Cell Source, Inc. - Quarter Report: 2019 September (Form 10-Q)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any news or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

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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, 2019 and the condensed consolidated results of its operations and cash flows for the three and nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year ending December 31, 2019 or any other period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2018 and for the year then ended which were included in the Company's Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019.

Note 2 - Going Concern and Management Plans

 

During the nine months ended September 30, 2019, the Company had not generated any revenues, had a net loss of approximately $3,899,000 and had used cash in operations of approximately $1,724,000. As of September 30, 2019, the Company had a working capital deficiency of approximately $5,915,000 and an accumulated deficit of approximately $20,570,000. Subsequent to September 30, 2019 and as more fully described in Note 9, Subsequent Events, the Company received proceeds of $500,000 from an advance payable and aggregate proceeds of $329,505 through the sale of 43,937 shares of Series A Convertible Preferred Stock at $7.50 per share.

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

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

Note 3 - Summary of Significant Accounting Policies

 

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, 2019 and 2018 includes the weighted average impact of warrants to purchase an aggregate of 2,043,835 shares of common stock because their exercise price was determined to be nominal.

 

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

 

		September 30,
		2019				2018
Options			3,782,004				-
Warrants			6,459,157				11,915,481
Convertible notes			1,172,144				1,549,810
Convertible preferred stock			11,687,590				6,504,570
Total			23,100,895				19,969,861

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, 2019. However, such conversion rates are subject to adjustment under certain circumstances, which may result in the issuance of common shares greater than the amount indicated.

Recently Adopted Accounting Pronouncements

 

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, 2019 and December 31, 2018, and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value of its restricted common stock during the three and nine months ended September 30, 2019 based upon observations of the recent sales of Preferred Stock convertible into common stock as well as the thinly traded volume and closing prices of its common stock. On June 7, 2018, the Company obtained a third-party valuation of its common stock as of December 31, 2017. As the nature of the Company's operations has not significantly changed since the date of the valuation and the Company has continued to raise capital during 2018 and 2019 at the same valuation as the capital raised during the year ended December 31, 2017, management’s estimate of the fair value of its restricted common stock has not changed during the three and nine months ended September 30, 2019.

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

 

 

 

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, 2019 and December 31, 2018 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

						Quoted Prices
						In Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Liabilities				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Accrued compensation - common stock		$	39,250			$	-			$	-			$	39,250
Accrued compensation - warrants			55,089				-				-				55,089
Accrued compensation - warrants - related party			103,526				-				-				103,526
Derivative liabilities			380,100				-				-				380,100
Balance - September 30, 2019		$	577,965			$	-			$	-			$	577,965
Accrued compensation - common stock		$	37,500			$	-			$	-			$	37,500
Accrued compensation - warrants			24,741				-				-				24,741
Accrued compensation - warrants - related party			55,083				-				-				55,083
Derivative liabilities			200,500				-				-				200,500
Balance - December 31, 2018		$	317,824			$	-			$	-			$	317,824

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants deemed to be derivative liabilities according to the Company’s sequencing policy in accordance with ASC 815-40-35-12, the conversion option of convertible notes payable, and an accrued obligation to issue warrants and common stock.

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all Level 3 liabilities measured at fair value on a recurring basis using unobservable inputs during the nine months ended September 30, 2019:

 

		Accrued				Derivative
		Compensation				Liabilities				Total
Balance - December 31, 2018		$	117,324			$	200,500			$	317,824
Issuance of warrants and conversion options			-				15,600				15,600
Extinguishment of conversion option			-				(1,000	)			(1,000	)
Warrant modification			-				283,500				283,500
Accrued compensation - common stock			1,750				-				1,750
Accrued compensation - warrants			30,604				-				30,604
Accrued compensation - warrants - related party			49,017				-				49,017
Change in fair value			(830	)			(118,500	)			(119,330	)
Balance - September 30, 2019		$	197,865			$	380,100			$	577,965

As of September 30, 2019, the Company had an obligation to issue 150,000 shares of common stock to a service provider. The shares had a fair value of $37,500, which was a component of accrued compensation on the condensed consolidated balance sheet.

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

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2019				2018				2019				2018
Risk-free interest rate			1.55%-1.91	%			2.12%-2.91	%			1.17%-2.44	%			1.73%-2.91	%
Expected term (years)			0.11-5.00				0.08 - 4.41				0.02-5.00				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.

 

Note 5 – Notes Payable and Convertible Notes Payable

 

During the three months ended September 30, 2019 and 2018, the Company recorded interest expense of $26,418 and $30,923, respectively, and interest expense for related party debt of $683 and $756, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded interest expense of $159,202 and $124,774, respectively, and interest expense for related party debt of $1,977 and $49,244, respectively.

During the three months ended September 30, 2019 and 2018, the Company recorded amortization of debt discount of $3,566 and $0, respectively, and amortization of debt discount for related party debt of $0 and $0, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded amortization of debt discount of $10,095 and $173,099, respectively, and amortization of debt discount for related party debt of $0 and $28,356, respectively.

As of September 30, 2019 and through the date of this filing, notes payable with principal amounts totaling $1,983,000 were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2019. Such notes continue to accrue interest and all relevant penalties have been accrued as of September 30, 2019. Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Note 8, Commitments and Contingencies – Litigation for additional details. The Company is in negotiations with all holders of notes payable to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.

As of September 30, 2019 and December 31, 2018, the Company had $270,025 and $302,974, respectively, of accrued interest and penalties related to notes payable, which is included with accrued interest and accrued interest – related parties on the condensed consolidated balance sheets.

Notes Payable

On March 31, 2019, holders of notes with aggregate principal amounts of $400,000 and aggregate late payment penalties of $40,000 exchanged those notes for 70,400 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6, Stockholders’ Deficiency - Series A Convertible Preferred Stock, this difference of $88,000 was recorded in the condensed consolidated statement of operations as a loss on exchange of notes payable for Series A Convertible Preferred Stock.

On May 15, 2019, the Company issued a note payable in the principal amount of $70,000. The note did not accrue interest and matured on May 25, 2019. The note was repaid in full on May 22, 2019. In connection with the note issuance, the Company issued a five-year immediately vested warrant for the purchase of 35,000 shares of common stock at $0.75 per share. The warrant had an issuance date fair value of $5,800, which was recorded as a debt discount and was amortized over the term of the note.

On July 29, 2019, the Company issued a note payable in the principal amount of $50,000. The note does not accrue interest and matures on January 29, 2020. In connection with the note issuance, the Company issued to the noteholder a five-year immediately vested warrant for the purchase of 50,000 shares of common stock at $0.75 per share. The warrant had an issuance date fair value of $8,200, which was recorded as a debt discount and was amortized over the term of the note.

 

Convertible Notes Payable

On March 31, 2019, holders of notes with aggregate principal amounts of $290,000 and aggregate accrued interest of $97,784 exchanged those notes for 74,967 shares of the Company's Series A Convertible Preferred Stock. The value of the shares issued exceeded the carrying value of the debt and accrued interest and, as more fully discussed in Note 6, Stockholders’ Deficiency - Series A Convertible Preferred Stock, this difference of $174,470 was recorded in the condensed consolidated statements of operations as a loss on exchange of notes payable for Series A Convertible Preferred Stock.

On May 20, 2019, the Company issued a convertible note payable in the principal amount of $103,000 for cash proceeds of $100,000 which matures on November 20, 2019. The note accrues interest at 8% per annum, of which, twelve months of interest was guaranteed.  The note also includes certain prepayment penalties that provide for payments ranging from 115% to 140% of the then outstanding principal and interest. The note is convertible at the option of the holder into common stock at either (i) $0.75 per share or (ii) in the event of a default, at 75% of the volume-weighted average price in the ten consecutive trading days prior to the conversion date. The conversion option had an issuance date fair value of $1,600 and, together with the original issuance discount of $3,000, was recorded as a debt discount and was amortized to expense over the term of the note. In accordance with the Company's sequencing policy, this conversion option was determined to be a derivative liability. On June 27, 2019, a third-party repaid the note in full on behalf of the Company, which payment included a 20% prepayment penalty for an aggregate total payment of $133,488, which has been recorded as accrued expenses on the Company’s condensed consolidated balance sheet as of September 30, 2019. The Company determined the transaction was a note extinguishment and recorded a loss on extinguishment of debt of $1,504 in the condensed consolidated statements of operations.

On July 2, 2019, the Company issued a convertible note payable in the principal amount of $68,000. The note accrues interest at 12% per annum and matures on July 2, 2020 and any amount of principal or interest which is not paid at maturity shall accrue interest at 22% per annum. The note also includes certain prepayment penalties that provide for payments ranging from 115% to 140% of the then outstanding principal and interest. The note is convertible at the option of the holder into common stock at 61% of the lowest trading price during the ten consecutive trading days prior to the conversion date at any time during the period which is 180 days following the issuance date of the convertible note and ending on the later of (i) July 2, 2020 or (ii) in the event of default, the date of the payment of the default amount. The convertible note contained an original issuance discount of $3,000 which was recorded as a debt discount and will be amortized to expense over the term of the note.

 

Note 6 – Stockholders’ Deficiency

Series A Convertible Preferred Stock

The Board of Directors extended the expiration date of the Private Placement Memorandum (“PPM”), under which the Company continues to raise up to $10,000,000 via the sale of up to 1,333,333 shares of Series A Convertible Preferred Stock at $7.50 per share, on various dates in 2019, the latest of which occurred on September 26, 2019 when the Board of Directors further extended the expiration date of the PPM to November 29, 2019.

On March 31, 2019, in connection with the exchange of various notes payable, accrued interest and late payment penalties totaling $827,784, the Company issued 145,367 shares of Series A Convertible Preferred Stock under the terms of the PPM with a total value of $1,090,254, as more fully described in Note 5, Notes Payable and Convertible Notes Payable. As the value of those shares exceeded the carrying value of the note payable, accrued interest and late payment penalties, the difference of $262,470 was recorded in the condensed consolidated statement of operations during the nine months ended September 30, 2019 as a loss on exchange of notes payable for Series A Convertible Preferred Stock.

On various dates from January 7, 2019 through August 20, 2019, the Company received proceeds of $1,223,269 through the sale of 163,101 shares of Series A Convertible Preferred Stock at $7.50 per share.

Adoption of Equity Incentive Plan and Grant of Option

On August 13, 2019, the Company’s Board of Directors approved the adoption of the Company’s 2019 Equity Incentive Plan (the “Plan”).  A total of 7,900,000 shares of common stock are reserved for issuance under the Plan, which permits the Board of Directors to issue stock options, stock appreciation rights, restricted stock, restricted stock units, performance and other awards to employees, consultants and directors of the Company.

On the same date, the Board of Directors approved the grant under the Plan of ten-year stock options to purchase an aggregate of 3,782,004 shares of common stock at an exercise price of $0.75 per share to a consultant to the Company. The 3,782,004 shares vest immediately on the date of grant. The stock options had a grant date value of $825,100, which the Company recognized as expense on the date of the grant.

Stock-Based Compensation

On July 20, 2019, the Company extended the expiration dates of certain warrants to purchase an aggregate of 377,500 shares of common stock at an exercise price of $0.75 per share from July 2019 to July 2023.

As a result of the above modifications, the Company recognized warrant modification expense of $54,100 and $283,500 during the three and nine months ended September 30, 2019, respectively.

Note 7 – Related Party Transactions

 

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

During the three months ended September 30, 2019 and 2018, the Company recorded research and development expense of $33,333 and $72,527, respectively, and during the nine months ended September 30, 2019 and 2018, the Company recorded research and development expense of $83,333 and $375,151, respectively, in connection with the agreement with Yeda.

On January 7, 2019, the Company received proceeds of $50,000 from the Chairman of the Board through the sale of 6,667 shares of Series A Convertible Preferred Stock at $7.50 per share, which amount is included in the issuances disclosed in Note 6, Stockholders’ Deficiency.

Note 8 – Commitments and Contingencies

 

The Company recognized $249,171 and $1,230,441 of research and development expenses during the three and nine months ended September 30, 2019, respectively, associated with services provided by MD Anderson in the periods, under the two agreements with MD Anderson dated November 2018 and February 2019. The Company did not recognize any expense pursuant to the agreements with MD Anderson for the three and nine months ended September 30, 2018. As of September 30, 2019, the Company had $507,316 of accrued research and development expenses pursuant to the agreements with MD Anderson, which are included within accounts payable and accrued expenses on the condensed consolidated balance sheet.

Note 9 – Subsequent Events

Series A Convertible Preferred Stock

On various dates from October 3, 2019 through October 28, 2019, the Company received proceeds of $329,505 through the sale of 43,937 shares of Series A Convertible Preferred Stock at $7.50 per share.

Advance Payable

On October 28, 2019, the Company received an advance of $500,000 from an investor who indicated plans to enter into a convertible promissory note agreement that is anticipated to bear interest at a rate of 8% per annum.

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, 2019 and for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction with our unaudited financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019.

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A (“Risk Factors”) of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019.

Overview

We are a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance.  Our technology platform has been extensively tested by in vitro studies and confirmed in animal trials. MD Anderson has commenced a clinical trial using our Anti-Viral Veto Cell and is actively recruiting patients. The first patient has already been treated.

Consolidated Results of Operations

Three Months Ended September 30, 2019 Compared with the Three Months Ended September 30, 2018 

Research and Development

 

Research and development expense was $1,192,090 and $128,986 for the three months ended September 30, 2019 and 2018, respectively, an increase of $1,063,104, or 824%, primarily related to the commencement of research by MD Anderson and stock-based compensation expense.

 

Selling, General and Administrative

 

Selling, general and administrative expense was $244,609 and $359,660 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $115,051, or 32%, primarily related to the expiration of a consulting agreement with a financial and marketing advisory firm in April 2019.

 

Change in Fair Value of Derivative Liabilities

 

The change in fair value of derivative liabilities for the three months ended September 30, 2019 and 2018 was a gain of $33,500 and a gain of $115,500, respectively, primarily due to the warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.

 

Interest Expense

 

Interest expense for the three months ended September 30, 2019 and 2018 was $27,101 and $31,679, respectively, a decrease of $4,578, or 14%, primarily as a result of lower outstanding notes payable balances.

 

During the three months ended September 30, 2019, we recognized $54,100 of warrant modification expense related to the extension of the expiration date of certain warrants.

Nine Months Ended September 30, 2019 Compared with the Nine Months Ended September 30, 2018 

Research and Development

 

Research and development expense was $2,352,602 and $541,148 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $1,811,454, or 335%, primarily related to the commencement of research by MD Anderson and stock based compensation expense.

 

During the nine months ended September 30, 2019, we recognized $283,500 of warrant modification expense on the extension of an expiration date of certain warrants.

During the nine months ended September 30, 2019, we recognized $262,470 of loss on extinguishment of debt. The losses recognized represent the value of the preferred shares in excess of the carrying value of the notes payable.

During the nine months ended September 30, 2019, we recognized $1,504 of loss on extinguishment of debt.

During the nine months ended September 30, 2019, we recognized $38,427 of gain on forgiveness of accrued expenses. The gain recognized represents the forgiveness of accrued payroll expenses and director fees due by a former member of the Board of Directors.

Liquidity and Going Concern

 

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

 

		September 30,				December 31,
		2019				2018
		(unaudited)
Cash		$	8,831			$	18,934
Working capital deficiency		$	(5,914,548	)		$	(4,920,171	)

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, 2019 and 2018, our sources and uses of cash were as follows:

 

Net Cash Used in Operating Activities

 

We experienced negative cash flows from operating activities for the nine months ended September 30, 2019 and 2018 in the amounts of $1,723,872 and $1,412,927, respectively. The net cash used in operating activities for the nine months ended September 30, 2019 was primarily due to cash used to fund a net loss of $3,899,460, adjusted for net non-cash income in the aggregate amount of $1,306,283, and by $869,305 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, 2018 was primarily due to cash used to fund a net loss of $1,557,738, adjusted for net non-cash income in the aggregate amount of $188,945, partially offset by $333,756 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, 2019 and 2018 was $1,713,769 and $1,050,000, respectively. The net cash provided by financing activities during the nine months ended September 30, 2019 was attributable to $1,223,269 of proceeds received from the issuance of Series A preferred stock, $275,000 of proceeds from advances payable and $215,000 of net proceeds from debt financings. 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 from advances payable, and $50,000 of 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.

 

Item 3.  Quantitative And Qualitative Disclosures About Market Risk.

 

Not applicable.

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

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, 2019 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.

 

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 year ended December 31, 2018, which was filed with the SEC on April 1, 2019.

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

 

On July 2, 2019, the Company issued a convertible promissory note in the principal amount of $68,000. The note matures on July 2, 2020 and bears interest at a rate of 12% per annum.  The holder has the right to convert the note into common stock any time beginning on the six month anniversary of the date of the note at a conversion price equal to 61% of the lowest market price of the common stock during the 10 trading day period prior to the conversion.  The note contains a prepayment penalty of 115% of the principal amount if payment is made during the 30 days following the date of issuance which increases by five percent (5%) during each 30-day period thereafter until the maturity date.  The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 as amended (the “Securities Act”) in connection with this transaction.

On July 29, 2019, the Company issued a five-year warrant to purchase 50,000 shares of common stock having an exercise price of $0.75 per share to the purchaser of a note in the principal amount of $50,000. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with this transaction.

The Company sold a total of 13,333 shares of Series A Preferred Stock to accredited investors at a purchase price of $7.50 per share during the three months ended September 30, 2019. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.

On August 13, 2019, the Company granted an option to purchase 3,782,004 shares of common stock at an exercise price of $0.75 per share to a consultant to the Company. The Company relied upon the exemption provided by Rule 701 of the Securities Act in connection with this transaction.

The Company sold a total of 43,937 shares of Series A Preferred Stock to accredited investors at a purchase price of $7.50 per share during October 2019. The Company relied upon the exemption provided by Rule 506 and Section 4(2) of the Securities Act in connection with these transactions.

Item 3. Defaults Upon Senior Securities.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

Item 5. Other Information.

 

Item 6. Exhibits.

 

31		Certification of principal executive and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of principal executive and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

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.