Form 10-Q Cell Source, Inc. For: Jun 30

August 14, 2019 2:39 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

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, New York
 
10019
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (646) 416-7896

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 August 12, 2019, the registrant had 26,479,471 shares of $0.001 par value common stock outstanding.


CELL SOURCE, INC. AND SUBSIDIARY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
 
 
 
 
 
Item 1. Financial Statements.
 
1
     
Condensed Consolidated Balance Sheets as of
June 30, 2019 (Unaudited) and December 31, 2018
 
1
     
Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2019 and 2018
 
2
     
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficiency for the
Six Months Ended June 30, 2019 and 2018
 
3
     
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2019 and 2018
 
4
     
Notes to Unaudited Condensed Consolidated Financial Statements
 
5
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
12
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
14
 
 
 
Item 4. Controls and Procedures.
 
15
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
Item 1. Legal Proceedings.
 
16
 
 
 
  Item 1A. Risk Factors.
 
16
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
16
 
 
 
Item 3. Defaults Upon Senior Securities.
 
16
 
 
 
Item 4. Mine Safety Disclosures.
 
17
 
 
 
Item 5. Other Information.
 
17
 
 
 
Item 6. Exhibits.
 
17
 
 
 
SIGNATURES
 
18



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30,
   
December 31,
 
   
2019
   
2018
 
     
(Unaudited)
       
Assets
           
             
Current Assets:
           
Cash
 
$
28,077
   
$
18,934
 
Prepaid expenses
   
22,167
     
38,926
 
Other current assets
   
29,391
     
7,932
 
Total Assets
 
$
79,635
   
$
65,792
 
                 
Liabilities and Stockholders' Deficiency
               
                 
Current Liabilities:
               
Accounts payable
 
$
293,668
   
$
277,786
 
Accrued expenses
   
1,169,175
     
532,790
 
Accrued expenses - related party
   
72,000
     
72,000
 
Accrued interest
   
309,203
     
345,948
 
Accrued interest - related parties
   
29,047
     
27,559
 
Accrued compensation
   
610,358
     
587,734
 
Accrued compensation - related party
   
91,464
     
55,083
 
Advances payable
   
175,000
     
100,000
 
Advances payable - related party
   
100,000
     
100,000
 
Notes payable
   
1,063,000
     
1,463,000
 
Notes payable - related parties
   
150,000
     
150,000
 
Convertible notes payable
   
545,000
     
835,000
 
Convertible notes payable - related parties
   
225,000
     
225,000
 
Derivative liabilities
   
351,300
     
200,500
 
Accrued dividend payable
   
49,191
     
13,563
 
Total Liabilities
   
5,233,406
     
4,985,963
 
                 
Commitments and contingencies (Note 8)
   
-
     
-
 
                 
Stockholders' Deficiency:
               
Convertible Preferred Stock, $0.001 par value, 10,000,000 shares authorized; Series A Convertible Preferred Stock,
1,335,000 shares designated, 1,155,426 and 860,291 shares issued and outstanding as of June 30, 2019 and
December 31, 2018, respectively; liquidation preference of $8,714,885 and $6,465,745 as of June 30, 2019
and December 31, 2018, respectively
   
1,155
     
860
 
Common Stock, $0.001 par value, 200,000,000 shares authorized, 26,479,471 and 26,077,611 shares issued and outstanding as of
June 30, 2019 and December 31, 2018, respectively
   
26,479
     
26,078
 
Additional paid-in capital
   
13,900,422
     
11,723,224
 
Accumulated deficit
   
(19,081,827
)
   
(16,670,333
)
Total Stockholders' Deficiency
   
(5,153,771
)
   
(4,920,171
)
                 
Total Liabilities and Stockholders' Deficiency
 
$
79,635
   
$
65,792
 



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

1

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

     
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Operating Expenses:
                       
Research and development
 
$
385,770
   
$
31,922
   
$
1,110,512
   
$
109,538
 
Research and development - related party
   
25,000
     
77,485
     
50,000
     
302,624
 
Selling, general and administrative
   
319,138
     
314,500
     
740,428
     
671,857
 
Total Operating Expenses
   
729,908
     
423,907
     
1,900,940
     
1,084,019
 
                                 
Loss From Operations
   
(729,908
)
   
(423,907
)
   
(1,900,940
)
   
(1,084,019
)
                                 
Other (Expense) Income:
                               
Interest expense
   
(55,917
)
   
(30,586
)
   
(132,784
)
   
(60,851
)
Interest expense - related parties
   
(554
)
   
(748
)
   
(1,294
)
   
(1,488
)
Amortization of debt discount
   
(6,529
)
   
(35,125
)
   
(6,529
)
   
(173,099
)
Amortization of debt discount - related parties
   
-
     
(9,863
)
   
-
     
(28,356
)
Change in fair value of derivative liabilities
   
32,400
     
139,500
     
85,000
     
274,900
 
Warrant modification expense
   
(229,400
)
   
-
     
(229,400
)
   
-
 
Loss on exchange of notes payable for preferred shares
   
-
     
-
     
(262,470
)
   
-
 
Loss on extinguishment of debt
   
(1,504
)
   
-
     
(1,504
)
   
-
 
Gain on forgiveness of accrued expenses
   
38,427
     
-
     
38,427
     
-
 
Total Other (Expense) Income
   
(223,077
)
   
63,178
     
(510,554
)
   
11,106
 
                                 
Net Loss
   
(952,985
)
   
(360,729
)
   
(2,411,494
)
   
(1,072,913
)
                                 
Dividend attributable to Series A preferred stockholders
   
(188,973
)
   
(109,464
)
   
(337,008
)
   
(216,960
)
Net Loss Applicable to Common Stockholders
 
$
(1,141,958
)
 
$
(470,193
)
 
$
(2,748,502
)
 
$
(1,289,873
)
                                 
Net Loss Per Common Share - Basic and Diluted
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.10
)
 
$
(0.05
)
                                 
Weighted Average Common Shares Outstanding -
                         
Basic and Diluted
   
28,139,110
     
27,393,071
     
28,130,327
     
27,393,071
 



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

2

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

(Unaudited)

   
 
FOR THE SIX MONTHS ENDED JUNE 30, 2019
 
   
 
Convertible Preferred
                           
Total
 
   
 
Stock - Series A
   
Common Stock
   
Additional
   
Accumulated
   
Stockholders'
 
   
 
Shares
   
Amount
   
Shares
   
Amount
   
Paid-In Capital
   
Deficit
   
Deficiency
 
 
                                         
Balance, January 1, 2019
   
860,291
   
$
860
     
26,077,611
   
$
26,078
   
$
11,723,224
   
$
(16,670,333
)
 
$
(4,920,171
)
 
                                                       
Issuance of Series A Convertible
Preferred Stock for cash
   
43,331
     
43
     
-
     
-
     
324,957
     
-
     
325,000
 
 
                                                       
Issuance of Series A Convertible Preferred
Stock in exchange for notes payable
   
145,367
     
145
     
-
     
-
     
1,090,109
     
-
     
1,090,254
 
 
                                                       
Series A Convertible Preferred Stock dividends:
Accrual of earned dividends
   
-
     
-
     
-
     
-
     
(148,035
)
   
-
     
(148,035
)
 
                                                       
Net loss
   
-
     
-
     
-
     
-
     
-
     
(1,458,509
)
   
(1,458,509
)
 
                                                       
Balance, March 31, 2019
   
1,048,989
     
1,048
     
26,077,611
     
26,078
     
12,990,255
     
(18,128,842
)
   
(5,111,461
)
 
                                                       
Issuance of Series A Convertible
Preferred Stock for cash
   
106,437
     
107
     
-
     
-
     
798,162
     
-
     
798,269
 
 
                                                       
Series A Convertible Preferred Stock dividends:
Accrual of earned dividends
   
-
     
-
     
-
     
-
     
(188,973
)
   
-
     
(188,973
)
Payment of dividends in kind
   
-
     
-
     
401,860
     
401
     
300,978
     
-
     
301,379
 
 
                                                       
Net loss
   
-
     
-
     
-
     
-
     
-
     
(952,985
)
   
(952,985
)
 
                                                       
Balance, June 30, 2019
   
1,155,426
   
$
1,155
     
26,479,471
   
$
26,479
   
$
13,900,422
   
$
(19,081,827
)
 
$
(5,153,771
)


   
 
FOR THE SIX MONTHS ENDED JUNE 30, 2018
 
   
 
Convertible Preferred
                           
Total
 
   
 
Stock - Series A
   
Common Stock
   
Additional
   
Accumulated
   
Stockholders'
 
   
 
Shares
   
Amount
   
Shares
   
Amount
   
Paid-In Capital
   
Deficit
   
Deficiency
 
 
                                         
Balance, January 1, 2018
   
643,790
   
$
644
     
25,349,236
   
$
25,349
   
$
9,969,520
   
$
(14,552,887
)
 
$
(4,557,374
)
 
                                                       
Issuance of Series A Convertible
Preferred Stock for cash
   
6,667
     
6
     
-
     
-
     
49,994
     
-
     
50,000
 
 
                                                       
Series A Convertible Preferred Stock dividends:
     Accrual of earned dividends
   
-
     
-
     
-
     
-
     
(107,496
)
   
-
     
(107,496
)
 
                                                       
Net loss
   
-
     
-
     
-
     
-
     
-
     
(712,184
)
   
(712,184
)
 
                                                       
Balance, March 31, 2018
   
650,457
     
650
     
25,349,236
     
25,349
     
9,912,018
     
(15,265,071
)
   
(5,327,054
)
 
                                                       
Series A Convertible Preferred Stock dividends:
Accrual of earned dividends
   
-
     
-
     
-
     
-
     
(109,464
)
   
-
     
(109,464
)
 
                                                       
Net loss
   
-
     
-
     
-
     
-
     
-
     
(360,729
)
   
(360,729
)
 
                                                       
Balance, June 30, 2018
   
650,457
   
$
650
     
25,349,236
   
$
25,349
   
$
9,802,554
   
$
(15,625,800
)
 
$
(5,797,247
)



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

3

CELL SOURCE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

      
For The Six Months Ended June 30,
 
   
2019
   
2018
 
Cash Flows From Operating Activities:
           
Net loss
 
$
(2,411,494
)
 
$
(1,072,913
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Change in fair value of derivative liabilities
   
(85,000
)
   
(274,900
)
Warrant modification expense
   
229,400
     
-
 
Amortization of debt discount
   
6,529
     
201,455
 
Loss on exchange of notes payable for preferred shares
   
262,470
     
-
 
Loss on extinguishment of debt
   
1,504
     
-
 
Gain on forgiveness of accrued expenses
   
(38,427
)
   
-
 
Stock-based compensation:
               
Warrants
   
57,636
     
-
 
Changes in operating assets and liabilities:
               
Prepaid expenses
   
16,759
     
30,526
 
Other current assets
   
(21,459
)
   
1,097
 
Accounts payable
   
15,882
     
61,274
 
Accrued expenses
   
502,896
     
79,403
 
Accrued expenses-related parties
   
-
     
17,015
 
Accrued interest
   
132,894
     
42,806
 
Accrued interest - related parties
   
1,488
     
1,488
 
Accrued compensation
   
39,796
     
(5,760
)
Net Cash Used In Operating Activities
   
(1,289,126
)
   
(918,509
)
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of notes payable
   
70,000
     
500,000
 
Proceeds from issuance of convertible notes payable
   
100,000
     
-
 
Proceeds from cash advances
   
75,000
     
-
 
Repayment of notes payable
   
(70,000
)
   
-
 
Proceeds from issuance of preferred stock - Series A
   
1,123,269
     
50,000
 
Net Cash Provided By Financing Activities
   
1,298,269
     
550,000
 
                 
Net Increase (Decrease) In Cash
   
9,143
     
(368,509
)
                 
Cash - Beginning of Period
   
18,934
     
371,048
 
                 
Cash - End of Period
 
$
28,077
   
$
2,539
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for:
               
Interest
 
$
-
   
$
18,030
 
                 
Non-cash investing and financing activities:
               
Preferred stock issued in exchange for notes and advances payable
 
$
1,090,254
   
$
-
 
Repayment of convertible note payable and accrued interest by third party
 
$
133,488
   
$
-
 
Accrual of earned preferred stock dividends
 
$
(337,008
)
 
$
(216,960
)
Common stock issued in connection with payment of Series A Convertible Preferred Stock dividends in-kind
 
$
301,379
   
$
-
 
Warrants and conversion options issued in connection with issuance and extension of notes payable
 
$
7,400
   
$
49,600
 
Original issue discount in connection with convertible note payable
 
$
3,000
   
$
-
 



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

4

CELL SOURCE, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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

Organization and Operations

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

Note 2 - Going Concern and Management Plans

During the six months ended June 30, 2019, the Company had not generated any revenues, had a net loss of approximately $2,411,000 and had used cash in operations of approximately $1,289,000. As of June 30, 2019, the Company had a working capital deficiency of approximately $5,154,000 and an accumulated deficit of approximately $19,082,000. Subsequent to June 30, 2019 and as more fully described in Note 9, Subsequent Events, the Company received aggregate proceeds of $118,000 through the issuance of a short-term convertible note and note payable and aggregate proceeds of $47,500 through the sale of 6,333 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.

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

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

5


Note 3 - Summary of Significant Accounting Policies

Since the date of the Annual Report on Form 10-K for the year ended December 31, 2018, there have been no material changes to the Company’s significant accounting policies.

Loss Per Share

The Company computes basic net loss per share by dividing net loss by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable. Weighted average shares outstanding for the three and six months ended June 30, 2019 and 2018 includes the weighted average impact of warrants to purchase an aggregate of 2,043,835 shares of common stock because their exercise price was determined to be nominal.

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

   
June 30,
 
   
2019
   
2018
 
             
Warrants
 
6,409,157
     
11,915,481
 
Convertible notes
   
1,073,921
     
1,535,189
 
Convertible preferred stock
   
11,554,260
     
6,504,570
 
Total
   
19,037,338
     
19,955,240
 

Convertible notes are assumed to be converted at the rate of $0.75 per common share, which is the conversion price as of June 30, 2019. However, such conversion rates are subject to adjustment under certain circumstances, which may result in the issuance of common shares greater than the amount indicated.

Note 4 - Fair Value

The Company determines the estimated fair value of amounts presented in these condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of June 30, 2019 and December 31, 2018, and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value of its restricted common stock during the three and six months ended June 30, 2019 based upon observations of the recent sales of Preferred Stock convertible into common stock as well as the thinly traded volume and closing prices of its common stock. The Company obtained a third-party valuation of its common stock as of December 31, 2017, which was also considered in management’s estimation of the fair value of its restricted common stock during the three and six months ended June 30, 2019.

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

Level 1
Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2
Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3
Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

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

6


Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs. The following table summarizes the valuation of the Company’s derivatives by the above fair value hierarchy levels as of June 30, 2019 and December 31, 2018 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 
       
Quoted Prices
             
         
In Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Liabilities
   
Inputs
   
Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Accrued compensation - common stock
 
$
37,500
   
$
-
   
$
-
   
$
37,500
 
Accrued compensation - warrants
   
45,997
     
-
     
-
     
45,997
 
Accrued compensation - warrants - related party
   
91,464
     
-
     
-
     
91,464
 
Derivative liabilities
   
351,300
     
-
     
-
     
351,300
 
Balance - June 30, 2019
 
$
526,261
   
$
-
   
$
-
   
$
526,261
 
                                 
Accrued compensation - common stock
 
$
37,500
   
$
-
   
$
-
   
$
37,500
 
Accrued compensation - warrants
   
24,741
     
-
     
-
     
24,741
 
Accrued compensation - warrants - related party
   
55,083
     
-
     
-
     
55,083
 
Derivative liabilities
   
200,500
     
-
     
-
     
200,500
 
Balance - December 31, 2018
 
$
317,824
   
$
-
   
$
-
   
$
317,824
 

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

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

   
Accrued
   
Derivative
       
   
Compensation
   
Liabilities
   
Total
 
                   
Balance - December 31, 2018
 
$
117,324
   
$
200,500
   
$
317,824
 
                         
Issuance of warrants and conversion options
   
-
     
7,400
     
7,400
 
Extinguishment of conversion option
   
-
     
(1,000
)
   
(1,000
)
Warrant modification
   
-
     
229,400
     
229,400
 
Accrued compensation - warrants
   
21,460
     
-
     
21,460
 
Accrued compensation - warrants - related party
   
36,844
     
-
     
36,844
 
Change in fair value
   
(667
)
   
(85,000
)
   
(85,667
)
                         
Balance - June 30, 2019
 
$
174,961
   
$
351,300
   
$
526,261
 

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

7

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

   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Risk-free interest rate
   
1.17%-2.18
%
   
1.93%-2.73
%
   
1.17%-2.44
%
   
1.93%-2.73
%
Expected term (years)
   
0.05-5.00
     
0.25-4.66
     
0.02-5.00
     
0.25-5.00
 
Expected volatility
   
110
%
   
110
%
   
110
%
   
110
%
Expected dividends
 
0.00
%
   
0.00
%
   
0.00
%
   
0.00
%

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

Note 5 – Notes Payable and Convertible Notes Payable

During the three months ended June 30, 2019 and 2018, the Company recorded interest expense of $55,917 and $30,586, respectively, and interest expense for related party debt of $554 and $748, respectively. During the six months ended June 30, 2019 and 2018, the Company recorded interest expense of $132,784 and $60,851, respectively, and interest expense for related party debt of $1,294 and $1,488, respectively.

During the three months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $6,529 and $35,125, respectively, and amortization of debt discount for related party debt of $0 and $9,863, respectively. During the six months ended June 30, 2019 and 2018, the Company recorded amortization of debt discount of $6,529 and $173,099, respectively, and amortization of debt discount for related party debt of $0 and $28,356, respectively.

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

As of June 30, 2019 and December 31, 2018, the Company had $251,206 and $302,974, respectively, of accrued interest and penalties related to notes payable, which is included with accrued interest and accrued interest – related parties on the condensed consolidated balance sheets.

Notes Payable

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

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

8

Convertible Notes Payable

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

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

Note 6 – Stockholders’ Deficiency

Series A Convertible Preferred Stock

On January 27, 2019, the Board of Directors extended the expiration date of the Private Placement Memorandum (“PPM”) to March 31, 2019 and has authorized two sixty-day extensions beyond that date at management's discretion, under which the Company continues to raise up to $7,500,000 via the sale of up to 1,000,000 shares of Series A Convertible Preferred Stock at $7.50 per share. On March 27, 2019, the Board of Directors extended the expiration date of the PPM to May 30, 2019. On May 30, 2019, the Board of Directors further extended the expiration date of the PPM to July 29, 2019.

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

On various dates from January 7, 2019 through June 12, 2019, the Company received proceeds of $1,123,269 through the sale of 149,768 shares of Series A Convertible Preferred Stock at $7.50 per share.

During the three and six months ended June 30, 2019, the Company accrued and recorded Series A Preferred Stock dividends of $188,973 and $337,008, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital. During the three and six months ended June 30, 2018, the Company accrued and recorded Series A Preferred Stock dividends of $109,464 and $216,960, respectively, with an increase in liabilities and a corresponding decrease in additional paid-in capital.

During the three months ended June 30, 2019, the Company issued 401,860 shares of common stock valued at $0.75 per share for aggregate value of $301,379, pursuant to the terms of the Series A Convertible Preferred Stock Certificate of Designation, in connection with the partial payment of accrued dividends for Series A Convertible Preferred Stock, as more fully described in the Series A Convertible Preferred Stock section of this footnote.

Stock-Based Compensation

During the three and six months ended June 30, 2019, the Company recognized expense of $24,629 and $57,636, respectively, of stock-based compensation related to warrants. During the three and six months ended June 30, 2018, the Company did not recognize any stock-based compensation expense. As of June 30, 2019, there was no unrecognized stock-based compensation expense.

9

Stock Warrants

On June 25, 2019, the Company extended the expiration date of a warrant to purchase 1,600,000 shares of common stock at an exercise price of $0.75 per share originally from June 27, 2019 to June 27, 2023. As a result of the modification, the Company recognized warrant modification expense of $229,400 during the three and six months ended June 30, 2019.

Note 7 – Related Party Transactions

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

During the three months ended June 30, 2019 and 2018, the Company recorded research and development expense of $25,000 and $77,485, respectively, and during the six months ended June 30, 2019 and 2018, the Company recorded research and development expense of $50,000 and $302,624, respectively, in connection with the agreement with Yeda.

On January 7, 2018, the Company received proceeds of $50,000 from the Chairman of the Board through the sale of 6,667 shares of Series A Convertible Preferred Stock at $7.50 per share, which amount is included in the issuances disclosed in Note 6, Stockholders’ Deficiency.

Note 8 – Commitments and Contingencies

MD Anderson Agreements

On February 19, 2019, as amended on April 4, 2019 and August 13, 2019, the Company entered into an agreement with The University of Texas M.D. Anderson Cancer Center (“MD Anderson”) for the latter to perform cell production and conduct Phase I/II human clinical trials. In connection with that agreement, the Company committed to fund such work in the amount of approximately $2,038,000 over a two-year period beginning that same date, with payments becoming due as certain specified milestones are met by MD Anderson.

The Company recognized $297,015 and $981,270 of research and development expenses during the three and six months ended June 30, 2019, respectively, associated with services provided by MD Anderson in the periods, under the two agreements with MD Anderson dated November 2018 and February 2019. The Company did not recognize any expense pursuant to the agreements with MD Anderson for the three and six months ended June 30, 2018. As of June 30, 2019, the Company had $383,063 of accrued research and development expenses pursuant to the agreements with MD Anderson, which are included within accrued expenses on the condensed consolidated balance sheet.

Litigation

Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.

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. A motion for summary judgement was heard on July 12, 2019 and the Company did not oppose the motion. The Company has had discussion with respect to entering into an agreement providing for a payment plan with the holder of the note, but no agreement has yet been reached.

10


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. As of June 30, 2019 and December 31, 2018, the Company has not accrued any amounts for contingencies.

Note 9 – Subsequent Events

Notes Payable and Convertible Notes Payable

On July 2, 2019, the Company issued a convertible note payable in the principal amount of $68,000. The note accrues interest at 12% per annum and matures on July 2, 2020.

On July 29, 2019, the Company issued a note payable in the principal amount of $50,000. The note does not accrue interest and matures on January 29, 2020. In connection with the note issuance, the Company issued to the noteholder a five-year immediately vested warrant for the purchase of 50,000 shares of common stock at $0.75 per share.

Series A Convertible Preferred Stock

On various dates between July 24 and July 29, 2019, the Company received aggregate proceeds of $47,500 through the sale of 6,333 shares of Series A Convertible Preferred Stock at $7.50 per share.

On July 29, 2019, the Board of Directors extended the expiration date of the PPM to September 30, 2019 and has authorized two sixty-day extensions beyond that date at management's discretion, under which the Company continues to raise up to $7,500,000 via the sale of up to 1,000,000 shares of Series A Convertible Preferred Stock at $7.50 per share.

Stock Warrants

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

Adoption of Equity Incentive Plan and Grant of Option

On August 13, 2019, the Company’s Board of Directors approved the adoption of the Company’s 2019 Equity Incentive Plan (the “Plan”). A total of 7,900,000 shares of common stock are reserved for issuance under the Plan, which permits the Board of Directors to issue stock options, stock appreciation rights, restricted stock, restricted stock units, performance and other awards to employees, consultants and directors of the Company. As of the date of filing, the Company’s shareholders have not approved the Plan.

On the same date, the Board of Directors approved the grant under the Plan of options to purchase an aggregate of 3,782,004 shares of common stock at an exercise price of $0.75 per share to a consultant to the Company.

11

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

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

Overview

We are a biotechnology company focused on developing cell therapy treatments based on the management of immune tolerance.  Our technology platform has been extensively tested by in vitro studies and confirmed in animal trials. We continue to move forward towards clinical trials as more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 which was filed with the SEC on April 1, 2019.

Consolidated Results of Operations

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

Research and Development

Research and development expense was $410,770 and $109,407 for the three months ended June 30, 2019 and 2018, respectively, an increase of $301,363, or 275%, primarily related to the commencement of research by MD Anderson.

Selling, General and Administrative

Selling, general and administrative expense was $319,138 and $314,500 for the three months ended June 30, 2019 and 2018, respectively, an increase of $4,638, or 1%.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities for the three months ended June 30, 2019 and 2018 was a gain of $32,400 and a gain of $139,500, respectively, primarily due to the warrants and conversion options, which are deemed to be derivative liabilities, either drawing closer to their expiration dates or were no longer outstanding.

Interest Expense

Interest expense for the three months ended June 30, 2019 and 2018 was $56,471 and $31,334, respectively, an increase of $25,137, or 80%, primarily as a result of a convertible note being issued during the three months ended June 30, 2019.

Amortization of Debt Discount

Amortization of debt discount was $6,529 and $44,988 for the three months ended June 30, 2019 and 2018, respectively, which is associated with warrants, conversion options and original issue discounts issued in connection with notes payable.

12

Warrant Modification Expense

During the three months ended June 30, 2019, we recognized $229,400 of warrant modification expense related to the extension of the expiration date of a certain warrant.

Loss on Extinguishment of Debt

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

Gain on Forgiveness of Accrued Expenses

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

Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018 

Research and Development

Research and development expense was $1,160,512 and $412,162 for the six months ended June 30, 2019 and 2018, respectively, an increase of $748,350, or 182%, primarily related to the commencement of research by MD Anderson.

Selling, General and Administrative

Selling, general and administrative expense was $740,428 and $671,857 for the six months ended June 30, 2019 and 2018, respectively, an increase of $68,571, or 10%, primarily related to increases of approximately $58,000 in stock-based compensation expense in the 2019 period, approximately $29,000 of marketing fees, offset by decreases of approximately $22,000 in travel and entertainment expenses.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities for the six months ended June 30, 2019 and 2018 was a gain of $85,000 and a gain of $274,900, 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 six months ended June 30, 2019 and 2018 was $134,078 and $62,339, respectively, an increase of $71,739, or 115%, primarily as a result of penalties associated with certain past due notes payable and of a convertible note being issued during the six months ended June 30, 2019.

Amortization of Debt Discount

Amortization of debt discount was $6,529 and $201,455 for the six months ended June 30, 2019 and 2018, respectively, which is associated with warrants and conversion options issued in connection with notes payable.

Warrant Modification Expense

During the six months ended June 30, 2019, we recognized $229,400 of warrant modification expense on the extension of an expiration date of a certain warrant.

Loss on Extinguishment of Debt

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

Gain on Forgiveness of Accrued Expenses

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

13

Liquidity and Going Concern

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

   
June 30,
   
December 31,
 
   
2019
   
2018
 
   
(unaudited)
       
             
Cash
 
$
28,077
   
$
18,934
 
Working capital deficiency
 
$
(5,153,771
)
 
$
(4,920,171
)

During the six months ended June 30, 2019, we have not generated any revenues, had a net loss of approximately $2,411,000 and had used cash in operations of approximately $1,289,000. As of June 30, 2019, we had a working capital deficiency of approximately $5,154,000 and an accumulated deficit of approximately $19,082,000. Subsequent to June 30, 2019, we received aggregate proceeds of $118,000 through the issuance of a short-term convertible note and note payable and aggregate proceeds of $47,500 through the sale of 6,333 shares of Series A Convertible Preferred Stock at $7.50 per share. These conditions raise substantial doubt about our ability to continue as a going concern within twelve months from the date these financial statements are issued.

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 six months ended June 30, 2019 and 2018, our sources and uses of cash were as follows:

Net Cash Used in Operating Activities

We experienced negative cash flows from operating activities for the six months ended June 30, 2019 and 2018 in the amounts of $1,289,126 and $918,509, respectively. The net cash used in operating activities for the six months ended June 30, 2019 was primarily due to cash used to fund a net loss of $2,411,494, adjusted for net non-cash income in the aggregate amount of $434,112, partially offset by $688,256 of net cash provided by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the six months ended June 30, 2018 was primarily due to cash used to fund a net loss of $1,072,913, adjusted for net non-cash income in the aggregate amount of $73,445, partially offset by $227,849 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 six months ended June 30, 2019 and 2018 was $1,298,269 and $550,000, respectively. The net cash provided by financing activities during the six months ended June 30, 2019 was attributable to $1,123,269 of proceeds received from the issuance of Series A preferred stock, $175,000 of net proceeds from debt financings. The net cash provided by financing activities during the six months ended June 30, 2018 was attributable to $500,000 of proceeds from the issuance of notes payable and $50,000 of proceeds received from the issuance of Series A preferred stock.

Off-Balance Sheet Arrangements 

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

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

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

Not applicable.

14


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 June 30, 2019, 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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

15

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Except as described below, we are not involved in any pending legal proceeding or litigations and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.

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. A motion for summary judgement was heard on July 12, 2019 and the Company did not oppose the motion. The Company has had discussion with respect to entering into an agreement providing for a payment plan with the holder of the note, but no agreement has yet been reached.

Item 1A. Risk Factors.

There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on April 1, 2019.

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

In May 2019, the Company issued a five-year warrant to purchase 35,000 shares of common stock having an exercise price of $0.75 per share to a purchaser of a note in the principal amount of $70,000.  The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), in connection with this transaction.

In May 2019, the Company issued a convertible note in the principal amount of $103,000 for cash proceeds of $100,000. The note, which matures on November 20, 2019, accrues interest at a rate of 8% per annum and is convertible into common stock at (i) $0.75 per share or (ii) in the event of a default, at 75% of the volume-weighted average trading price for the ten consecutive trading days prior to the conversion date.  The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with this transaction.

During the three months ended June 30, 2019, the Company sold 106,437 shares of Series A Preferred Stock to accredited investors at a purchase price of $7.50 per share. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.

During the three months ended June 30, 2019, the Company issued 401,860 shares of common stock as a payment of in-kind dividends to holders of Series A Convertible Preferred Stock.  The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.

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

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

The Company sold a total of 6,333 shares of Series A Preferred Stock to accredited investors at a purchase price of $7.50 per share during July 2019. The Company relied upon the exemption provided by Section 4(2) of the Securities Act in connection with these transactions.

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

Item 3. Defaults Upon Senior Securities.

As of June 30, 2019 and through the date of this filing, notes payable and convertible notes payable with face values totaling $1,983,000 were past due and are classified as current liabilities on the condensed consolidated balance sheet as of June 30, 2019.  Such notes continue to accrue interest and all relevant penalties have been accrued as of June 30, 2019. Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See 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.

16


Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

10.40
 
2019 Equity Incentive Plan
     
10.41
 
Stock Option Agreement dated August 13, 2019 between Cell Source, Inc. and Yair Reisner.
     
10.42
 
Stock Option Agreement dated August 13, 2019 between Cell Source, Inc. and Yair Reisner.
     
10.43
 
Convertible Promissory Note dated July 2, 2019.
     
10.44
 
Convertible Promissory Note dated May 20, 2019.
     
10.55
 
Promissory Note dated July 29, 2019.
     
31
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and Chief Financial Officer
     
32 *
  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and Chief Financial Officer
     
101.INS   XBRL Instance Document
101.SCH   XBRL Schema Document
101.CAL   XBRL Calculation Linkbase Document
101.DEF   XBRL Definition Linkbase Document
101.LAB   XBRL Label Linkbase Document
101.PRE   XBRL Presentation Linkbase Document


*
  This certification is being furnished and shall not be deemed "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise be subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
 
17


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: August 14, 2019
By:
/s/        Itamar Shimrat
 
 
 
Name: Itamar Shimrat
 
 
 
Title:   Chief Executive Officer and
            Chief Financial Officer (Principal
            Executive, Financial and Accounting
            Officer)
 
 


18
Exhibit 10.40

CELL SOURCE, INC.

2019 EQUITY INCENTIVE PLAN

This Cell Source, Inc. 2019 Equity Incentive Plan (the “Plan”) is effective as of August 13, 2019 (the “Effective Date”)

1.
Purposes and Eligibility.


(a)
General Purpose. The purposes of this Plan are (i) to enable Cell Source, Inc., a Nevada corporation, (the “Company”) and its Affiliates to attract and retain the types of Employees, Directors and Consultants who will contribute to the Company’s long range success; (ii) provide incentives that align the interests of Employees, Directors and Consultants with those of the shareholders of the Company; and (iii) promote the success of the Company’s business.


(b)
Eligible Award Recipients. The persons eligible to receive Awards are the Employees, Consultants and Directors of the Company and its Affiliates, and such other individuals designated by the Administrator who are reasonably expected to become Employees, Consultants and Directors after the receipt of Awards.


(c)
Available Awards. The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and other Awards.

2.
Definitions.


(a)
Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.


(b)
Affiliate” means a corporation or other entity that, directly or through one or more intermediaries, controls, is controlled by or is under common control with, the Company.


(c)
Applicable Laws” means the requirements relating to or implicated by the administration of the Plan and Awards under applicable U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted, and the applicable laws of any foreign country or jurisdiction where Awards are granted under the Plan.


(d)
Award” means, individually or collectively, a right granted under the Plan, including an Incentive Stock Option, a Nonqualified Stock Option, a Stock Appreciation Right, an award of Restricted Stock, or an award of Restricted Stock Units.


(e)
Award Agreement” means the written agreement, contract, certificate or other instrument or document setting forth the terms and conditions applicable to an individual Award granted under the Plan, which may, in the discretion of the Company, be transmitted electronically to any Participant. Each Award Agreement shall be subject to the terms and conditions of the Plan.




(f)
Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular Person, such Person shall be deemed to have beneficial ownership of all securities that such Person has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time. The terms “Beneficially Owns” and “Beneficially Owned” have a corresponding meaning.


(g)
Board” means the Board of Directors of the Company.


(h)
“Change in Control” means the occurrence of any of the following events:


(i)
A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change of Control: (A) any acquisition by the Company or any Affiliate, (B) any acquisition by any employee benefit plan sponsored or maintained by the Company or any Subsidiary, (C) any acquisition which complies with clauses, (A), (B) and (C) of subsection (v) of this definition or (D) in respect of an Award held by a particular Participant, any acquisition by the Participant or any group of persons including the Participant (or any entity controlled by the Participant or any group of persons including the Participant); or


(ii)
If the Company has a class of securities registered pursuant to Section 12 of the Exchange Act, a change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this clause (ii), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control;


(iii)
A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection (iii), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets;


(iv)
The date which is ten (10) business days prior to the consummation of a complete liquidation or dissolution of the Company; or

2



(v)
The consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of the Company’s shareholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (1) the entity resulting from such Business Combination (the “Surviving Company”), or (2) if applicable, the ultimate parent entity that directly or indirectly has Beneficial Ownership of sufficient voting securities eligible to elect a majority of the members of the board of directors (or the analogous governing body) of the Surviving Company (the “Parent Company”), is represented by the Outstanding Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Outstanding Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Outstanding Company Voting Securities among the holders thereof immediately prior to the Business Combination; (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Company or the Parent Company) is or becomes the Beneficial Owner, directly or indirectly, of 50% or more of the total voting power of the outstanding voting securities eligible to elect members of the board of directors of the Parent Company (or the analogous governing body) (or, if there is no Parent Company, the Surviving Company); and (C) at least a majority of the members of the board of directors (or the analogous governing body) of the Parent Company (or, if there is no Parent Company, the Surviving Company) following the consummation of the Business Combination were Board members at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination.


(i)
Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein shall be deemed to include a reference to any regulations promulgated thereunder, and any successor or amended section of the Code.


(j)
Committee” means a committee of one or more Directors appointed by the Board to administer the Plan in accordance with Section 4 hereof.


(k)
Common Stock” means the common stock, par value $0.001 of the Company, or such other securities of the Company as may be designated by the Administrator from time to time in substitution thereof.


(l)
Company” means Cell Source, Inc., a Nevada corporation, or any successor thereto.


(m)
Consultant” means any individual or entity that performs bona fide services to the Company or an Affiliate, other than as an Employee or Director.


(n)
Director” means a member of the Board.

3



(o)
Disability” means, unless the applicable Award Agreement provides otherwise, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment; provided, however, that for purposes of determining the term of an Incentive Stock Option, the term Disability shall have the meaning ascribed to it under Section 22(e)(3) of the Code. The determination of whether an individual has a Disability shall be determined under procedures established by the Administrator. Except in situations where the Administrator is determining Disability for purposes of the term of an Incentive Stock Option within the meaning of Section 22(e)(3) of the Code, the Administrator may rely on any determination that a Participant is disabled for purposes of benefits under any long-term disability plan maintained by the Company or any Affiliate in which a Participant participates.


(p)
Employee” means any person, including an officer or Director, employed by the Company or an Affiliate, provided, that, for purposes of determining eligibility to receive Incentive Stock Options, an Employee shall mean an employee of the Company or a parent or subsidiary corporation within the meaning of Section 424 of the Code. Mere service as a Director or payment of a director’s fee by the Company or an Affiliate will not be sufficient to constitute “employment” by the Company or an Affiliate.


(q)
Exchange Act” means the Securities Exchange Act of 1934, as amended.


(r)
Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have higher or lower exercise prices and different terms), Awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award is reduced or increased. The Administrator will determine the terms and conditions of any Exchange Program in its sole discretion.


(s)
Fair Market Value” means, as of any date, the value of the Common Stock as determined as follows. If the Common Stock is listed on any established stock exchange or a national market system, including without limitation, the New York Stock Exchange or the NASDAQ Stock Market, the Fair Market Value shall be the closing price of a share of Common Stock as quoted on such exchange or system on the day of determination (or if no sales were reported the closing price on the date immediately preceding such date). In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons.


(t)
Grant Date” means the date on which the Administrator adopts a resolution, or takes other appropriate action, expressly granting an Award to a Participant that specifies the key terms and conditions of the Award or, if a later effective date is set forth in such resolution, then such effective date as is set forth in such resolution.


(u)
Incentive Stock Option” means an Option that is designated by the Administrator as an incentive stock option within the meaning of Section 422 of the Code and that meets the requirements set out in the Plan.


(v)
Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

4



(w)
Option” means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.


(x)
Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.


(y)
Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Code Section 424(e).


(z)
Participant” means an eligible person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Award.


(aa)
Performance Award” means an award granted pursuant to Section 10.


(bb)
Performance Goals” means, for a Performance Period, the one or more goals established by the Administrator for the Performance Period based upon business criteria or other performance measures determined by the Administrator in its discretion.


(cc)
Performance Period” means the one or more periods of time not less than one fiscal quarter in duration, as the Administrator may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of an Award.


(dd)
Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator. (ee) “Permitted Transferee” means: (i) a member of the Optionholder’s immediate family (child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,  father-in-law,  son-in-law,  daughter-in-law,  brother-in-law, or sister-in-law, including adoptive relationships), (ii) any person sharing the Optionholder’s household (other than a tenant or employee), (iii) a trust in which these persons have more than 50% of the Beneficial Ownership interest, (iv) a foundation in which these persons (or the Optionholder) control the management of assets, and (v) any other entity in which these persons (or the Optionholder) own more than 50% of the voting interests; and (vi) such other transferees as may be permitted by the Administrator in its sole discretion.


(ee)
Permitted Transferee” means: (i) a member of the Optionholder’s immediate family (child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships), (ii) any person sharing the Optionholder’s household (other than a tenant or employee), (iii) a trust in which these persons have more than 50% of the Beneficial Ownership interest, (iv) a foundation in which these persons (or the Optionholder) control the management of assets, and (v) any other entity in which these persons (or the Optionholder) own more than 50% of the voting interests; and (vi) such other transferees as may be permitted by the Administrator in its sole discretion.


(ff)
Person” means a person as defined in Section 13(d)(3) of the Exchange Act.

5



(gg)
Plan” means this Cell Source, Inc. 2019 Equity Incentive Plan.


(hh)
Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 8 of the Plan, or issued pursuant to the early exercise of an Option.


(ii)
Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 9. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.


(jj)
Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.


(kk)
Service Provider” means an Employee, Director or Consultant.


(ll)
Share” means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.


(mm)
Stock Appreciation Right” means the right pursuant to an Award granted under Section 7 to receive, upon exercise, an amount payable in cash or shares equal to the number of shares subject to the Stock Appreciation Right that is being exercised multiplied by the excess of (a) the Fair Market Value of a share of Common Stock on the date the Award is exercised, over (b) the exercise price specified in the Stock Appreciation Right Award Agreement.


(nn)
Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Code Section 424(f).

3.
Stock Subject to the Plan.


(a)
Stock Subject to the Plan.  Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of Shares that may be subject to Awards and sold under the Plan is Seven Million Nine Hundred Thousand (7,900,000) Shares.


(b)
Automatic Share Reserve Increase. The number of Shares available for issuance under the Plan will be increased on the first day of each fiscal year of the Company beginning with the 2020 fiscal year and ending with the 2028 fiscal year, in an amount equal to the least of (i) 3% of the outstanding Shares on the last business day of the immediately preceding fiscal year or (iii) such number of Shares determined by the Board.


(c)
Lapsed Awards. If an Award outstanding under the Plan expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an Exchange Program, or is forfeited to or repurchased by the Company due to the failure to vest, then the unpurchased Shares (or forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to Stock Appreciation Rights, only Shares actually issued pursuant to a Stock Appreciation Right will cease to be available under the Plan; all remaining Shares under Stock Appreciation Rights will remain available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan under any

6




Award will not be returned to the Plan and will become available for future distribution under the Plan; provided, however, that if Shares issued pursuant to an Award are repurchased by the Company or are forfeited to the Company due to the failure to vest, such Shares will become available for future grant under the Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an Award will not become available for future grant or sale under the Plan. To the extent that an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing and, subject to adjustment as provided in Section 15, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable under Code Section 422 and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under the Plan pursuant to Section 3(b).


(d)
Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan. Shares of Common Stock available for distribution under the Plan may consist, in whole or part, of authorized but unissued shares, or reacquired Common Stock.

4.
Administration of the Plan.


(a)
Procedure.


(i)
Multiple Administrative Bodies.  Different persons may administer the Plan with respect to different groups of Service Providers.


(ii)
Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.


(iii)
Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) in the Board’s sole discretion, a Committee, which Committee will be constituted to satisfy Applicable Laws.


(b)
Powers of the Administrator. Subject to the provisions of the Plan, Applicable Laws, and, in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:


(i)
to construe and interpret the Plan and apply its provisions;


(ii)
to prescribe, amend and rescind rules and regulations relating to the administration of the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or for qualifying for favorable tax treatment under applicable foreign laws;


(iii)
to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;


(iv)
to delegate its authority to one or more officers of the Company with respect to Awards that do not involve “insiders” within the meaning of Section 16 of the Exchange Act;

7



(v)
to determine when Awards are to be granted under the Plan and the applicable Grant Date;


(vi)
from time to time to select, subject to the limitations set forth in this Plan, those eligible Award recipients to whom Awards shall be granted;


(vii)
to determine the number of Shares to be covered by each Award;


(viii)
to determine whether each Option is to be an Incentive Stock Option or a Nonqualified Stock Option;


(ix)
to approve forms of Award Agreements for use under the Plan;


(x)
to determine the terms and conditions, not inconsistent with the terms of the Plan, of each Award, including but not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, any Performance Goals over any Performance Periods, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;


(xi)
to modify or amend any outstanding Awards, including for the purpose of modifying the time or manner of vesting, or the term of any outstanding Award, including but not limited to the discretionary authority to extend the post-termination exercisability period of Awards and to extend the maximum term of an Option (subject to Section 6(d)); provided, however, that if any such amendment would impair a Participant’s rights or increase a Participant’s obligations under his or her Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant’s consent;


(xii)
to modify the purchase price or the exercise price of any outstanding Award, provided that if the modification effects a repricing, shareholder approval shall be required before the repricing is effective;


(xiii)
to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of their employment for purposes of the Plan, which periods shall be no shorter than the periods generally applicable to Employees under the Company’s employment policies;


(xiv)
to make decisions with respect to outstanding Awards that may become necessary upon a change in corporate control or an event that triggers anti-dilution adjustments; (xv) to allow Participants to satisfy withholding tax obligations in a manner prescribed in Section 16;


(xv)
to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;


(xvi)
to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that otherwise would be due to such Participant under an Award;

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(xvii)
to interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; and


(xviii)
to exercise discretion to make any and all other determinations which it determines to be necessary or advisable for the administration of the Plan.


(c)
Effect of Administrator’s Decision. All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on the Company, and all Participants and any other holders of Awards, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious.


(d)
Delegation. The Committee or, if no Committee has been appointed, the Board may delegate administration of the Plan to a committee or committees of one or more members of the Board, and the term “Administrator” shall apply to any person or persons to whom such authority has been delegated. The Committee shall have the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board, the Committee or the Administrator shall include the committee or subcommittee for the duration of such delegation), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. The members of the Committee shall be appointed by and serve at the pleasure of the Board. From time to time, the Board may increase or decrease the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of the majority of its members or, in the case of a Committee comprised of only two members, the unanimous consent of its members, whether present or not, or by the written consent of the majority of its members and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable.


(e)
In addition to such other rights of indemnification as they may have as Directors or members of the Committee or otherwise, and to the extent allowed by Applicable Laws, each person who is, either individually or as a member of the Board or a Committee, covered by the term Administrator, shall be indemnified by the Company against the reasonable expenses, including attorney’s fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which the Committee may be party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted under the Plan, and against all amounts paid by such person in settlement thereof (provided, however, that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by such person in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, or in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful; provided, however, that within 60 days after the institution of any such action, suit or proceeding, such person shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding.

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5.
Eligibility.  Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, and Restricted Stock Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

6.
Stock Options.


(a)
Grant of Options. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Options in such amounts as the Administrator, in its sole discretion, will determine.


(b)
Option Agreement. Each Award of an Option will be evidenced by an Award Agreement that will specify the exercise price, the term of the Option, the number of Shares subject to the Option, the exercise restrictions, if any, applicable to the Option, and such other terms and conditions as the Administrator, in its sole discretion, will determine.


(c)
Limitations. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding such designation, however, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(c), Incentive Stock Options will be taken into account in the order in which they were granted, the Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted, and calculation will be performed in accordance with Section 422 of the Code. No Incentive Stock Option may be issued more than ten years following the earlier of (i) the date of adoption or (ii) the most recent date of approval of this Plan by the Company’s shareholders, except as permitted by Section 422 of the Code.


(d)
Term of Option. The term of each Option will be stated in the Award Agreement; provided, however, that the term will be no more than ten (10) years from the Grant Date thereof. In the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the Grant Date or such shorter term as may be provided in the Award Agreement.


(e)
Option Exercise Price and Consideration.


(i)
Exercise Price. The per Share exercise price for the Shares to be issued pursuant to the exercise of an Option will be determined by the Administrator, but will be no less than one hundred percent (100%) of the Fair Market Value per Share on the Grant Date. In addition, in the case of an Incentive Stock Option granted to an Employee who owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the Grant Date. Notwithstanding the foregoing provisions of this Section 6(e)(i), Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the Grant Date pursuant to a transaction described in, and in a manner consistent with, Code Section 424(a).

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(ii)
Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.


(iii)
Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option will be exercised and provided further that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Administrator determines in its sole discretion; (4) consideration received by the Company under cashless exercise program (whether through a broker or otherwise) implemented by the Company in connection with the Plan; (5) by net exercise, (6) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws, or (7) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator will consider if acceptance of such consideration may be reasonably expected to benefit the Company.


(f)
Exercise of Option.


(i)
Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.

An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable tax withholding). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan.

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Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.


(ii)
Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s termination as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within thirty (30) days of termination, or such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent that the Option is vested on the date of termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.


(iii)
Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within six (6) months of termination, or such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent the Option is vested on the date of termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.


(iv)
Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised within six (6) months following the Participant’s death, or within such longer period of time as is specified in the Award Agreement (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) to the extent that the Option is vested on the date of death, by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to the Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

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(g)
Transferability.  (i) An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Administrator, in a form satisfactory to the Administrator, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (ii) A Nonstatutory Stock Option may, in the sole discretion of the Administrator, be transferable to a Permitted Transferee, upon written approval by the Administrator to the extent provided in the Award Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.

7.
Stock Appreciation Rights.


(a)
Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.


(b)
Number of Shares. The Administrator will have complete discretion to determine the number of Shares subject to any Award of Stock Appreciation Rights.


(c)
Exercise Price and Other Terms. The per Share exercise price for the Shares that will determine the amount of the payment to be received upon exercise of a Stock Appreciation Right as set forth in Section 7(f) will be determined by the Administrator and will be no less than one hundred percent (100%) of the Fair Market Value per Share on the Grant Date. Otherwise, the Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under the Plan.


(d)
Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.


(e)
Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(d) relating to the maximum term and Section 6(f) relating to exercise also will apply to Stock Appreciation Rights.


(f)
Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:


(i)
The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times

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(ii)