This Management Discussion and Analysis ("MD&A") contains "forward-looking statements," which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management's future plans or objectives or to our future economic and financial performance. In some cases, you can identify these statements by terminology such as "may," "should," "plans," "believe," "will," "anticipate," "estimate," "expect," "project" or "intend," including their opposites or similar phrases or expressions.

You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should not be regarded as a representation by the Company or any other person that the events or plans of the Company will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this MD&A. Except as may be required under applicable securities laws, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this MD&A or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe under "Risk Factors" in this Annual Report on Form 10-K. Actual results may differ materially from any forward-looking statement.





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 recently 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 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.






         51

  Table of Contents

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 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 (recipient) type cells. Attaining sustained chimerism is an important perquisite 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 show that Cell Source's Veto Cell technology (currently in clinical trials in the US) 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 and 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-reject 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.




Recent Developments

After two years of intensive collaboration with Professor Zelig Eshhar, the inventor of CAR-T cell therapy, interim data confirm 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 will form the basis of the 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 the second quarter of 2021.

Consolidated Results of Operations

Year Ended December 31, 2019 Compared with the Year Ended December 31, 2018





Research and Development

Research and development expense was $2,630,385 and $725,088 for the years ended December 31, 2019 and 2018, respectively, an increase of $1,905,297, or 263%, primarily related to approximately $1,335,000 associated with the commencement of research by MD Anderson and approximately $825,000 of stock-based compensation expense associated with a stock option grant to Dr. Reisner, who Chairs the Company's Scientific Advisory Board and leads the Reisner Laboratory at MD Anderson, offset by a decrease of approximately $277,000 in fees related to our agreement with Yeda.






         52

  Table of Contents




General and Administrative

General and administrative expense, which is associated with external consulting and professional fees, payroll and stock-based compensation expenses, was $1,174,816 and $1,281,055 for the years ended December 31, 2019 and 2018, respectively, a decrease of $106,239, or 8%.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities for the years ended December 31, 2019 and 2018 was a gain of $146,700 and a gain of $485,500, respectively, primarily due to the warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.





Interest Expense

Interest expense for the years ended December 31, 2019 and 2018 was $292,977 and $268,997, respectively, a decrease of $23,980, or 9%, due to a decrease in notes payable outstanding during 2019 as well as interest and penalties associated with certain notes payable that became past due in 2018.

Amortization of Debt Discount

Amortization of debt discount was $14,970 and $209,655 for the years ended December 31, 2019 and 2018, respectively, a decrease of $194,685, or 93%, which is primarily related to warrants, conversion options and original issuance discounts drawing closer to their expiration dates or which were no longer outstanding.

Gain on Exchange of Accrued Liabilities for Warrants

During the year ended December 31, 2018, we recognized a $73,100 gain on exchange of accrued liabilities for warrants related to accrued Scientific Advisory Board fees, which represents the excess value of the warrants as compared to the carrying value of the accrued liabilities.





Warrant Modification Expense

During the year ended December 31, 2019, we recognized $283,500 of warrant modification expense on the extension of an expiration date of certain warrants.

Loss on Exchange of Notes Payable for Series A Convertible Preferred Stock

During the years ended December 31, 2019 and 2018, we recognized a loss on exchange of notes payable for Series A Convertible Preferred Stock of $262,470 and $191,251, respectively, which represents the value of the preferred shares in excess of the carrying value of notes payable.

Loss on Extinguishment of Debt

During the year ended December 31, 2019, we recognized $1,504 of loss on extinguishment of debt.

Gain on Forgiveness of Accrued Expenses

During the year ended December 31, 2019, we recognized a gain on forgiveness of accrued expenses of $38,427, which represents the forgiveness of accrued payroll expenses and director fees due by a former member of the Board of Directors.

Liquidity and Going Concern

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





                                      December 31,
                                 2019             2018
Cash                         $     27,908     $     18,934

Working capital Deficiency $ (5,596,941 ) $ (4,920,171 )

We have not generated any revenues since our inception, we have recurring net losses, we have a working capital deficiency as of December 31, 2019 and 2018 of approximately $5,597,000 and $4,920,000, respectively. We have used cash in operations of approximately $2,587,000 and $2,002,000 during the years ended December 31, 2019 and 2018, respectively. Subsequent to December 31, 2019 and as more fully described in Note 13, Subsequent Events, the Company received aggregate proceeds of $578,000 from convertible notes payable and $100,000 through the sale of 13,333 shares of Series A Convertible Preferred Stock at $7.50 per share. These conditions raise substantial doubt about the Company's ability to continue as a going concern within twelve months from the date these financial statements are issued. We are currently funding our operations on a month-to-month basis. While there can be no assurance that we will be successful, we are in active negotiations to raise additional capital.






         53

  Table of Contents

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

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

During the years ended December 31, 2019 and 2018, our sources and uses of cash were as follows:

Net Cash Used in Operating Activities

We experienced negative cash flows from operating activities for the years ended December 31, 2019 and 2018 in the amounts of $2,587,212 and $2,002,114, respectively. The net cash used in operating activities for the year ended December 31, 2019 was primarily due to cash used to fund a net loss of $4,475,495, reduced by net non-cash expenses in the aggregate amount of $1,315,196 and by $573,087 of net cash provided due to changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year ended December 31, 2018 was primarily due to cash used to fund a net loss of $2,117,446, reduced by net non-cash expenses in the aggregate amount of $176,809 and by $292,141 of net cash provided due to changes in the levels of operating assets and liabilities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the years ended December 31, 2019 and 2018 was $2,596,186 and $1,650,000, respectively. The net cash provided by financing activities during the year ended December 31, 2019 was attributable to $1,795,677 of proceeds from the issuance of Series A preferred stock, $665,000 of proceeds from the issuance of convertible notes payable, $275,500 of proceeds from an advance payable, $120,000 of proceeds from the issuance of notes payable, offset by $140,000 of repayments of advances payable, $70,000 of repayments of notes payable and $49,991 of payments of equity issuance costs. The net cash provided by financing activities during the year ended December 31, 2018 was attributable to $1,050,000 of proceeds from the issuance of Series A preferred stock, $500,000 of proceeds from the issuance of notes payable and $100,000 of proceeds from a related party advance.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies, see Note 3 - Summary of Significant Accounting Policies of our financial statements included within this Annual Report.





Recent Accounting Standards

For a description of our recently issued and adopted accounting pronouncements, see in Note 3 - Summary of Significant Accounting Policies of our financial statements included within this Annual Report.

© Edgar Online, source Glimpses