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CELL SOURCE, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 19, 2014

The information set forth below should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as with the financial statements and related disclosures of Cell Source Limited for the years ended December 31, 2013 and 2012, which were included in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on July 1, 2014. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to the "Company," "us," "we," "our," and similar terms refer to Cell Source, Inc., a Nevada corporation, and its subsidiaries. Forward-Looking Statements 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, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks factors and uncertainties set forth in Part I, Item 1A of our Current Report on Form 8-K which was filed with the SEC on July 1, 2014.



Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Overview

Cell Source, Inc. is a Nevada corporation formed on June 6, 2012 under the name Ticket to See, Inc. ("TTSI"). On June 30, 2014, TTSI, Cell Source Limited and 100% of the shareholders of Cell Source Limited entered into and closed a Share Exchange Agreement pursuant to which Cell Source Limited became the wholly-owned subsidiary of TTSI (the "Share Exchange"). In connection with the Share Exchange, on June 26, 2014, TTSI changed its name to "Cell Source, Inc." Our wholly-owned subsidiary, Cell Source Limited was founded in 2011 as a privately held company located in Tel Aviv, Israel. Our business is based on over ten (10) years of prominent research at the Weizmann Institute, whose commercial arm is Yeda, from whom we license patented technology. Our exclusive, world-wide license provides us with access to certain discoveries, inventions and other intellectual property generated by Dr. Yair Reisner, Head of the Immunology Department at the Weizmann Institute, together with others. Dr. Reisner leads a team at the Weizmann Institute to continue the development of these technologies in order to facilitate the transition of those technologies from the laboratory to clinical trials. We also collaborate with Dr. Herman Einsele and Dr. Franco Aversa, leading figures in bone marrow transplantation for cancer treatment and research, both of whom plan to serve on our Scientific Advisory Board and will oversee our initial clinical trials which, when started, will focus on addressing cancer through cell therapy accompanied by bone marrow transplants. Our lead prospective product is our patented Veto-Cell immune system management technology, which is an immune tolerance biotechnology that enables the selective blocking of immune responses. The Company's target indications include lymphoma, multiple myeloma and BCLL, a form of leukemia. The treatment involves facilitating safe and successful transplantation engraftment (initially bone -marrow transplantation and subsequently organ transplantation) and ultimately effective treatment of a variety of non-malignant diseases. 14 Results of Operations



Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table presents selected items in our unaudited condensed consolidated statements of operations for the three months ended June 30, 2014 and 2013, respectively: For The Three Months Ended June 30, 2014 2013 Revenues $ - $ - Operating Expenses Research and development 220,995 87,436

Research and development - related party 398,845 329,753 Selling, general and administrative 397,338 79,100

Total Operating Expenses 1,017,178 496,289 Loss From Operations (1,017,178 ) (496,289 ) Other (Expense) Income Interest expense - (362,001 )

Change in fair value of derivative liability 31,100 54,300

Total Other Income (Expense) 31,100 (307,701 ) Net Loss $ (986,078 )$ (803,990 ) Research and Development Research and development expense was $619,840 and $417,189 for the three months ended June 30, 2014 and 2013, respectively, an increase of $202,651, or 49%, primarily because the proceeds from our recent equity financing permitted us to expand our research and development expenses, including expenses associated with key patents entering the National Phase in a number of countries around the world.



Selling, General and Administrative

Selling, general and administrative expense was $397,338 and $79,100 for the three months ended June 30, 2014 and 2013, respectively, an increase of $318,238, or 402%, primarily as a result of legal and professional fees associated with our Share Exchange transaction which was prepared for and closed in the current period. Interest Expense

Interest expense for the three months ended June 30, 2014 and 2013, was $0 and $362,001, respectively. Interest expense during the three months ended June 30, 2013 was primarily related to the amortization of debt discount associated

with our convertible notes.



Change in Fair Value of Derivative Liability

The change in fair value of derivative liability for the three months ended June 30, 2014 and 2013 was $31,100 and $54,300, respectively, which represents the change in fair value of the warrants and embedded conversion options associated with our convertible notes that were deemed to be derivative liabilities. 15



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table presents selected items in our unaudited condensed consolidated statements of operations for the six months ended June 30, 2014 and 2013, respectively: For The Six Months Ended June 30, 2014 2013 Revenues $ - $ - Operating Expenses Research and development 545,412 193,806 Research and development - related party 611,203



402,629

Selling, general and administrative 633,305 127,853 Total Operating Expenses 1,789,920 724,288 Loss From Operations (1,789,920 ) (724,288 ) Other (Expense) Income Interest expense - (396,534 ) Change in fair value of derivative liability (16,400 ) 64,500 Total Other Income (Expense) (16,400 ) (332,034 ) Net Loss $ (1,806,320 )$ (1,056,322 ) Research and Development Research and development expense was $1,156,615 and $596,435 for the six months ended June 30, 2014 and 2013, respectively, an increase of $560,180, or 94%, primarily because the proceeds from our recent equity financing permitted us to expand our research and development expenses, including expenses associated with key patents entering the National Phase in a number of countries around the world.



Selling, General and Administrative

Selling, general and administrative expense was $633,305 and $127,853 for the six months ended June 30, 2014 and 2013, respectively, an increase of $505,452, or 395%, primarily as a result of legal and professional fees associated with our Share Exchange transaction, which was prepared for and closed in the current period. Interest Expense Interest expense for the six months ended June 30, 2014, and 2013 was $0 and $396,534, respectively. Interest expense during the six months ended June 30, 2013 was primarily related to the amortization of debt discount associated

with our convertible notes.



Change in Fair Value of Derivative Liability

The change in fair value of derivative liability for the six months ended June 30, 2014 and 2013 was $(16,400) and $64,500, respectively, which represents the change in fair value of the warrants and embedded conversion options associated with our convertible notes that were deemed to be derivative liabilities. 16



Liquidity and Capital Resources

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

June 30, December 31, 2014 2013 (unaudited) Cash $ 889,332$ 28,878



Working capital deficiency $ (1,679,565 )$ (697,334 )

We have not generated any revenues since our inception, we have recurring net losses, we have a working capital deficiency as of June 30, 2014 and December 31, 2013 of $1,679,565 and $697,334, respectively, and we have used cash in operations of $2,149,810 and $340,090 during the six months ended June 30, 2014 and 2013, respectively. These conditions raise substantial doubt about our ability to continue as a going concern. Based upon our working capital deficiency and forecast for continued operating losses, we expect that the cash we currently have available will fund our operations through November 2014. Our ability to continue our operations is dependent on management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, 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 the Company will be successful in generating additional cash from equity or debt financings or other sources to be used for operations. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets if necessary.



During the six months ended June 30, 2014 and 2013, 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, 2014 and 2013 in the amounts of $2,149,810 and $340,090, respectively. The net cash used in operating activities for the six months ended June 30, 2014 was primarily due to cash used to fund a net loss of $1,806,320, adjusted for net non-cash expenses in the aggregate amount of $59,425, and $402,915 of net cash used to fund changes in the levels of operating assets and liabilities, primarily as a result of payments to vendors due to improved cash availability. The net cash used in operating activities for the six months ended June 30, 2013 was primarily due to cash used to fund a net loss of $1,056,322, adjusted for non-cash expenses in the aggregate amount of $409,024 partially offset by $307,208 of net cash provided due to changes in the levels of operating assets and liabilities, primarily as a result of increases in accounts payable and accrued expenses, due to cash constraints during the period.



Net Cash Used in Investing Activities

Net cash used in investing activities was $2,582 for the six months ended June 30, 2014, which was related to purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014 and 2013 was $3,012,846 and $210,000, respectively. The net cash provided by financing activities during the six months ended June 30, 2014 was attributable to $3,012,846 of net proceeds from our IPO (gross proceeds of $3,067,996 less $55,150 of issuance costs). The net cash provided by financing activities during the six months ended June 30, 2013 was attributable $210,000 of proceeds from the issuance of convertible notes.



Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 17



Critical Accounting Policies

There are no material changes from the critical accounting policies set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Current Report on Form 8-K which was filed with the SEC on July 1, 2014. Please refer to that document for disclosures regarding the critical accounting policies related to our business. Recent Accounting Standards In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, "Compensation - Stock Compensation" as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not anticipate that the adoption of this standard will have a material impact on our condensed consolidated financial statements. See the Notes to the Condensed Financial Statements within our Current Report on Form 8-K, which was filed with the SEC on July 1, 2014 for additional Recent Accounting Standards.



Significant Factors, Assumptions, and Methodologies Used in Estimating Fair Value of Common Stock

We performed valuations to estimate the fair value of our common stock during the first half of 2014 and during 2013. To determine the value of our common stock, we considered the following three possible valuation methods (1) the income approach, (2) the market approach and the (3) cost approach to estimate our enterprise value. The income approach focuses on the income-producing capability of a business by estimating value based on the expectation of future cash flows that a company will generate - such as cash earnings, cost savings, tax deductions, and the proceeds from disposition. These cash flows are discounted to the present using a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. The selected discount rate is generally based on rates of return available from alternative investments of similar type, quality, and risk. The market approach valuation method measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets. When applied to the valuation of equity interests, consideration is given to the financial condition and operating performance of the entity being appraised relative to those of publicly traded entities operating in the same or similar lines of business, potentially subject to corresponding economic, environmental, and political factors and considered to be reasonable investment alternatives. In addition to the income approach and market approach valuation methods, we also considered the cost approach as a valuation method. This approach measures the value of an asset by the cost to reconstruct or replace it with another

of like utility.



We selected the Market Approach to estimate the fair value of the Common shares as the Company sold shares of Common Stock to third parties in 2014 and 2013.

During the year ended December 31, 2013, we entered into an agreement with a

group of investors whereby, the investors purchased 735,327 units for cash

proceeds of $551,497 at $0.75 per unit. Each unit consisted of 1 share of

common stock and 1 five-year warrant, which entitles the holder to purchase 1

share of common stock at an exercise price of $0.75 per share.



During the six months ended June 30, 2014, we entered into an agreement with a

group of investors whereby the investors purchased 4,090,661 units for cash

proceeds of $3,067,996. Each unit was sold for $0.75 and consisted of 1 share

of common stock and 1 five-year warrant, which entitles the holder to purchase

1 share of common stock at an exercise price of $0.75 per share. 18



Using an option pricing method and the relative fair values, we derived the implied equity value for the Common Stock based on the sale of the Units described above.

Six months ended June 30, 2014 Year ended December 31, 2013 Common Stock Fair Allocation Common Stock Fair Allocation Equivalents Value % Equivalents Value % Common stock 4,090,661 $ 3,067,996 57 % 735,327 $ 551,497 54 % Warrants 4,090,661 $ 2,320,054 43 % 735,327 $ 470,800 46 % Relative fair value of the common Relative fair value of the common stock $ 0.43 stock $ 0.40 There is inherent uncertainty in our forecasts and projections, and if we had made different assumptions and estimates than those described previously, the determined fair value of our common stock for either period could have been materially different.


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Source: Edgar Glimpses


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