Cell Source, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number: 000-55413
Cell Source, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 32-0379665 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
57 West 57th Street, Suite 400
New York, NY 10019
(Address of principal executive offices)
(646) 416-7896
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| 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):
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
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 ☒
As of November 6, 2023, the registrant had shares of $0.001 par value common stock outstanding.
CELL SOURCE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
CELL SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 2,582 | $ | 222,665 | ||||
| Prepaid expenses | 242,375 | 164,175 | ||||||
| Other current assets | 3,400 | 23,005 | ||||||
| Total Assets | $ | 248,357 | $ | 409,845 | ||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,580,863 | $ | 680,325 | ||||
| Accrued expenses | 1,126,536 | 1,485,857 | ||||||
| Accrued expenses - related party | 130,000 | 86,500 | ||||||
| Accrued interest | 962,183 | 809,426 | ||||||
| Accrued interest - related parties | 1,443,452 | 987,310 | ||||||
| Accrued compensation | 885,665 | 849,898 | ||||||
| Notes payable, net of debt discount of $ and $ as of September 30, 2023 and December 31, 2022, respectively | 681,093 | 768,126 | ||||||
| Notes payable - related parties | 150,000 | 150,000 | ||||||
| Convertible notes payable, net of debt discount of $ and $ as of September 30, 2023 and December 31, 2022, respectively | 1,328,006 | 908,311 | ||||||
| Convertible notes payable - related parties, net of debt discount of $0 and $147,230 as of September 30, 2023 and December 31, 2022, respectively | 7,315,036 | 6,077,770 | ||||||
| Financing liability | 130,040 | |||||||
| Advances payable | 135,000 | 135,000 | ||||||
| Advances payable - related party | 100,000 | 100,000 | ||||||
| Accrued dividend payable | 310,630 | 5,217 | ||||||
| Total Liabilities | 16,278,504 | 13,043,740 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ Deficiency: | ||||||||
| Preferred stock, $ par value, shares authorized | ||||||||
| Series A Convertible Preferred Stock, shares designated, shares issued and outstanding as of September 30, 2023 and December 31, 2022; liquidation preference of $10,294,818 and $10,066,463 and as of September 30, 2023 and December 31, 2022, respectively | 1,342 | 1,342 | ||||||
| Series B Convertible Preferred Stock, shares designated, shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively; liquidation preference of $0 as of September 30, 2023 and December 31, 2022 | ||||||||
| Series C Convertible Preferred Stock, shares designated, and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively; liquidation preference of $4,073,102 and $3,776,039 as of September 30, 2023 and December 31, 2022, respectively | 532 | 503 | ||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 38,495 | 36,082 | ||||||
| Additional paid-in capital | 24,546,969 | 23,674,354 | ||||||
| Accumulated deficit | (40,617,485 | ) | (36,346,176 | ) | ||||
| Total Stockholders’ Deficiency | (16,030,147 | ) | (12,633,895 | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | 248,357 | $ | 409,845 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
CELL SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | $ | 500,005 | $ | 468,005 | $ | 1,175,093 | $ | 1,487,520 | ||||||||
| Research and development - related party | 14,500 | 14,500 | 43,500 | 43,500 | ||||||||||||
| General and administrative | 480,875 | 533,538 | 2,097,801 | 1,571,572 | ||||||||||||
| Total Operating Expenses | 995,380 | 1,016,043 | 3,316,394 | 3,102,592 | ||||||||||||
| Loss From Operations | (995,380 | ) | (1,016,043 | ) | (3,316,394 | ) | (3,102,592 | ) | ||||||||
| Other (Expense) Income: | ||||||||||||||||
| Interest expense | (62,463 | ) | (41,581 | ) | (138,937 | ) | (153,306 | ) | ||||||||
| Interest expense - related parties | (199,628 | ) | (138,373 | ) | (496,206 | ) | (386,775 | ) | ||||||||
| Amortization of debt discount | (29,912 | ) | (23,561 | ) | (107,487 | ) | (113,249 | ) | ||||||||
| Amortization of debt discount - related party | (50,755 | ) | (32,748 | ) | (254,205 | ) | (74,553 | ) | ||||||||
| Gain on extinguishment of note payable | 41,920 | |||||||||||||||
| Total Other Expense | (342,758 | ) | (236,263 | ) | (954,915 | ) | (727,883 | ) | ||||||||
| Net Loss | (1,338,138 | ) | (1,252,306 | ) | (4,271,309 | ) | (3,830,475 | ) | ||||||||
| Dividend attributable to Series A and Series C preferred stockholders | (309,150 | ) | (299,827 | ) | (907,516 | ) | (869,715 | ) | ||||||||
| Net Loss Applicable to Common Stockholders | $ | (1,647,288 | ) | $ | (1,552,133 | ) | $ | (5,178,825 | ) | $ | (4,700,190 | ) | ||||
| Net Loss Per Common Share - Basic and Diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted Average Common Shares Outstanding - | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
CELL SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
(Unaudited)
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 | ||||||||||||||||||||||||||||||||||||
| Convertible Preferred | Convertible Preferred | Total | ||||||||||||||||||||||||||||||||||
| Stock - Series A | Stock - Series C | Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Paid-In Capital | Deficit |
Deficiency | ||||||||||||||||||||||||||||
| Balance, January 1, 2023 | 1,342,195 | $ | 1,342 | 502,776 | $ | 503 | 36,081,758 | $ | 36,082 | $ | 23,674,354 | $ | (36,346,176 | ) | $ | (12,633,895 | ) | |||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | 6,667 | 7 | 2,747 | 3 | 52,050 | 52,060 | |||||||||||||||||||||||||||||
| Series A and Series C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (297,517 | ) | (297,517 | ) | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | 21,202 | 21,202 | |||||||||||||||||||||||||||||||
| Conversion of Series C Convertible Preferred Stock into common stock | - | (10,000 | ) | (10 | ) | 100,000 | 100 | (90 | ) | |||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Common stock | - | - | 1,000,000 | 1,000 | 329,000 | 330,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,691,567 | ) | (1,691,567 | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 1,342,195 | $ | 1,342 | 499,443 | $ | 500 | 37,184,505 | $ | 37,185 | $ | 23,778,999 | $ | (38,037,743 | ) | $ | (14,219,717 | ) | |||||||||||||||||||
| Series A and Series C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (300,849 | ) | (300,849 | ) | |||||||||||||||||||||||||||||
| Payment of dividends in kind | - | - | 802,880 | 802 | 601,300 | 602,102 | ||||||||||||||||||||||||||||||
| Issuance of common stock in connection with extinguishment of note payable | - | - | 176,000 | 176 | 57,904 | 58,080 | ||||||||||||||||||||||||||||||
| Issuance of warrants in connection with: | ||||||||||||||||||||||||||||||||||||
| Satisfaction of accrued interest | - | - | - | 40,167 | 40,167 | |||||||||||||||||||||||||||||||
| Issuance of convertible notes payable | - | - | - | 75,462 | 75,462 | |||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Warrants | - | - | - | 40,600 | 40,600 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,241,604 | ) | (1,241,604 | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | 1,342,195 | $ | 1,342 | 499,443 | $ | 500 | 38,163,385 | $ | 38,163 | $ | 24,293,583 | $ | (39,279,347 | ) | $ | (14,945,759 | ) | |||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | 62,667 | 62 | 32,232 | 32 | 494,040 | 494,134 | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | 45,008 | 45,008 | |||||||||||||||||||||||||||||||
| Conversion of Series C Convertible Preferred Stock into common stock | - | (30,000 | ) | (30 | ) | 300,000 | 300 | (270 | ) | |||||||||||||||||||||||||||
| Series A and Series C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (309,150 | ) | (309,150 | ) | |||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Warrants | - | - | - | 23,758 | 23,758 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,338,138 | ) | (1,338,138 | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 1,342,195 | $ | 1,342 | 532,110 | $ | 532 | 38,495,617 | $ | 38,495 | $ | 24,546,969 | $ | (40,617,485 | ) | $ | (16,030,147 | ) | |||||||||||||||||||
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 | |||||||||||||||||||||||||||||||||||
| Convertible Preferred | Convertible Preferred | Total | ||||||||||||||||||||||||||||||||||
| Stock - Series A | Stock - Series C | Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Paid-In Capital |
Deficit |
Deficiency | ||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 1,342,195 | $ | 1,342 | 272,021 | $ | 272 | 34,360,546 | $ | 34,361 | $ | 21,316,318 | $ | (31,178,428 | ) | $ | (9,826,135 | ) | |||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | 183,422 | 183 | 76,530 | 76 | 1,432,836 | 1,433,095 | |||||||||||||||||||||||||||||
| Series A and C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (324,917 | ) | (324,917 | ) | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | 8,043 | 8,043 | |||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Warrants | - | - | - | 5,372 | 5,372 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,292,575 | ) | (1,292,575 | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 1,342,195 | 1,342 | 455,443 | 455 | 34,437,076 | 34,437 | 22,437,652 | (32,471,003 | ) | (9,997,117 | ) | |||||||||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | 14,666 | 15 | 5,964 | 6 | 114,452 | 114,473 | |||||||||||||||||||||||||||||
| Series A and C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (244,971 | ) | (244,971 | ) | |||||||||||||||||||||||||||||
| Payment of dividends in kind | - | - | 796,629 | 797 | 596,634 | 597,431 | ||||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | 49,219 | 49,219 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,285,594 | ) | (1,285,594 | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 1,342,195 | 1,342 | 470,109 | 470 | 35,239,669 | 35,240 | 22,952,986 | (33,756,597 | ) | (10,766,559 | ) | |||||||||||||||||||||||||
| Conversion of convertible notes payable and accrued interest into Series C Convertible Preferred Stock and common stock | - | 12,667 | 13 | 5,181 | 5 | 98,868 | 98,886 | |||||||||||||||||||||||||||||
| Series A and C Convertible Preferred Stock dividends: | ||||||||||||||||||||||||||||||||||||
| Accrual of earned dividends | - | - | - | (299,827 | ) | (299,827 | ) | |||||||||||||||||||||||||||||
| Issuance of warrants in connection with issuance of convertible notes payable | - | - | - | 76,509 | 76,509 | |||||||||||||||||||||||||||||||
| Warrants issued in satisfaction of accrued interest | - | - | - | 114,727 | 114,727 | |||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||
| Options | - | - | - | 74,600 | 74,600 | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,252,306 | ) | (1,252,306 | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 1,342,195 | $ | 1,342 | 482,776 | $ | 483 | 35,244,850 | $ | 35,245 | $ | 23,017,863 | $ | (35,008,903 | ) | $ | (11,953,970 | ) | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
CELL SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (4,271,309 | ) | $ | (3,830,475 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on extinguishment of note payable | (41,920 | ) | ||||||
| Amortization of debt discount | 361,692 | 187,802 | ||||||
| Non-cash interest expense - warrants | 28,695 | 96,896 | ||||||
| Stock-based compensation: | ||||||||
| Options | 74,600 | |||||||
| Warrants | 63,709 | 5,190 | ||||||
| Common stock | 341,269 | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | 243,300 | (70,568 | ) | |||||
| Other current assets | 19,605 | (3,431 | ) | |||||
| Accounts payable | 900,538 | 451,179 | ||||||
| Accrued expenses | 53,697 | 187,597 | ||||||
| Accrued expenses - related parties | 43,500 | |||||||
| Accrued interest | 165,030 | 75,892 | ||||||
| Accrued interest - related parties | 441,446 | 346,061 | ||||||
| Accrued compensation | 25,147 | 63,846 | ||||||
| Net Cash Used In Operating Activities | (1,625,601 | ) | (2,415,411 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from issuance of convertible notes payable | 919,960 | 395,000 | ||||||
| Proceeds from issuance of convertible notes payable - related party | 677,018 | 2,000,000 | ||||||
| Proceeds from issuance of notes payable | 168,094 | |||||||
| Repayment of notes payable | (146,912 | ) | ||||||
| Repayment of financing liability | (191,460 | ) | (27,926 | ) | ||||
| Net Cash Provided By Financing Activities | 1,405,518 | 2,388,256 | ||||||
| Net Decrease In Cash | (220,083 | ) | (27,155 | ) | ||||
| Cash - Beginning of Period | 222,665 | 93,095 | ||||||
| Cash - End of Period | $ | 2,582 | $ | 65,940 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | 949 | $ | |||||
| Non-cash investing and financing activities: | ||||||||
| Accrual of earned preferred stock dividends | $ | (907,516 | ) | $ | (869,715 | ) | ||
| Common stock issued in connection with payment of Series A and C Convertible Preferred Stock dividends in-kind | $ | 602,102 | $ | 597,431 | ||||
| Financing of Directors and Officer’s insurance | $ | 321,500 | $ | |||||
| Conversion of Series C Convertible Preferred Stock into common stock | $ | 400 | $ | |||||
| Conversion of accrued expenses into note principal | $ | 413,018 | $ | |||||
| Accrual of warrant obligations in connection with issuance of notes payable | $ | 40,167 | $ | 232,697 | ||||
| Warrants issued in satisfaction of accrued warrant obligation | $ | (40,167 | ) | $ | ||||
| Issuance of warrants in connection with the issuance of notes payable | $ | 141,672 | $ | 133,771 | ||||
| Issuance of warrants in satisfaction of accrued interest | $ | $ | 114,727 | |||||
| Conversion of convertible notes payable and accrued interest into Series C Preferred Stock and common stock | $ | 546,194 | $ | 1,646,454 | ||||
| Extinguishment of note payable into common stock | $ | 58,080 | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Business Organization, Nature of Operations, Risks and Uncertainties and Basis of Presentation
Organization and Operations
Cell Source, Inc. (“Cell Source”, “CSI” or the “Company”) is a Nevada corporation formed on June 6, 2012 that is the parent company of Cell Source Limited (“CSL”), a wholly owned subsidiary which was founded in Israel in 2011 in order to commercialize a suite of inventions relating to certain cancer treatments. The Company is a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance. The Company’s lead prospective product is its patented Veto Cell immune system management technology, which is an immune tolerance biotechnology that enables the selective blocking of immune responses. CSL’s Veto Cell immune system management technology is based on technologies patented, owned, and licensed to CSL by Yeda Research and Development Company Limited, an Israeli corporation (“Yeda”) (see Note 8, Commitments and Contingencies). The Company’s target indications include: lymphoma, leukemia and multiple myeloma through the facilitation of safer and more accessible stem cell (e.g. bone marrow) transplantation acceptance, treatment of end stage kidney disease and other non-malignant organ diseases through improved organ transplantation (broadened donor pool, reduced dependence on post-transplant anti-rejection therapy), and ultimately treating a variety of cancers and non-malignant diseases.
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, 2023 and the condensed consolidated results of its operations and cash flows for the three and nine months ended September 30, 2023 and 2022. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023 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, 2022 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 August 8, 2023.
Risks and Uncertainties
On October 7, 2023, a conflict arose between Israel and Hamas militants on Israel’s southern border from the Gaza Strip. The intensity and duration of Israel’s current war against Hamas is difficult to predict, and as are such war’s economic implications on the Company’s business and operations. To the extent that any of these negative developments do occur, they may have an adverse effect on the Company’s business, results of operations and its ability to raise additional funds. As of September 30, 2023, the Company considered the impact of the war 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 September 30, 2023.
|
Note 2 - Going Concern and Management Plans
During the nine months ended September 30, 2023, the Company had not generated any revenues, had a net loss of approximately $4,271,000 and had used cash in operations of approximately $1,626,000. As of September 30, 2023, the Company had a working capital deficiency of approximately $16,030,000 and an accumulated deficit of approximately $40,617,000. As of September 30, 2023 and through the date of this filing, notes payable with principal amounts totaling approximately $5,246,000 and $1,726,000, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2023. 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 September 30, 2023 and as more fully described in Note 9, Subsequent Events, the Company received aggregate proceeds of $450,000 from equity financings.
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 these uncertainties.
7 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Summary of Significant Accounting Policies
Because the Company’s common stock historically was not actively traded on a public market, the fair value of the Company’s restricted equity instruments is estimated by management based on observations of the sales prices of both restricted and freely tradable common stock, or instruments convertible into common stock. The Company obtained a third-party valuation of its common stock as of July 1, 2023 and December 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 appraisal utilized the market approach, specifically the Backsolve method. The Backsolve method utilizes the economics from a direct transaction in the Company’s securities in determining fair value. The Backsolve method utilizes the Black-Scholes option pricing method (“OPM”) which allocated a probability-weighted present value to the Company’s convertible securities. The following steps were applied under the OPM:
| ● | 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 $ and $ as of July 1, 2023 and December 31, 2022, respectively, which included a discount for lack of marketability of 25%. Furthermore, the independent appraisal determined the Company’s expected volatility was 80% as of July 1, 2023 and December 31, 2022 by evaluating historical and implied volatilities of guideline companies.
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.
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Options | 6,932,004 | 6,932,004 | ||||||
| Warrants | 13,541,107 | 13,204,079 | ||||||
| Convertible notes [1] [2] | 13,493,270 | 1,529,683 | ||||||
| Convertible preferred stock | 18,743,053 | 18,249,713 | ||||||
| Total | 52,709,434 | 39,915,479 | ||||||
| [1] | Convertible notes are assumed to be converted at the rate of $ per common share, which is the conversion price as of September 30, 2023 and 2022. However, such conversion rates are subject to adjustment under certain circumstances such as stock splits and stock dividends, which may result in the issuance of common shares greater than the amount indicated. |
| [2] | As of September 30, 2022, excludes shares of common stock underlying convertible notes that are expected to become convertible into shares of Series B Convertible Preferred Stock since such stock had not been designated by the Company as of September 30, 2022. |
8 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and nine months ended September 30, 2023 and 2022:
| Accrued | Accrued | |||||||||||
| Interest | Compensation | Total | ||||||||||
| Balance - January 1, 2023 | $ | 504,700 | $ | 59,220 | $ | 563,920 | ||||||
| Accrual of warrant obligation | 40,167 | 40,167 | ||||||||||
| Change in fair value | (46,131 | ) | (1,095 | ) | (47,226 | ) | ||||||
| Balance - March 31, 2023 | 498,736 | 58,125 | 556,861 | |||||||||
| Accrual of common stock obligation | 9,438 | 9,438 | ||||||||||
| Satisfaction of warrant obligation | (40,167 | ) | (40,167 | ) | ||||||||
| Change in fair value | 27,272 | 73 | 27,345 | |||||||||
| Balance - June 30, 2023 | 485,841 | 67,636 | 553,477 | |||||||||
| Change in fair value | 47,554 | 2,204 | 49,758 | |||||||||
| Balance - September 30, 2023 | $ | 533,395 | $ | 69,840 | $ | 603,235 | ||||||
| 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 | ||||||||||
| Balance - March 31, 2022 | 550,680 | 60,894 | 611,574 | |||||||||
| Change in fair value | 29,658 | 74 | 29,732 | |||||||||
| Balance - June 30, 2022 | 580,338 | 60,968 | 641,306 | |||||||||
| Change in fair value | 33,630 | 156 | 33,786 | |||||||||
| Accrual of warrant obligation | 58,985 | 58,985 | ||||||||||
| Satisfaction of warrant obligation | (114,727 | ) | (114,727 | ) | ||||||||
| Balance - September 30, 2022 | $ | 558,226 | $ | 61,124 | $ | 619,350 |
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 accrued obligations to issue warrants and common stock to non-employees and is recorded at fair value at inception and subsequent changes in fair value are charged to the condensed consolidated statement of operations at each reporting period.
In applying the Black-Scholes option pricing model utilized in the valuation of Level 3 liabilities, the Company used the following approximate assumptions:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Risk-free interest rate | % - % | % - % | % - % | % - % | ||||||||||||
| Expected term (years) | - | - | - | - | ||||||||||||
| Expected volatility | % | % | % | % | ||||||||||||
| Expected dividends | % | % | % | % | ||||||||||||
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock does not have significant trading volume, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
As of September 30, 2023 and December 31, 2022, the Company had an obligation to issue and shares of common stock to service providers that had a fair value of $62,252 and $50,983, respectively, which was a component of accrued compensation on the condensed consolidated balance sheets. The fair value of the common stock underlying this obligation has a per share value of $ as of September 30, 2023 and $ as of December 31, 2022.
See Note 6, Stockholders’ Deficiency – Common Stock and Stock Warrants for additional details associated with the issuance of common stock and warrants.
9 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Notes Payable
As of September 30, 2023 and through the date of this filing, notes and convertible notes payable with principal amounts totaling $5,246,129 and $1,726,093, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2023. Such notes continue to accrue interest and all relevant penalties have been accrued as of September 30, 2023. 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. As of September 30, 2023, the Company had an accrued interest balance of $599,427 related to notes past due.
During the three months ended September 30, 2023 and 2022, the Company recorded interest expense of $262,091 and $179,954, respectively, and amortization of debt discount of $80,667 and $56,309, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded interest expense of $635,143 and $540,081, respectively, and amortization of debt discount of $361,692 and $187,802, respectively. As of September 30, 2023 and December 31, 2022, the Company had $2,405,635 and $1,796,736, respectively, of accrued interest (including interest in the form of warrants (see Note 4, Fair Value) 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 June 12, 2023, the Company issued shares of common stock to the holder of a promissory note issued by the Company in the principal amount of $100,000 that matured in May 2018 in exchange for the cancellation of the note. The exchange was accounted for as debt extinguishment and the Company recorded a gain on extinguishment of $41,920 which is included in other income on the condensed consolidated statements of operations. See Note 6, Stockholders’ Deficiency – Common Stock for additional details.
Convertible Notes Payable
During the nine months ended September 30, 2023, the Company issued convertible notes payable in the aggregate principal amount of $494,960 with maturity dates ranging from July 3, 2023 to February 17, 2024. 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 396,000 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $48,164 and was recorded as a discount to the face value of the notes, which will be amortized over the term of the notes.
During the nine months ended September 30, 2023, the Company issued convertible notes payable in the aggregate principal amount of $425,000 with maturity dates ranging from November 8, 2023 to July 28, 2024. The notes accrue 8% interest per annum and are convertible at any time at the option of the holder into the Company’s common stock at a conversion price of $0.75 per share. In connection with the issuances, the Company issued five-year immediately vested warrants to purchase an aggregate of 212,500 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $26,700 and was recorded as a discount to the face value of the notes, which will be amortized over the term of the notes. These notes are guaranteed by a director of the Company.
During the nine months ended September 30, 2023, $519,960 of principal outstanding under convertible notes automatically converted into shares of Series C Convertible Preferred Stock and the Company elected to convert $26,234 of interest accrued under such notes into an aggregate of shares of common stock. The note principal had a conversion price of $7.50 per share and the common stock was valued at $ per share for purposes of the interest payment.
Convertible Notes Payable - Related Parties
The Company and George Verstraete, a director of the Company, entered into a promissory note agreement dated March 10, 2022 (the “Verstraete Note”), whereby Mr. Verstraete, at his discretion, can loan up to $6,000,000 to the Company. Mr. Verstraete 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, prior to its amendment in November 2023, provided that it would 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 Company first issues any shares 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 $ per share for purposes of calculating the number of shares of common stock to be issued). For each $500,000 advanced under the Verstraete 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 -year term.
In February 2023, $413,018 of payments made by Mr. Verstraete to third parties on behalf of the Company in June 2022 were characterized as convertible notes payable – related parties under the Verstraete Note. The Company received additional advances of $250,000, $100,000, $150,000, $72,018 and $105,000 in April 2023, May 2023, July 2023, August 2023 and September 2023, respectively, and, as a result, increased the outstanding principal balance of the Verstraete Note to $3,590,036 as of September 30, 2023. In connection with the advances, the Company issued -year immediately vested warrants to purchase an aggregate of 872,029 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $106,973 which was recorded as a discount to the face value of the note and has been amortized over the term of the note.
Mr. Verstraete has assigned the Verstraete Note to a trust for which Darlene Soave, a director of the Company, serves as trustee. On March 10, 2023, the Company and the trust agreed to extend the maturity date of the Verstraete Note to September 10, 2023. See Note 9, Subsequent Events - Convertible Notes Payable - Related Parties for details of an additional extension of the maturity date of the Verstraete Note.
On April 28, 2023, the Company and Ms. Soave agreed to extend the maturity date of the convertible promissory note dated October 28, 2019 issued to Ms. Soave (“Soave Note”) from April 28, 2023 to October 28, 2023. Under the terms of the Soave Note, Ms. Soave, at her discretion, can loan up to $6,000,000 to the Company. As of September 30, 2023, $3,500,000 was outstanding under the Soave Note. See Note 9, Subsequent Events - Convertible Notes Payable - Related Parties for details of an additional extension of the maturity date of the Soave Note.
10 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 – Stockholders’ Deficiency
Authorized Capital
Effective July 26, 2023, the Company amended the certificates of designation which established the Series A Convertible Preferred Stock and Series C Convertible Preferred Stock to increase the number of shares designated from to shares for the Series A Convertible Preferred Stock and from to shares for the Series C Convertible Preferred Stock.
As of September 30, 2023, the Company was authorized to issue shares of common stock, par value of $ per share, and shares of preferred stock, par value of $ per share. The holders of the Company’s common stock are entitled to one vote per share. The preferred stock was designated as follows: shares of Series A Convertible Preferred Stock and shares of Series C Convertible Preferred Stock.
Series B Convertible Preferred Stock
On September 21, 2023, the Company’s Board of Directors approved the designation of shares of the authorized shares of preferred stock as Series B Convertible Preferred Stock, par value $ per share. See Note 9, Subsequent Events for details of the Company’s filing of the Certificate of Designation of its Series B Convertible Preferred Stock subsequent to September 30, 2023.
Preferred Stock Dividends
During the three months ended September 30, 2023 and 2022, the Company accrued additional preferred dividends of $309,150 and $299,827, respectively. During the nine months ended September 30, 2023 and 2022, the Company accrued additional preferred dividends of $907,516 and $869,715, respectively. As of September 30, 2023 and December 31, 2022, the Company accrued preferred stock dividends of $310,630 and $5,217, respectively.
During the nine months ended September 30, 2023, the Company issued shares of common stock at the stated value of $ per share for aggregate value of $602,102, pursuant to the terms of the Series A and C Convertible Preferred Stock Certificate of Designation, in connection with the partial payment of accrued dividends for Series A and Series C Convertible Preferred Stock.
Series C Convertible Preferred Stock
See Note 5, Notes Payable – Convertible Notes Payable for details associated with conversions of notes payable into shares 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 shares of common stock.
During the nine months ended September 30, 2023, certain investors converted an aggregate of shares of Series C Convertible Preferred Stock into an aggregate of shares of the Company’s common stock.
During the nine months ended September 30, 2023, the Company issued immediately-vested shares of the Company’s common stock to a consultant with a grant date fair value of $ which was immediately recognized in the condensed consolidated statement of operations.
See Note 5, Notes Payable for details associated with the issuance of shares of common stock in connection with the extinguishment of a note payable.
Stock Warrants
On May 25, 2023, the Company issued immediately vested year warrants to an investor to purchase an aggregate amount of 300,000 shares of the Company’s common stock at an exercise price of $0.75 per share. The warrants had an issuance date fair value of $40,600, which was recognized immediately.
On August 9, 2023, the Company issued immediately vested four-year warrants to a former director of the Company to purchase an aggregate amount of 160,000 shares of the Company’s common stock at an exercise price of $0.75 per share. The warrants had an issuance date fair value of $23,758, which was recognized immediately.
See Note 5, Notes Payable for additional details associated with the issuance of stock warrants.
11 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based Compensation
During the three months ended September 30, 2023, the Company recognized stock-based compensation expense of $, consisting of $ of expense related to warrants (of which, $ was included within stockholder’s deficiency and $372 was included within accrued compensation), and $ of expense related to common stock issued or to be issued for consulting services (which has been included within accrued compensation) which was included within general and administrative expenses. During the three months ended September 30, 2022, the Company recognized stock-based compensation expense of $ (of which, $ has been included within stockholders’ deficiency and $156 has been included within accrued compensation) which was included within general and administrative expenses.
During the nine months ended September 30, 2023, the Company recognized stock-based compensation expense of $ (consisting of $ of expense related to warrants (of which, $ was included within stockholder’s deficiency and $(649) was included within accrued compensation and $ of expense related to common stock issued or to be issued for consulting services described above (of which, $ has been included within stockholder’s deficiency and $11,269 has been included within accrued compensation) which was included within general and administrative expenses. During the nine months ended September 30, 2022, the Company recognized stock-based compensation expense of $ (of which, $ has been included within stockholders’ deficiency and $(182) has been included within accrued compensation) which was included within general and administrative expenses.
There was no unrecognized stock-based compensation expense as of September 30, 2023.
Note 7 – Related Party Transactions
As of September 30, 2023 and December 31, 2022, the Company was required to issue warrants to purchase an aggregate of 1,881,500 and 1,656,500, respectively, shares of common stock at an exercise price of $0.75 per share to a director and former director 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 $322,813 and $308,117 associated with the fair value of the obligations as of September 30, 2023 and December 31, 2022, respectively, which amount is included in accrued interest – related parties on the condensed consolidated balance sheets. The obligations to issue warrants are subject to changes in fair value at each reporting period. See Note 4, Fair Value for additional details.
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.
See Note 5 – Stockholders’ Deficiency – Stock Warrants for additional details related to a grant to a former director of the Company.
Note 8 – Commitments and Contingencies
Yeda Research and License Agreement
During the three months ended September 30, 2023 and 2022, the Company recorded research and development expenses of $14,500, related to its Research and License Agreement with Yeda (the “Agreement”). During the nine months ended September 30, 2023 and 2022, the Company recorded research and development expenses of $43,500, related to the Agreement with Yeda. As of September 30, 2023 and December 31, 2022, the Company had $58,000 and $14,500, respectively, of accrued research and development expenses pursuant to the Agreement with Yeda.
MD Anderson Sponsored Research Agreements
The Company recognized $429,505 of research and development expenses during the three months ended September 30, 2023 and 2022, and $1,082,193 and $1,394,020 of research and development expenses during the nine months ended September 30, 2023 and 2022, respectively, associated with services provided by The University of Texas M.D. Anderson Cancer Center (“MD Anderson”) under the two agreements with MD Anderson dated November 2018 and February 2019, respectively. As of September 30, 2023 and December 31, 2022, the Company had no 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 contended that it was not given sufficient notice under the applicable statute and did not have an opportunity to oppose the motion. Judgment was entered in October 2019 in the amount of $267,680. The Company brought a motion to vacate based on the jurisdictional defect of the motion in not providing the required amount of time, but that motion was denied in February 2021 without properly addressing the jurisdictional issues raised by the Company. The Company 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 the second denial as well and pursued both appeals in a consolidated manner so as to resolve all issues together. Each of the appeals was denied and there is no further opportunity to appeal. While the Company’s motions were pending, the plaintiff commenced steps to collect judgment. During the year ended December 31, 2021, $103,088 of a $250,000 deposit made with the court by a third party on behalf of the Company was released to an officer of the court and has been accounted for as partial note repayment, with an additional $146,912 due under the note repaid by a release of the remaining deposit to an officer of the court during the year ended December 31, 2022, which was also accounted for as a note repayment. In August 2023, a supplemental judgment of $38,838 was entered against the Company. Inasmuch, as there are no further opportunities to appeal, the Company is arranging to pay the remaining amount due, which, as of the date of this Report, is estimated to be approximately $106,000, which was recorded as a liability as of September 30, 2023.
12 |
CELL SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In August 2022, a holder of 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 complaints against the Company’s legal counsel and President were dismissed by the Court. In October 2023, the Company reached an agreement in principle with the plaintiff to settle the matter. The settlement is subject to the execution of a formal settlement agreement.
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, there are no other known contingencies through the date of this filing.
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.
Common Stock
Subsequent to September 30, 2023, a certain investor converted shares of Series C Convertible Preferred Stock into shares of the Company’s common stock.
Series B Convertible Preferred Stock
On October 30, 2023, the Company filed the Certificate of Designation with the Office of the Secretary of State for the State of Nevada, which established the Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock has a stated value of $ per share. The Series B Convertible Preferred Stock contains the following terms:
Conversion. Each share of Series B Convertible Preferred Stock is convertible into shares of common stock (subject to adjustment as provided in the related certificate of designation of preferences, rights and limitations) at the option of the holder at any time. The number of shares of common stock which are issuable upon conversion of the Series B Convertible Preferred Stock shall be equal to the number of shares of Series B Convertible Preferred Stock to be converted, multiplied by the stated value of $ per share, divided by the conversion price in effect at the time of conversion, initially at $0.75 per share.
Mandatory Conversion. On the earlier of (i) October 30, 2027 or (ii) any of the Company’s treatment candidates receiving approval from the U.S. or European agencies, all of the outstanding shares of Series B Convertible Preferred Stock will automatically convert to common stock.
Liquidation Preference. In the event of the liquidation, dissolution or winding-up of the Company, the Series B Convertible Preferred Stock will rank senior to common stock and any other class of capital stock which does not expressly rank senior to or parri passu with the Series B Preferred Stock and will rank parri passu with the Series A and Series C Convertible Preferred Stock.
Voting Rights. The holders of Series B Convertible Preferred Stock have the right to vote on any matter submitted to a vote of holders of common stock, voting together with the common stock as one class, on an as-converted basis.
Dividends. Holders of shares of Series B Convertible Preferred Stock will be entitled to receive cumulative dividends at an annual rate of 10% of the stated value. Dividends are payable semi-annually on June 30 and December 31, commencing on December 31, 2023, either by (i) issuance of shares of common stock at the rate of $0.75 per share of common stock or (ii) in cash, at the Company’s option.
Beginning in October 2023, the Company entered into subscription agreements with certain accredited investors in a private placement offering. Each unit, which is sold at a price of $ per unit, consists of one (1) share of Series B Convertible Preferred Stock and a five-year warrant to purchase a certain number of shares of common stock at an exercise price of $0.75 per share. For every $100,000 of units acquired, the investor will receive warrants to purchase an aggregate of 150,000 shares of common stock.
From October 2023 through the date of filing, the Company sold units for gross proceeds of $450,000 and issued warrants to purchase 675,000 shares of the Company’s common stock.
Convertible Notes Payable - Related Parties
On November 8, 2023, the Company and the trust which holds the Soave Note entered into an amendment to the Soave Note whereby the parties agreed to extend the maturity date from October 28, 2023 to April 28, 2024.
On November 8, 2023, the Company and the trust which holds the Verstraete Note entered into an agreement to the Verstraete Note whereby the parties agreed to extend the maturity date from September 10, 2023 to March 10, 2024.
Conversion of Convertible Notes Payable
Subsequent to September 30, 2023, certain investors converted convertible notes payable with aggregate principal amount of $180,000 and aggregate accrued interest of $7,961 into an aggregate of shares of Series C Convertible Preferred Stock and shares of common stock.
MD Anderson Sponsored Research Agreements
On November 6, 2023, the Company and MD Anderson agreed to extend the Sponsored Research Agreement by one year to November 27, 2024. Under the amendment, the research budget for the additional year is approximately $1,296,000.
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 September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 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, 2022 as filed with the Securities and Exchange Commission (“SEC”) on August 8, 2023.
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, 2022, filed with the SEC on August 8, 2023.
Overview
We are a cell therapy company focused on immunotherapy. Since our inception, we have been involved with the development of proprietary immune system management technology licensed from Yeda Research & Development Company Limited (“Yeda”), the commercial arm of the Weizmann Institute. We have since shifted the focus of our research and development efforts to MD Anderson.
This technology addresses one of the most fundamental challenges within human immunology: how to tune the immune response such that it tolerates selected desirable foreign cells, but continues to attack all other (undesirable) targets. In simpler terms, a number of potentially life-saving treatments have limited effectiveness today because the patient’s immune system rejects them. For example, while HSCT – hematopoietic stem cell transplantation (e.g. bone marrow transplantation) has become a preferred therapeutic approach for treating blood cell cancer, most patients do not have a matched family donor. Although matched unrelated donors and cord blood can each provide an option for such patients, haploidentical stem cell transplants (sourced from partially mismatched family members) are rapidly gaining favor as a treatment of choice. This is still a risky and difficult procedure primarily because of potential conflicts between host (recipient) and donor immune systems and also due to viral infections that often follow even successful HSCT while the compromised new immune system works to reconstitute itself by using the transplanted stem cells. Today, rejection is partially overcome using aggressive immune suppression treatments that leave the patient exposed to many dangers by compromising their immune system.
The unique advantage of Cell Source technology lies in the ability to induce sustained tolerance of transplanted cells (or organs) by the recipient’s immune system in a setting that requires only mild immune suppression, while avoiding the most common post-transplant complications. The scientific term for the result of successfully inducing such tolerance in a transplantation setting is chimerism, where the recipient’s immune system tolerates the co-existence of the (genetically different) donor type and host type cells. Attaining sustained chimerism is an important prerequisite to achieving the intrinsic GvL (graft versus leukemia) effect of HSCT and supporting the reconstitution of normal hematopoiesis (generation of blood cells, including those that protect healthy patients from cancer) in blood cancer patients. Preclinical data and initial clinical data show that Cell Source’s Veto Cell technology can provide superior results in allogeneic (donor-derived) HSCT by allowing for haploidentical stem cell transplants under a mild conditioning regimen, while avoiding the most common post-transplant complications. Combining this with CAR (Chimeric Antigen Receptor) T cell therapy as a unified VETO CAR-T treatment, we will be able to treat patients in relapse as well as those in remission and use the cancer killing power of CAR-T to protect the patient while their immune system fully reconstitutes, thus providing an end-to-end solution for blood cancer treatment by potentially delivering a fundamentally safer and more effective allogeneic HSCT: prevention of relapse; avoidance GvHD; prevention of viral infections; and enhanced persistence of GvL effect. This means that the majority of patients will be able to find a donor, and will have access to a potentially safer procedure with higher long term survival rates than what either donor-derived HSCT or autologous CAR-T each on their own currently provide.
The ability to induce permanent chimerism (and thus sustained tolerance) in patients – which allows the transplantation to overcome rejection without having to compromise the rest of the immune system – may open the door to effective treatment of a number of severe medical conditions, in addition to blood cancers, which are characterized by this need. These include:
| ● | The broader set of cancers, including solid tumors, that can potentially be treated effectively using genetically modified cells such as CAR-T cell therapy, but also face efficacy and economic constraints due to limited persistence based on immune system issues (i.e., the need to be able to safely and efficiently deliver allogeneic CAR-T therapy). Inducing sustained tolerance to CAR-T cells may bring reduced cost and increased efficacy by allowing for off-the-shelf (vs. patient-derived) treatments with more persistent cancer killing capability. | |
| ● | 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 Resources
Other than our Chief Executive Officer, we currently do not have any full-time employees, but retain the services of independent contractors/consultants on a contract-employment basis.
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Recent Developments
Preclinical Results and Clinical Results
Following on a successful, 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 2023. The Phase 1/2 clinical trial at the University of Texas MD Anderson Cancer Center, using Cell Source’s Anti-viral Veto Cells, has successfully treated 12 patients each receiving a haploidentical HSCT under reduced intensity conditioning with Veto Cells. The primary endpoints of the trial are to achieve engraftment of the T-cell depleted transplant, under a mild immune suppression regimen, without the incidence of severe GvHD by using Veto cells. Having attained these endpoints thus far, we have structured the balance of the trial to both determine maximum Veto cell dose tolerance and also to ensure that we can avoid certain antibody-related issues that appeared with some of the initial patients treated. If it continues to succeed in human clinical trials, we believe that this novel treatment may have a meaningful and potentially broad impact on the field of stem cell transplantation:
| 1) | Significantly improve outcomes of transplantations by reducing the host (transplant recipient) rejection rate of T-cell depleted stem cells (e.g. from bone marrow) – thus supporting successful engraftment of the transplanted cells, which is the treatment for the blood cancer itself. In order to improve the safety of this cancer treatment, Veto Cell technology has shown in both preclinical studies and initial clinical data that it can markedly reduce both the risk of GvHD and the need for using aggressive amounts of immunosuppression treatments. We have shown in preclinical studies, and are seeing in the clinic, the reduction of viral infections that typically threaten patients post transplantation. This safer means of delivering stem cell transplants would significantly reduce the HSCT mortality rate and therefore lead to broader use of this treatment. Furthermore, by adding CAR-T to the HSCT protocol, which we have already done successfully in preclinical studies, we can bridge between the initial transplantation and the conclusion of immune reconstitution, thus providing both short-term and ongoing protection against remission. This has the potential to significantly improve efficacy beyond that of the current outcomes of either CAR-T or HSCT on their own. | |
| 2) | Substantively increase the number of transplantations by enabling successful engraftment under lower levels of immune suppression and therefore making the therapy accessible to older and sicker patients (who today may not survive ablation). | |
| 3) | Further increase the number of transplantations by making transplantation appropriate for other indications (for which today transplantation would be considered an inappropriately risky treatment). See, e.g. BMT 2021 Correction of Sickle Cell Disease by Allogeneic Hematopoietic Cell Transplantations with Anti-3rd Party Veto Cells, Bone Marrow Transplantation, March 3, 2021. |
In addition, our Veto Cell technology may possibly play a role in the treatment of a number of additional serious and currently poorly treated non-malignant diseases. Finally, based on preclinical studies using genetically modified cells, we believe that Veto Cells will be able to act as critical enabler for other cell therapies, most notably CAR-T cell therapy, which has recently shown strong initial indications of being effective in the near term in treating blood cancer.
Private Placement of Series B Convertible Preferred Stock
Beginning in October 2023, the Company entered into subscription agreements with certain accredited investors in a private placement offering. Each unit, which is sold at a price of $7.50 per unit, consists of one (1) share of Series B Convertible Preferred Stock and a five-year warrant to purchase a certain number of shares of common stock at an exercise price of $0.75 per share. For every $100,000 of units acquired, the investor will receive warrants to purchase an aggregate of 150,000 shares of common stock.
From October 2023 through the date of filing, the Company sold 60,000 units for gross proceeds of $450,000 and issued warrants to purchase 675,000 shares of the Company’s common stock.
Condensed Consolidated Results of Operations
Three Months Ended September 30, 2023 Compared with the Three Months Ended September 30, 2022
Research and Development
Research and development expense was $514,505 and $482,505 for the three months ended September 30, 2023 and 2022, respectively, an increase of $32,000, or 7%. This increase is primarily attributable to increased research and development activities performed by consultants during the 2023 period.
General and Administrative
General and administrative expense, which is associated with external consulting and professional fees, payroll and stock-based compensation expenses, was $480,875 and $533,538 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $52,663, or 10%. The decrease was primarily attributable to a decrease in stock-based compensation of $49,000, a decrease in legal expenses of $25,000, partially offset by an increase in accounting and audit expenses of $67,000 and an increase in consulting expenses of $50,000.
Interest Expense
Interest expense for the three months ended September 30, 2023 and 2022 was $262,091 and $179,954, respectively, an increase of $82,137, or 46%. This increase is primarily associated with increased convertible notes and the fair value of warrants issued in connection with convertible notes payable during the 2023 period.
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Amortization of Debt Discount
Amortization of debt discount was $80,667 and $56,309 for the three months ended September 30, 2023 and 2022, respectively, an increase of $24,358, or 43%. This increase is primarily associated with an increased convertible notes and the fair value of warrants issued in connection with convertible notes payable during the 2023 period.
Nine Months Ended September 30, 2023 Compared with the Nine Months Ended September 30, 2022
Research and Development
Research and development expense was $1,218,593 and $1,531,020 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $312,427, or 20%. This decrease is mainly attributable to the achievement of $317,000 of patient enrollment milestones achieved in 2022 under the sponsored research agreement with MD Andersen whereas one $106,000 milestone was achieved in the 2023 period, furthermore there were additional research and development activities performed during the 2022 period.
General and Administrative
General and administrative expense, which is associated with external consulting and professional fees, payroll and stock-based compensation expenses, was $2,097,801 and $1,571,572 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $526,229, or 33%. The increase was primarily attributable to an increase in stock-based compensation of $325,000 during the 2023 period, an increase in consulting expenses of $219,000, and an increase of $13,000 in legal expenses, and a $43,000 reduction in other miscellaneous expenses.
Interest Expense
Interest expense for the nine months ended September 30, 2023 and 2022 was $635,143 and $540,081, respectively, an increase of $95,062, or 18%. This increase is primarily associated with increased convertible notes and the fair value of warrants issued in connection with convertible notes payable during the 2023 period.
Amortization of Debt Discount
Amortization of debt discount was $361,692 and $187,802 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $173,890, or 93%. The increase is primarily associated with the increased levels of warrants issued as debt discounts in connection with convertible notes payable in the 2023 period.
Gain on Extinguishment of Note Payable
Gain on extinguishment of note payable was $41,920 and $0 for the nine months ended September 30, 2023 and 2022, respectively. The gain on extinguishment of note payable is attributable to the exchange of a promissory note in the principal amount of $100,000 for 176,000 shares of common stock.
Liquidity and Going Concern
We measure our liquidity in a number of ways, including the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Cash | $ | 2,582 | $ | 222,665 | ||||
| Working capital deficiency | $ | (16,030,147 | ) | $ | (12,633,895 | ) | ||
During the nine months ended September 30, 2023, we had not generated any revenues, had a net loss of approximately $4,271,000 and had used cash in operations of approximately $1,626,000. As of September 30, 2023, we had a working capital deficiency of $16,030,000 and an accumulated deficit of approximately $40,617,000. As of September 30, 2023 and through the date of this filing, notes payable with principal amounts totaling $5,246,129 and $1,726,093, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2023. 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 September 30, 2023 and as more fully described in Note 9, Subsequent Events, the Company received aggregate proceeds of $450,000 from equity financings.
We are currently funding our operations on a month-to-month basis. Our ability to continue our operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. We may need to incur additional liabilities with certain related parties to sustain our existence. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of our financial statements.
There can be no assurances that we will be successful in generating additional cash from equity or debt financings or other sources to be used for operations. Should we not be successful in obtaining the necessary financing to fund our operations, we would need to curtail certain or all operational activities and/or contemplate the sale of our assets, if necessary.
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During the nine months ended September 30, 2023 and 2022, 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, 2023 and 2022 in the amounts of approximately $1,626,000 and $2,415,000, respectively. The net cash used in operating activities for the nine months ended September 30, 2023 was primarily due to cash used to fund a net loss of approximately $4,271,000, adjusted for non-cash expenses in the aggregate amount of approximately $753,000, partially offset by $1,892,000 of net cash provided by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the nine months ended September 30, 2022, was primarily due to cash used to fund a net loss of approximately $3,830,000 adjusted for non-cash expenses in the aggregate amount of approximately $364,000, partially offset by $1,051,000 of net cash provided by changes in the levels of operating assets and liabilities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2023 and 2022 was approximately $1,406,000 and $2,388,000, respectively. The net cash provided by financing activities during the nine months ended September 30, 2023 was attributable to $677,000 of proceeds from the issuance of convertible notes to a related party director and $920,000 of proceeds from the issuance of convertible notes payable, partially offset by $191,000 of repayments towards the financing of the Company’s Director’s and Officer’s Insurance. The net cash provided by financing activities during the nine months ended September 30, 2022, was attributable to $2,000,000 of proceeds from the issuance of convertible notes to a related party director and $395,000 of proceeds from the issuance of convertible notes payable, proceeds from the issuance of notes payable of $168,000 partially offset by the repayments of the insurance financing liability in the amount of $28,000 and the repayment of notes payable of $147,000.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures are 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 critical accounting policies and estimates are 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 in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on August 8, 2023, as well as 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.
The Black-Scholes option pricing model was used to estimate the fair value of the Company’s warrants. The Black-Scholes option pricing model includes subjective input assumptions that can materially affect the fair value estimates.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities;
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable; and
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
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The carrying amounts of the Company’s financial instruments, such as cash, other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amounts of Company’s credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates, are comparable to rates of returns for instruments of similar credit risk.
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and is then recognized over the period the services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.
Because the Company’s common stock historically was not actively traded on a public market, the fair value of the Company’s restricted equity instruments is estimated by management based on observations of the sales prices of both restricted and freely tradable common stock, or instruments convertible into common stock. The Company obtained a third-party valuation of its common stock as of July 1, 2023 and December 31, 2022, which was considered in management’s estimation of fair value during the three and nine months ended September 30, 2023 and year ended December 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 appraisal utilized the market approach, specifically the Backsolve method. The Backsolve method utilizes the economics from a direct transaction in the Company’s securities in determining fair value. The Backsolve method utilizes the Black-Scholes option pricing method (“OPM”) which allocated a probability-weighted present value to the Company’s convertible securities. The following steps were applied under the OPM:
| ● | Establishment of total enterprise or equity value; | |
| ● | Analysis of equity rights for each class of security; | |
| ● | Selection of appropriate model for valuation purposes; | |
| ● | Determination of key valuation inputs; and | |
| ● | Computation of the fair value of the subject security. |
Under the OPM, it was determined the Company’s common stock had a fair value of $0.34 and $0.33 per share as of July 1, 2023 and December 31, 2022, respectively, which included a discount for lack of marketability of 25%. Furthermore, the independent appraisal determined the Company’s expected volatility was 80% as of July 1, 2023 and December 31, 2022 by evaluating historical and implied volatilities of guideline companies.
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 Annual 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, 2023, our disclosure controls and procedures were effective.
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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
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 contended that it was not given sufficient notice under the applicable statute and did not have an opportunity to oppose the motion. Judgment was entered in October 2019 in the amount of $267,680. The Company brought a motion to vacate based on the jurisdictional defect of the motion in not providing the required amount of time, but that motion was denied in February 2021 without properly addressing the jurisdictional issues raised by the Company. The Company 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 the second denial as well and pursued both appeals in a consolidated manner so as to resolve all issues together. Each of the appeals was denied and there is no further opportunity to appeal. While the Company’s motions were pending, the plaintiff commenced steps to collect judgment. During the year ended December 31, 2021, $103,088 of a $250,000 deposit made with the court by a third party on behalf of the Company was released to an officer of the court and has been accounted for as partial note repayment, with an additional $146,912 due under the note repaid by a release of the remaining deposit to an officer of the court during the year ended December 31, 2022, which was also accounted for as a note repayment. In August 2023, a supplemental judgment of $38,838 was entered against the Company. Inasmuch, as there are no further opportunities to appeal, the Company is arranging to pay the remaining amount due, which, as of the date of this Report, is estimated to be approximately $106,000, which was recorded as a liability as of September 30, 2023.
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 complaints against the Company’s legal counsel and President were dismissed by the Court. In October 2023, the Company reached an agreement in principle with the plaintiff to settle this matter. The settlement is subject to the execution of a formal settlement agreement.
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, 2022, which was filed with the SEC on August 8, 2023 except as described below.
On October 7, 2023, a conflict arose between Israel and Hamas militants on Israel’s southern border from the Gaza Strip. The intensity and duration of Israel’s current war against Hamas is difficult to predict, and as are such war’s economic implications on the Company’s business and operations. To the extent that any of these negative developments do occur, they may have an adverse effect on the Company’s business, results of operations and its ability to raise additional funds. As of September 30, 2023, the Company considered the impact of the war 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 September 30, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
During the three months ended September 30, 2023, we issued a convertible note in the principal amount of $100,000 to an accredited investor. The note matures six months from the date of issuance, accrues interest at a rate of 8% per annum and is convertible at any time at the option of the holder into the Company’s Series C Preferred Stock at a conversion price of $7.50 per share. The note automatically converts into Series C Preferred Stock on the maturity date. In connection with the issuance, we issued a five-year warrant to purchase an aggregate of 80,000 shares of common stock at an exercise price of $1.25 per share. We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), in connection with this transactions.
During the three months ended September 30, 2023, we issued a convertible note in the principal amount of $25,000 to an accredited investor. The note matures six months from the date of issuance, accrues interest at a rate of 8% per annum and is convertible at any time at the option of the holder into the Company’s common stock at a conversion price of $0.75 per share. In connection with the issuance, we issued a five-year warrant to purchase 12,500 shares of common stock at an exercise price of $1.25 per share. We relied upon the exemption provided by Section 4(2) of the Securities Act in connection with this transaction.
In August 2023, we issued a four-year warrant to a former director of the Company to purchase 160,000 shares of the Company’s common stock at an exercise price of $0.75 per share. We relied upon the exemption provided by Section 4(2) of the Securities Act in connection with this transaction.
In September 2023, we issued 300,000 shares of common stock to an accredited investor upon the conversion of 30,000 shares of the Company’s Series C Convertible Preferred Stock. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act in connection with this transaction.
During the three months ended September 30, 2023, $469,960 of principal outstanding under convertible notes automatically converted into 62,667 shares of our Series C Convertible Preferred Stock and we elected to issue 32,232 shares of common stock in lieu of the payment of $24,000 of cash interest due under such notes. We relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.
Item 3. Defaults Upon Senior Securities.
As of September 30, 2023 and through the date of this filing, notes payable and convertible notes payable with face values totaling $5,246,129 and $1,726,093, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2023. Such notes continue to accrue interest and all relevant penalties have been accrued as of September 30, 2023. Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Item 1 above for additional details. We are in negotiations with all holders to extend the maturity dates of such notes or to convert the principal and accrued interest into equity.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
* Filed herewith
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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.
| CELL SOURCE, INC. | ||
| Dated: November 9, 2023 | By: | /s/ Itamar Shimrat |
| Name: | Itamar Shimrat | |
| Title: | Chief Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) | |
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