the periods ended March 31, 2017, June 30, 2017, September 30, 2017, March 31, 2018 and June 30, 2018 on a timely basis. Management evaluated the lack of financial resources in its assessment of our reporting controls and procedures and has concluded that the control deficiency represented a material weakness.

Planned Remediation

Management’s efforts to remediate the material weakness include raising funds and to seek new resources to alleviate this material weakness and to file all necessary regulatory reports on a timely basis. There can be no assurance that the necessary funds and resources will be obtained and the material weakness will be alleviated.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

 

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the years ended December 31, 2017 and 2016 which was filed with the SEC on July 25, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

Item 3. Defaults Upon Senior Securities.

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

Item 5. Other Information.

 

None.

Item 6. Exhibits.

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.