UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31,June 30, 2019

 

or

 

[  ]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: 001-36763

 

MEDOVEX CORP.H-CYTE, INC

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada 46-3312262
(State or Other Jurisdiction of (IRS Employer
of Incorporation or Organization) Identification Number)

201 East Kennedy Blvd, Suite 700  
Tampa, Florida 33602
(Address of Principal Executive Offices) (Zip Code)
(844) 633-6839
(Registrant’s Telephone Number, Including Area Code)

(844) 633-6839

(Registrant’s Telephone Number, Including Area Code)

 

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.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files.)

[X] Yes [  ] No

 

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

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ]Smaller Reporting Company [X]
 Emerging Growth Company [X]

 

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 new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ] Yes [X] No

 

As of May 8,August 12, 2019, 94,732,24698,886,413 shares of the registrant’s common stock were outstanding.

 

 

   

 

MEDOVEX CORP.H-CYTE, INC AND SUBSIDIARIES

 

TABLE OF CONTENTS

  Page
PART I – FINANCIAL INFORMATION 
   
Item 1.Financial Statements 
 Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 (unaudited)4
 Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)5
 Condensed Consolidated StatementStatements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2019 (unaudited)6
 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)7
 Notes to Condensed Consolidated Financial Statements (unaudited)8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations22 23
Item 3.Quantitative and Qualitative Disclosures About Market Risk.Risks27 30
Item 4.Controls and Procedures.Procedures27 31
   
PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings.Proceedings28 31
Item 1A.Risk Factors.Factors28 31
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds2831
Item 3.Defaults Upon Senior Securities.Securities2831
Item 4.Mine Safety Disclosures.Disclosures2831
Item 5.Other Information.Information2831
Item 6.Exhibits.Exhibits2831
   
SIGNATURES2932

 

 2 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements”, as defined under United States federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

 our ability to market, commercialize and achieve broader market acceptance for our products;
   
 our ability to successfully expand, and achieve full productivity from, our sales, clinical support, and marketing capabilities;
   
 our ability to successfully complete the development of, and obtain regulatory clearance or approval for, our products; and
   
 the estimates regarding the sufficiency of our cash resources, our ability to obtain additional capital or our ability to maintain or grow sources of revenue.

 

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. You should also refer to the section of our Annual report on Form 10-K entitled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us, or any other person, that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this Quarterly Report, except to the extent required by applicable securities laws.

 

The “Risk Factors” included in the Company’s Annual Report on Form 10-K reflect the “Risk Factors” of H-CYTE (formerly MedoveX) business and do not include information relative to Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”).

3

MEDOVEX CORP.H-CYTE, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 March 31, 2019  December 31, 2018  June 30, 2019 (Unaudited) December 31, 2018 
          
Assets                
                
Current Assets                
Cash $2,591,869  $69,628  $300,068  $69,628 
Accounts receivable  76,163   15,242   13,896   15,242 
Other receivables  81,648   5,144   65,865   5,144 
Inventory  129,264      129,264    
Prepaid expenses  365,167   59,678   294,585   59,678 
Total Current Assets  3,244,111   149,692   803,678   149,692 
                
Right-of-use Asset  1,092,102    
Property and Equipment, net  274,820   266,875 
Intangibles  3,496,000    
Right-of-use asset  973,386    
Property and equipment, net  259,209   266,916 
Intangibles, net  3,312,000    
Goodwill  5,133,724      11,348,724    
Other Assets  40,839   38,288 
Other assets  29,239   38,288 
Total Assets $13,281,596  $454,855  $16,726, 236  $454,896 
                
Liabilities and Stockholders’ Equity (Deficit)                
                
Current Liabilities                
Interest payable $123,070  $158,371  $149,861  $158,371 
Accounts payable  941,303   851,604   717,079   851,604 
Accounts payable to related parties     180,000      180,000 
Accrued payroll  170,084    
Accrued liabilities  272,740   183,183   422,458   183,183 
Other current liabilities  227,752   463,025   733,111   462,856 
Notes payable  248,155   30,852   193,445   30,852 
Short-term note payable, net of debt discount  561,696      625,982    
Dividend payable  76,315      97,315    
Deferred revenue  395,814   322,264   838,377   326,064 
Lease liability, current portion  484,087      482,632    
Total Current Liabilities  3,501,016   2,189,299   4,260,260   2,192,930 
                
Long-Term Liabilities                
Lease liability, net of current portion  629,559      511,930    
Convertible debt to a related party     4,306,300 
Convertible debt to related parties     4,306,300 
Deferred rent     22,206      22,206 
Total Long-Term Liabilities  629,559   4,328,506   511,930   4,328,506 
                
Total Liabilities  4,130,575   6,517,805   4,772,190   6,521,436 
                
Commitments and Contingentcies        
Commitments and Contingencies (Note 10)        
                
Stockholders’ Equity (Deficit)                
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at March 31, 2019 and December 31, 2018      
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 7,200 and 0 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively  7    
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at March 31, 2019 and December 31, 2018      
Common stock - $.001 par value: 199,000,000 and 49,500,000 shares authorized as of March 31, 2019 and December 31, 2018, respectively. 94,036,746 and 33,681,388 shares issued and outstanding atMarch 31, 2019 and December 31, 2018, respectively  94,037   33,661 
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018      
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 7,000 and 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively  7    
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018      
Common stock - $.001 par value: 199,000,000 and 49,500,000 shares authorized as of June 30, 2019 and December 31, 2018, respectively. 98,886,360 and 33,661,388 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively  98,887   33,661 
Additional paid-in capital  17,610,529   3,566,339   25,705,975   3,566,339 
Accumulated deficit  (8,183,420)  (9,292,818)  (13,480,691)  (9,296,408)
Non-controlling interest  (370,132)  (370,132)  (370,132)  (370,132)
Total Stockholders’ Equity (Deficit)  9,151,021   (6,062,950)  11,954,046   (6,066,540)
                
Total Liabilities and Stockholders’ Equity (Deficit) $13,281,596  $454,855  $16,726,236  $454,896 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

4

MEDOVEX CORP.H-CYTE, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 Three Months Ended March 31, 
 2019  2018  Three Months Ended June 30, Six Months Ended June 30, 
      2019 2018 2019 2018 
Revenues $1,324,240  $2,902,797  $2,431,721  $2,441,007  $3,755,961  $5,343,804 
Cost of Sales  (559,319)  (858,855)  (492,145)  (644,236)  (988,964)  (1,475,373)
Gross Profit  764,921   2,043,942   1,939,576   1,796,771   2,766,997   3,868,431 
                        
Operating Expenses                        
General and administrative  3,020,509   2,150,438 
Sales and marketing  1,135,546   737,505 
Depreciation and amortization  211,218   24,497 
Salaries and related costs  3,480,354   888,643   5,164,686   2,178,034 
Other general and administrative  1,885,133   784,905   3,283,810   1,673,670 
Advertising  

1,584,850

   

419,337

   

2,720,396

   

1,156,842

 
Depreciation & amortization  208,619   24,391   419,837   48,888 
Total Operating Expenses  4,367,273   2,912,440   7,158,956   2,117,276   11,588,729   5,057,434 
                        
Operating Loss  (3,602,352)  (868,498)  (5,219,380)  (320,505)  (8,821,732)  (1,189,003)
                        
Other Income (Expense)                        
Other income  2,152      -   -   2,152   - 
Foreign currency transaction loss  (2,357)   
Foreign currency transaction gain  9,194   -   6,837   - 
Interest expense  (92,259)  (28,702)  (87,085)  (42,217)  (179,344)  (70,919)
Total Other Income (Expense)  (92,464)  (28,702)
Total Other Expenses  (77,891)  (42,217)  (170,355)  (70,919)
                        
Net Loss $(3,694,816) $(897,200) $(5,297,271) $(362,722) $(8,992,087) $(1,259,922)
                        
Dividend on outstanding Series B Preferred Stock  24,639      21,000      45,639    
Deemed dividend on adjustment to exercise price on certain warrants  404,384    
Deemed dividend on Beneficial Conversion Features  32,592    
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants        404,384    
Deemed dividend on beneficial conversion features        32,592    
Net loss attributable to common stockholders $(4,156,431) $(897,200) $(5,318,271) $(362,722) $(9,474,702) $(1,259,922)
                        
Loss per share - Basic and Diluted $(0.05) $(0.03)
        
Loss per share – Basic and Diluted $(0.06) $(0.01) $(0.11) $(0.04)
Weighted average outstanding shares used to compute basic and diluted net loss per share  85,513,024   33,661,388   96,407,668   33,661,388   87,236,222   33,661,388 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

5

MEDOVEX CORP.H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the three and six months ended March 31,June 30, 2019

(UNAUDITED)

 

  Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’
(Deficit)
 
  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
Balances - December 31, 2018    $   33,661,388  $33,661  $3,566,339  $(9,292,818) $(370,132) $(6,062,950)
Purchase Accounting entries due to the purchase transaction  9,250   9   24,717,217   24,717   6,442,182         6,466,908 
Adjustment for assets and liabilities not included in purchase transaction                 5,241,190      5,241,190 
Issuance of common stock in connection with private placement offering from January 8, 2019 through March 31, 2019        17,000,000   17,000   4,200,946         4,217,946 
Issuance of warrants in connection with private placement offering from January 8, 2019 through March 31, 2019              2,565,638         2,565,638 
Issuance of common stock pursuant to conversion of short-term debt in January 2019        500,000   500   125,437         125,937 
Issuance of warrants pursuant to conversion of short-term debt in January 2019              74,063         74,063 
Issuance of additional exchange shares - Note 3          17,263,889   17,264   (17,264)          
Issuance of common stock pursuant to conversion of short-term debt in February 2019        250,000   250   99,750         100,000 
Issuance of common stock pursuant to conversion of Preferred Series B Stock conversions  (2,050)  (2)  512,500   513   (511)         
Issuance of common stock pursuant to conversion of short-term debt and accrued interest        1,667   2   665         667 
Issuance of common stock in March 2019 in exchange for consulting fees incurred in Q1 2019        130,085   130   51,904         52,034 
Adjustment of exercise price on certain warrants              404,384   (404,384)      
Beneficial conversion on Preferred Series B Stock              32,592   (32,592)      
Stock based compensation              89,043         89,043 
Dividends payable              (24,639)        (24,639)
Net loss                 (3,694,816)     (3,694,816)
Balances - March 31, 2019  7,200  $7   94,036,746  $94,037  $17,610,529  $(8,183,420) $(370,132) $9,151,021 

  Preferred Stock  Common Stock  Additional  Accumulated  Non-Controlling  Total
Stockholders’ (Deficit)
 
  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
For the Three Months Ended June 30, 2019                                
Balance - March 31, 2019  7,200  $7   94,036,746  $94,037  $17,610,529  $(8,183,420) $(370,132) $9,151,021 
Purchase accounting entries due to the purchase transaction (Note 3)              6,215,000         6,215,000 
Issuance of common stock in connection with private placement offering        500,000   500   123,977         124,477 
Issuance of warrants in connection with private placement offering              75,523         75,523 
Issuance of common stock to pay accrued dividends on Preferred Series B stock        32,313   32   12,894         12,926 
Conversion of Preferred Series B Stock and accrued dividends  (200)     91,667   92   (92)         
Issuance of common stock per restricted stock award to executive (Note 9)        4,225,634   4,226   1,686,028         1,690,254 
Stock based compensation              3,116         3,116 
Dividends payable              (21,000)        (21,000)
Net loss                 (5,297,271)     (5,297,271)
Balance - June 30, 2019  7,000  $7   98,886,360  $98,887  $25,705,975  $(13,480,691) 

 

$

(370,132) 

 

$

11,954,046 
                                 
For the Six Months Ended June 30, 2019                                
Balance - December 31, 2018    $   33,661,388  $33,661  $3,566,339  $(9,296,408) $(370,132) $(6,066,540)
Purchase accounting entries due to the purchase transaction  9,250   9   24,717,217   24,717   12,657,182         12,681,908 
Adjustment for assets and liabilities not included in purchase transaction                 5,244,780      5,244,780 
Issuance of common stock in connection with private placement offering        17,500,000   17,500   4,324,923         4,342,423 
Issuance of warrants in connection with private placement offering              2,641,161         2,641,161 
Issuance of common stock  for repayment of  short-term debt        500,000   500   125,437         125,937 
Issuance of warrants for repayment of short-term debt              74,063         74,063 
Issuance of additional exchange shares (Note 3)        17,263,889   17,264   (17,264)         
Issuance of common stock pursuant to conversion of short-term debt        250,000   250   99,750         100,000 
Conversion of Preferred Series B Stock and accrued dividends  (2,250)  (2)  604,167   605   (603)         
Issuance of common stock to pay accrued interest on convertible  short-term debt        1,667   2   665         667 
Issuance of common stock to pay accrued dividends on Preferred Series B stock        32,313   32   12,894         12,926 
Issuance of common stock in exchange for consulting fees incurred        130,085   130   51,904         52,034 
Adjustment of exercise price on convertible debt              287,542   (287,542)      
Adjustment of exercise price on certain warrants              116,842   (116,842)      
Beneficial conversion of Preferred Series B Stock              32,592   (32,592)      
Issuance of common stock per restricted stock award to executive (Note 9)        4,225,634   4,226   1,686,028         1,690,254 
Stock based compensation              92,159         92,159 
Dividends payable              (45,639)        (45,639)
Net loss                 (8,992,087)     (8,992,087)
Balance - June 30, 2019  7,000  $7   98,886,360  $98,887  $25,705,975  $(13,480,691) $(370,132) $11,954,046 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

6

MEDOVEX CORP.H-CYTE, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  Six Months Ended 
  June 30, 2019  June 30, 2018 
Cash Flows from Operating Activities        
Net loss $(8,992,087) $(1,259,922)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  419,837   48,888 
Amortization of debt discount  127,863    
Stock-based compensation  1,782,413    
Common stock issued for consulting services  52,034    
Changes in operating assets and liabilities, net of purchase transaction:        
Accounts receivable  147,103   (19,169)
Other receivables  (60,721)   
Accounts receivable from related parties     47,033 
Inventory  2,191    
Prepaid expenses and other assets  (41,667)  73,422 
Interest payable  4,838   49,574 
Accounts payable  (691,635)  26,283 
Accounts payable to related parties  (180,000)   
Accrued liabilities  (222,778)  (116,412)
Other current liabilities  

555,056

   

133,232

 
Dividend payable  (6,137)   
Deferred revenue  512,313   (567,063)
         
Net Cash Used in Operating Activities  (6,591,377)  (1,584,134)
         
Cash Flows from Investing Activities        
Purchases of property and equipment  (13,703)  (203,695)
Purchase of business, net of cash acquired  (302,710)   
Net assets not included in purchase transaction  (69,629)   
Net Cash Used in Investing Activities  (386,042)  (203,695)
         
Cash Flows from Financing Activities        
Payments on notes payable obligations  (84,381)  (2,424)
Borrowings from notes payable obligations  8,656   8,081 
Proceeds from issuance of preferred and common stock, net of offering costs  4,342,423    
Proceeds from issuance of warrants, net of offering costs  2,641,161    
Proceeds from issuance of note payable     1,967,724 
Proceeds from contribution from stockholders  300,000    
Net Cash Provided by Financing Activities  7,207,859   1,973,381 
         
Net Increase in Cash  230,440   185,552 
         
Cash - Beginning of period  69,628   251,330 
         
Cash - End of period $300,068  $436,882 
         
Supplementary Cash Flow Information        
Cash paid for interest $8,623  $20,900 
         
Non-cash investing and financing activities        
Financing agreement for insurance policy $94,917  $ 
Conversion of convertible note and accrued interest to common stock $100,667  $ 
Conversion of note and accrued interest to common stock and warrants $

200,000

  $ 
Conversion of accrued dividends on Series B Preferred Stock to common stock $

12,926

  $ 
Issuance of common stock for Series B Preferred Stock and accrued dividends conversion $605  $ 
Dividends accrued $45,639  $ 

  Three Months Ended March 31, 
  2019  2018 
Cash Flows from Operating Activities        
Net loss $(3,694,816) $(897,200)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  211,218   24,497 
Amortization of debt discount  63,578    
Stock-based compensation  89,043    
Common stock issued for consulting services  52,034    
Changes in operating assets and liabilities, net of purchase transaction:        
Accounts receivable  84,836   (26,769)
Other receivables  (76,504)   
Accounts receivable from related parties     (25,361)
Inventory  2,191    
Prepaid expenses and other assets  (132,765)  112,798 
Interest payable  23,122   19,160 
Accounts payable  (527,148)  (27,434)
Accounts payable to related parties  (180,000)   
Accrued payroll  (281,123)   
Accrued liabilities  78,711   (151,615)
Dividends payable  (6,137)   
Deferred revenue  123,077   (390,271)
Net Cash Used in Operating Activities  (4,170,683)  (1,362,195)
         
Cash Flows from Investing Activities        
Purchase of property and equipment  (4,570)  (194,108)
Purchase of business, net of cash acquired  (302,710)   
Net assets not included in purchase transaction  (69,629)   
Net Cash Used in Investing Activities  (376,909)  (194,108)
         
Cash Flows from Financing Activities        
Payments on notes payable obligations  (22,407)   
Borrowings from notes payable obligations  8,656   8,081 
Proceeds from issuance of common stock, net of offering costs  4,217,946    
Proceeds from issuance of warrants, net of offering costs  2,565,638    
Proceeds from issuance of note payable     1,459,510 
Proceeds from contribution from stockholders  300,000    
Net Cash Provided by Financing Activities  7,069,833   1,467,591 
         
Net Increase (Decrease) in Cash  2,522,241   (88,712)
         
Cash - Beginning of period  69,628   251,330 
         
Cash - End of period $2,591,869  $162,618 
         
Supplementary Cash Flow Information        
Cash paid for interest $6,100  $1,931 
Non-cash investing and financing activities        
Financing agreement for insurance policy $127,500  $ 
Conversion of note and accrued interest to common stock  100,667    
Issuance of common stock for Series B Preferred Stock conversion  513    
Dividends accrued  18,502    

 

See accompanying notes to the unaudited condensed consolidated financial statements

7

 

MEDOVEX CORP.H-CYTE, INC

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Description of the Company

MedoveX Corp. (the “Company” or “MedoveX”) was incorporated in Nevada onOn July 30, 2013 as SpineZ11, 2019, Medovex Corp. (“SpineZ”MedoveX”) and changed its namenamed to MedoveX Corp. on March 20, 2014. MedoveX is“H-CYTE, Inc.” (H-CYTE or the parent companyCompany) by filing a Certificate of Debride Inc. (“Debride”Amendment (the “Amendment”), which was incorporated under to the lawsCompany’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of FloridaNevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on October 1, 2012. The Company is in the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company plans to seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the United States. The Company is presently reevaluating its approaches to revenue generation including the continuing use of distribution channels.15, 2019.

 

On October 18, 2018, MedoveXH-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the Asset Purchase Agreement was amended and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the Asset Purchase Agreement and its amendment, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.

 

Prior to the merger of H-CYTE and RMS was incorporatedon January 8, 2019, the consolidated results for H-CYTE included the financial activities of Regenerative Medicine Solutions, LLC, LI, RMS Nashville, LLC (“Nashville”), RMS Pittsburgh, LLC (“Pittsburgh”), RMS Scottsdale, LLC (“Scottsdale”), RMS Dallas, LLC (“Dallas”), State, LLC (“State”), CHIT, RMS LI Management, and Shareholder, H-CYTE included Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as VIEs.

As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: Debride Inc., Blue Zone Health Management, LLC (“BZHM”, changed in Delaware on December 26, 2012.July to H-CYTE Management, LLC), Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC). Additionally, H-CYTE has consolidated LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, as VIEs.

The Company’s RMS division is a healthcare medical biosciences company that develops and implements advanceadvanced innovative treatment options in regenerative medicine to treat an array of debilitating medical conditions. In addition, the company is the operator and manager of the various Lung Health Institute clinics. Committed to an individualized patient-centric approach, RMS consistently provides oversight and management of the highest quality care while producing positive outcomes. RMS offices are located in Tampa, Florida. The Lung Health Institute located in Tampa, Florida is a wholly owned subsidiary of RMS. RMS also provides oversight and management to the Lung Health Institutes located in Nashville, TN, Scottsdale AZ, Pittsburgh, PA, and Dallas, TX.

 

On May 10, 2019, the Company’s board of directors authorized a change in the Company’s name to H-Cyte, Inc. The Company is also in the processbusiness of takingdesigning and marketing proprietary medical devices for commercial use in the necessary stepsUnited States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company plans to effectuate this name change.seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the United States. The Company is presently reevaluating its approaches to revenue generation including the continuing use of its distribution channels and source of manufacturing.

 

Note 2 – Basis of presentation and Summary of Significant Accounting Policies

 

Based on the terms of the Asset Purchase Agreement and its amendment, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. RMS is deemed to be the acquiring company for accounting purposes and the transaction is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with accounting principles generally accepted in the United States.States (“U.S. GAAP”). The assets acquired and the liabilities assumed of RMS included as part of the purchase transaction are recorded at historical cost. Accordingly, the assets and liabilities of MedoveXH-CYTE are recorded as of the merger closing date at their estimated fair values. See(See Note 3.)

Further, the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity (Deficit), and the Condensed Consolidated Statements of Cash FlowFlows do not reflect the historical financial information related to MedoveXH-CYTE prior to the merger. The Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity (Deficit), and the Condensed Consolidated Statements of Cash FlowFlows only reflect the historical financial information related to RMS prior to the merger. For the Consolidated StatementStatements of Stockholders’ Equity (Deficit), the common stock, preferred stock, and additional paid in capital reflect the accounting for the stock received by the RMS members as of the merger as if it was received as of the beginning of the periods presented. For theThe Consolidated StatementStatements of Stockholders’ Equity (Deficit), the schedule in the Financial Statements reflects the activity from March 31, 2019 to June 30, 2019 and December 31, 2018 to March 31,June 30, 2019. For the comparable period from December 31, 2017 to March 31,June 30, 2018, the only activity in the Consolidated Statement of Stockholders’ Equity (Deficit) waswere the losslosses of $897,200approximately $362,722 and $1,259,922 for the three and six months ended March 31, 2018.June 30, 2018, respectively.

8

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”)GAAP and with the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments which included only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31,June 30, 2019 and December 31, 2018 and the results of operations and cash flows for the three and six months ended March 31,June 30, 2019 and 2018.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K. The December 31, 2018 financial information included in the Company’s Annual Report on Form 10-K reflect the historical financial information of H-CYTE business and do not include the RMS financial information. With the reverse merger, historical financial information for periods prior to the merger on January 8, 2019, presented in the comparative financial information included in the 2019 Form 10-Q, will only reflect the historical financial information related to RMS prior to the merger. (See Note 3.)

The results for the three and six months ended March 31,June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any future year.

 

8

principlesPrinciples of consolidationConsolidation

 

Accounting principles generally accepted in the United States of America (U.S. GAAP) requireU.S. GAAP requires that a related entity be consolidated with a company when certain conditions exist. An entity is considered to be a variable interest entity (VIE) when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by the parentParent would be required if it is determined that the Parent will absorb a majority of the VIE’s expected losses or residual returns if they occur, retain the power to direct or control the VIE’s activities, or both.

 

Prior to the merger of MedoveXH-CYTE and RMS on January 8, 2019, the consolidated results for MedoveXH-CYTE include the financial activities of Regenerative Medicine Solutions, LLC, LI, RMS Nashville, LLC (“Nashville”), RMS Pittsburgh, LLC (“Pittsburgh”), RMS Scottsdale, LLC (“Scottsdale”), RMS Dallas, LLC (“Dallas”), State, LLC (“State”), CHIT, RMS Lung InstituteLI Management, LLC (“RMS LI MGMT”), and RMS Shareholder, LLC.Shareholder. Additionally, MedoveXH-CYTE has consolidated Lung InstituteLI Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“and LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as VIEs.

 

As of the merger, the consolidated results for MedoveX includesH-CYTE include the following wholly-owned subsidiaries: Debride Inc., Blue Zone Health Management, LLC (“BZHM”), changed in July to H-CYTE Management, LLC), Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC.LLC). Additionally, MedoveXH-CYTE has consolidated LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, as VIEs.

 

The accompanying condensed consolidated financial statements include the accounts of the parent, its wholly-owned subsidiaries, and its variable interest entities.VIEs.

Accounts Receivable

Accounts receivable primarily represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables. Trade accounts receivable are stated net of an estimate made for doubtful accounts, if any. Management evaluates the adequacy of the allowance for doubtful accounts regularly to determine if any account balances will potentially be uncollectible. Customer account balances are considered past due or delinquent based on the contractual agreement with each customer. Accounts are written off when, in management’s judgment, they are considered uncollectible. At June 30, 2019 and December 31, 2018, management believes no allowance is necessary. For the three month period ended June 30, 2019, the Company recorded bad debt expense of approximately $60,000.

 

Goodwill And Intangibles

 

Goodwill is recorded at fair value and not amortized but is reviewed for impairment at least annually or more frequently if impairment indicators arise. Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value is “more likely than not” less than the carrying amount or if significant changes related to the business have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. The Company can elect to forgoforego the qualitative assessment and perform the quantitative test.

 

If the carrying amount exceeds its fair value, “Step 1” is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. This step compares the implied fair value of goodwill with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

9

 

The implied fair value of goodwill is determined by assigning the fair value to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The Company has elected to perform the annual impairment assessment for goodwill in the fourth quarter.

 

Intangibles acquired in a business combination are recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment at least annuallywhenever events or more frequently if indicators of impairment arise.changes in circumstances indicate that the carrying value may be greater than fair value. The Company’s intangible assets are patents and related proprietary technology for the DenerveX System.

Leases

 

In February 2016, the Financial Accounting Standard Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balanceon the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2019-01, Codification Improvements; ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

 

The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. Under ASCTopic 842, lessees are required to recognize a lease liability and right-of-use (“ROU”) asset for all leases (with the exception of short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the condensed consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components. At January 1, 2019, additional current lease liabilities of $475,000 and long-term lease liabilities of $713,000 with corresponding ROU assets of $1,167,000 were recognized based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

 

9

Other Receivables

 

Other receivables totaling approximately $82,000$66,000 at March 31,June 30, 2019 include receivables from the non-acquired Lung Institute, LLC to Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLCTampa) for approximately $75,000$53,000 and approximately $7,000$9,000 reimbursement receivable.receivable for reimbursement of expenses from a joint study. The $75,000$53,000 receivable was a result of Lung Institute, LLC being a transitory entity for Blue Zone Lung Institute Tampa, LLC while general liability insurance wasand the merchant services accounts were being underwritten for Blue Zone Lung Tampa, LLC. The $75,000transferred. A portion of the $53,000 receivable totaling $20,000 was paid to Blue Zone Lung Institute Tampa, LLC in MayJuly 2019. Blue Zone Health Management other receivables totaling $7,000 are to be reimbursed on behalf of a study being completed by Cognitive Health Institute Tampa.

Revenue Recognition

 

The companyCompany recognizes revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”)FASB Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five basic criteriasteps be met beforecompleted to determine when revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation. We recordThe Company records revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. The adoption of this standard did not have a material impact on the consolidated financial statements.

 

DenerveX System

 

The Company sells the DenerveX System through a combination of direct sales and independent distributors in international markets. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. The Company only records revenue when collectability is reasonably assured. Utilizing the five stepfive-step method outlined in Topic 606 to determine when revenue should be recognized, the Company’s policy is to recognize revenue when product is shipped to the customer, whether that customer is a distributor or an end user, as is the case in Germany.

 

10

Biomedical servicesServices

 

The biomedical services company (RMS) managesRMS wholly owns the Tampa, Florida Lung Health Institute (LHI). location and manages the other Lung Health Institute locations. The Lung Health Institute uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price accounts for medical, surgical, facility, and office services rendered by LHI for consented procedures and is recorded as revenue. The company recognizes revenue when the terms of a contract with a patient are satisfied.

 

LHI offers two types of cellular therapy treatments to their patients. The first type of treatment includes medical services rendered typically over typically a two-day period in which the patient receives cellular therapy. For this treatment type, revenue is recognized in full at time of service. LHI also offers a four-day treatment in which medical services are rendered typically over typically a two-day period and then again, approximately three months later, medical services are rendered for an additional two-days of treatment. Payment is collected in full for both service periods at the time the first treatment is rendered. LHI recognizes 62.5% of the transaction price during the first-round visit and 37.5% of transaction price during the second round visit. Transaction priceRevenue is allocated pro-ratarecognized when services are performed based on the related professional, facility, and diagnostic services for each session of treatment. The Company has deferred recognition of revenue amounting to approximately $396,000$838,000 and $326,000 at MarchJune 30, 2019 and December 31, 2019.2018, respectively.

Advertising

 

The Company expenses all advertising costs as incurred. For the three and six months ended March 31,June 30, 2019, and 2018, the Company had approximately $1,118,000$1,585,000 and $737,000,$2,720,000, respectively, in advertising costs.costs, as compared to $419,000 and $1,157,000, respectively, for the three and six months ended June 30, 2018.

 

Use of Estimates

 

In preparing the financial statements, U.S. GAAP requires disclosure regarding estimates and assumptions used by management that affect the amounts reported in financial statements and accompanying notes. The Company’s significant estimates include deferred revenue, the deferred income tax asset and the related valuation allowance, and the fair value of its share-based payment arrangements.

 

For those estimates that are sensitive to the outcome of future events, actual results could differ from those estimates.

 

Foreign Currency Transactions

 

The Company transacts some of its operating activities in foreign currencies, most notably the Euro. The Company also has certain assets and liabilities denominated in foreign currencies that are translated to USU.S. Dollars for reporting purposes as of and for the three and six months ended March 31,June 30, 2019. These amounts are immaterial and are included in other income or expense(expense) for the three and six months ended March 31,June 30, 2019. Because of the immaterial effect noted above, the Company did not present a separate statement of other comprehensive income.

Stock-Based Compensation

 

The Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718,Compensation - Stock Compensation. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee and non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures.

 

Recently Issued Accounting PronouncementsIncomeTaxes

 

From inception to June 30, 2019, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses is fully reserved as of June 30, 2019 and December 31, 2018, respectively, since it is currently likely that the benefit will not be realized in future periods.

As a result of the acquisition, the Company is required to file federal income tax returns and state income tax returns in the states of Arizona, Florida, Georgia, Minnesota, Pennsylvania, Tennessee, and Texas. There are no uncertain tax positions at June 30, 2019 or December 31, 2018. The Company considershas not undergone any tax examinations since inception.

11

Net Loss Per Share

Basic loss per share is computed on the applicabilitybasis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are antidilutive due to the Company’s net losses.

For the periods presented, there is no difference between the basic and impact of all ASUs issued, both effectivediluted net loss per share: 30,108,743 warrants and 517,509 common stock options outstanding were considered anti-dilutive and excluded for the period ended June 30, 2019. For the six-month period ended June 30, 2018, there were no dilutive securities as the accounting acquirer did not yet effective.historically have stock compensation programs.

 

Note 3 – Business Acquisition

 

On January 8, 2019, MedoveX CorporationH-CYTE completed its business combination with RMS under which MedoveXH-CYTE purchased certain assets and assumed certain liabilities of RMS. Pursuant to the terms of the Asset Purchase Agreement, MedoveXH-CYTE issued to the shareholders of RMS 33,661 shares plus 6,111 additional exchange shares (based on closing the sale of $2 million of new securities) for a total of 39,772 shares of Series C Preferred Stock where each share of Series C Preferred stock will, at the date of closing, automatically convert into 1,000 shares of Common Stock and represent approximately fifty-five percent (55%) of the outstanding voting shares of the Company.

 

Under the terms of the Asset Purchase Agreement, subsequent to the closing, the Company issued additional “Exchange Shares” to the shareholders of RMS to maintain the 55% ownership and not be diluted by the sale of convertible securities (“New Shares Sold”) until MedoveXH-CYTE raised an additional $5.65 million via the issuance of new securities. On the date of closing the companyCompany issued 6,111 additional Exchange Shares to RMS Shareholders as a result of the issuance of additional securities, which are included in the 39,772 shares above. Subsequent to the closing of the purchase transaction, allan incremental 11,153 additional Exchange Shares representing contingent considerationwere issued, for a total of 17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS for a total of 17,264 additionaland these Series C Preferred Stock which automaticallyshares converted to 1,00017,263,889 shares of Common Stock.

Because RMS shareholders own approximately 55% of the voting stock of MedoveXH-CYTE after the transaction, RMS is deemed to be the acquiring company for accounting purposes (the “Acquirer”) and the transaction is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with accounting principles generally accepted in the United States.U.S. GAAP. The assets acquired and the liabilities assumed of RMS included as part of the purchase transaction are recorded at historical cost. Accordingly, the assets and liabilities of MedoveXH-CYTE (the “Acquiree”) are recorded as of the merger closing date at their estimated fair values.

 

Under the terms of the business combination with RMS, MedoveXH-CYTE purchased certain assets and assumed certain liabilities of RMS. The assets of RMS reported on the MedoveXH-CYTE consolidated balance sheet as of December 31, 2018 that were excluded in the January 8, 2019 transaction were cash of approximately $70,000. The liabilities of RMS reflected on the MedoveXH-CYTE consolidated balance sheet as of December 31, 2018 but not assumed in the transaction included the following: convertible debt to a related party of approximately $4.3 million, interest payable of approximately $158,000, accounts payable of approximately $224,000 and other current liabilities of approximately $285,000. Additionally, there were certain on-going litigation matters that were not assumed as part of the January 9,8, 2019 RMS reverse merger transaction.acquisition.

 

Preliminary Purchase Price Allocation

 

The purchase price for the acquisition of the Acquiree has been allocated to the assets acquired and liabilities assumed based on their estimated relative fair values. The purchase price allocation herein is preliminary. The final purchase price allocation will be determined after completion of a thorough analysis to determine the fair value of all assets acquired and liabilities assumed but in no event later than one year following completion of the acquisition. Accordingly, the final acquisition accounting adjustments could differ materially from the allocation reflected as of March 31,June 30, 2019 presented herein. Any increase or decrease in the fair value of the assets acquired and liabilities assumed, as compared to the information shown herein, could also materially change the portion of purchase price allocated to goodwill and could materially impact the operating results of the Company following the acquisition due to differences in purchase price allocation, depreciation and amortization related to some of these assets and liabilities.

 

During the three months ended June 30, 2019 the Company revised its purchase price allocation for the acquisition. As a result, the Company recorded a measurement period adjustment of $6,215,000 as an increase to goodwill adjusting the amount recorded as of March 31, 2019. The adjustment resulted in corresponding increase of $6,215,000 to additional paid in capital.

12

The acquisition-date fair value of the consideration transferred is as follows:

 

Common shares issued and outstanding  24,717,271   24,717,271 
Common shares reserved for issuance upon conversion of the outstanding Series B Preferred Stock  2,312,500   2,312,500 
Total Common shares  27,029,771  27,029,771 
Closing price per share of MDVX Common stock on January 8, 2019 $0.40  $0.40 
  10,811,908  10,811,908 
Fair value of Outstanding Warrants and Options  2,220,000 
Fair value of outstanding warrants and options 2,220,000 
Cash consideration to RMS  (350,000)  (350,000)
  12,681,908 
Contingent consideration to RMS shareholders - Common shares  (6,215,000)
Total consideration $6,466,908  $12,681,908 

 

Just prior to the transaction, MedoveXH-CYTE had 24.5 million shares of common stock outstanding at a market capitalization of $9.8 million. The estimated fair value of the net assets of MedoveXH-CYTE was $8.4 million as of January 8, 2019. Measuring the fair value of the net assets to be received by RMS was readily determinable based upon the underlying nature of the net assets. The fair value of the MedoveXH-CYTE common stock is above the fair value of its net assets. The MedoveXH-CYTE net asset value is primarily comprised of definite-lived Intangibles (preliminarily estimated at $3.7 million)intangibles as of the closing and the RMS interest in the merger is significantly related to obtaining access to the public market. Therefore, the fair value of the MedoveXH-CYTE stock price and market capitalization as of the closing date is considered to be the best indicator of the fair value and, therefore, the estimated purchase price consideration.

 

Contingent consideration was recorded as a reduction to consideration paid, in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The Company calculated the fair value of the contingent consideration assets by assessing the likelihood of issuing stock to the accounting acquirer based upon a contingent capital raise clause. For contingent consideration to be settled in common stock, the Company uses public market data to determine the fair value of the shares as of the acquisition date and on an ongoing basis. During the three months ended March 31, 2019 the Company issued 17.3 million shares of common stock representing total consideration of $6.2 million, net of a 10% marketability discount as the shares were not readily available to trade.

The calculation of contingent consideration transferred during the period is as follows:

Total new shares issued by MedoveX  14,125,000 
MedoveX ownership %  45%
   31,388,889 
RMS ownership %  55%
Total additional Exchange Shares  17,263,889 
Closing price per share of MedoveX Common stock on January 8, 2019 $0.40 
Total contingent consideration $6,905,556 
     
Discount for lack of marketability – (10%) $(690,556)
Net Contingent Consideration $6,215,000 

The Acquisition was accounted for as a reverse merger under the acquisition method of accounting in accordance with ASC 805. Accordingly, the tangible assets and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on January 8, 2019:

 

Cash $(302,710) $(302,710)
Accounts receivable, net  145,757 
Accounts receivable 145,757 
Inventory  131,455  131,455 
Prepaid expenses  46,153  46,153 
Property and equipment  30,393  30,393 
Other  2,751  2,751 
Intangibles  3,680,000  3,680,000 
Goodwill  5,133,724   11,348,724 
Total assets acquired $8,867,523  $15,082,523 
Accounts payable and other accrued liabilities  1,645,399  1,645,399 
Interest-bearing liabilities and other  755,216   755,216 
Net assets acquired $6,466,908  $12,681,908 

 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and allocation of consideration to the identifiable intangible assets acquired.

This preliminary purchase price allocation has been reflected in the March 31, 2019 balance sheet and statement of operations for the three months ended March 31, 2019. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, technology and customer relationships as well as goodwill and (3) other changes to assets and liabilities. Intangible assets will beare recorded as definite-lived assets and amortized over the estimated period of economic benefit. Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. Goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.

 

Total interest bearing and other liabilities assumed are as follows:

 

Notes payable $99,017  $99,017 
Convertible notes payable  598,119  598,119 
Dividend payable  57,813  57,813 
Deferred rent  267   267 
Total interest-bearing and other $755,216 
Total interest-bearing and other liabilities $755,216 

 

Notes payable relate to promissory notes assumed by Aquiree in a 2015 acquisition, which acquisition was later divested in 2016, with the assumed promissory notes being retained by Aquiree. Payments on both of the notes are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes. The promissory notes had outstanding balances of approximately $99,000 plus accrued interest of approximately $3,000 at January 8, 2019. (See Note 11.)

 

Convertible notes payable representswere issued pursuant to a securities purchase agreement with select accredited investors, whereby the Acquiree offered up to $1,000,0001,000,000 in units at a purchase price of $50,000 per unit. Each Unit consistsconsisted of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants are exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. As a result of the price adjustment feature, the conversion price of the convertible notes was adjusted to $0.36 per share. The convertible notes have maturity dates between August and September 2019. The Company is in the process of negotiating a 30-day extension of the maturity dates. The notes are secured by all of the assets of the Company. (See Note 11.)

13

 

ASU 2017-11, Earnings Per Share (Topic 260), provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, and if one is determined to exist the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.

 

The down round feature embedded in the conversion option was triggered on January 8, 2019, as such, the Company recognized the down round as a deemed dividend of approximately $437,000 which reduced the income available to common stockholders.

 

In the offering, the Acquiree sold an aggregate of 15 units and issued to investors an aggregate of $750,000 in principal amount of convertible notes and 1,875,000 warrants to purchase common stock, resulting in total gross proceeds of $750,000 to the Company. If converted at $0.40 the convertible notes sold in the offering are convertible into an aggregate of 1,875,000 shares of common stock. The Acquiree recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of approximately $505,000 and $245,000, respectively. At acquisition date, the value of the notes was approximately $598,000.

 

Note 4 – Accounts ReceivableThe following schedule represents the amounts of revenue and net loss attributable to the MedoveX acquisition which have been included in the consolidated statements of operations for the periods subsequent to the acquisition date:

  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2019 
Revenues $-  $35,505 
Net loss attributable to H-CYTE  (894,585)  (1,948,962)

The following unaudited pro forma financial information represents the consolidated financial information as if the acquisition had been included in the consolidated results beginning on the first day of the fiscal year prior to its acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entity to remove any intercompany transactions and transaction costs incurred and to reflect any additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on the first day of the fiscal year prior to its acquisition date, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined entities may achieve as a result of the acquisition; the costs to combine the companies’ operations; or the costs necessary to achieve these cost savings, operating synergies or revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies’ under the current ownership and operation.

 

Accounts receivable primarily represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables. Trade accounts receivable are stated net of an estimate made for doubtful accounts, if any. Management evaluates the adequacy of the allowance for doubtful accounts regularly to determine if any account balances will potentially be uncollectible. Customer account balances are considered past due or delinquent based on the contractual agreement with each customer. Accounts are written off when, in management’s judgment, they are considered uncollectible. At March 31, 2019, management believes no allowance is necessary.

  For the Three Months Ending June 30, 2018 
  RMS  MedoveX  Pro Forma 
Revenues $2,441,007  $249,425  $2,690,432 
Net loss  (362,722)  (1,085,900) $(1,448,622)
Net loss attributable to common shareholders  (362,722)  (1,352,957) $(1,715,679)
             
Loss per share- basic and diluted $(0.01)     $(0.03)

  For the Six Months Ending June 30, 2018 
  RMS  MedoveX  Pro Forma 
Revenues $5,343,804  $392,614  $5,736,418 
Net loss  (1,259,922)  (2,339,686) $(3,599,608)
Net loss attributable to common shareholders  (1,259,922)  (2,606,743) $(3,866,665)
             
Loss per share- basic and diluted $(0.01)     $(0.07)

 

Note 54 - Inventory

 

Inventory consists only of finished goods and areis valued at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method. Inventories were acquired in the merger transaction from the MedoveXH-CYTE business and therefore there were no inventories prior to January 8, 2019.

 

Inventory consisted of the following items as of March 31, 2019, and December 31, 2018:following:

 

 March 31, 2019 December 31, 2018  June 30, 2019 December 31, 2018 
DenerveX device $3,014  $                       —  $3,014  $ — 
Pro-40 generator  126,250      126,250   
Total $129,264  $  $129,264 $ 

 

Note 65 – Right-of-use Asset And Lease Liability

 

In February 2016, the Financial Accounting Standard Board (“FASB”)FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balanceon the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company implemented the new standard effective January 1, 2019.

 

On adoption, additional current liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding right-of-useROU assets of approximately $1,167,000 were recognized, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

 

The consolidated balance sheet at March 31,June 30, 2019 reflects current lease liabilities of approximately $484,000$483,000 and long-term liabilities of $630,000,$512,000, with corresponding ROU assets of $1,092,000.$973,000.

 

The Company leases corporate office space in Tampa, FL and Atlanta, GA. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates.

 

14

As of March 31,June 30, 2019, maturities of lease liabilities are as follows:

 

Remainder of 2019 $358,000 
2020  454,000 
2021  139,000 
2022  94,000 
2023  68,000 
  $1,114,000 

14
Remainder of 2019 $240,000 
2020  454,000 
2021  139,000 
2022  94,000 
2023  68,000 
  $995,000 

 

Note 76 - Property andAnd Equipment

 

Property and equipment, net, consists of the following:

 

  Useful Life March 31, 2019  December 31, 2018 
Furniture and fixtures 5-7 years $202,142  $149,285 
Computers, medical equipment and software 3-7 years  294,935   278,434 
Leasehold improvements 15 years  154,129   154,129 
     651,206   581,848 
           
Less accumulated depreciation and amortization    (376,386)  (314,973)
Total   $274,820  $266,875 

  Useful Life June 30, 2019  December 31, 2018 
Furniture and fixtures 5-7 years $214,272  $149,285 
Computers and software 3-7 years  292,510   278,234 
Leasehold improvements 15 years  156,279   156,133 
     663,061   583,652 
Less accumulated depreciation    (403,852)  (316,736)
           
Total   $259,209  $266,916 

 

Depreciation expense amounted to approximately $27,000$25,000 and $24,000,$52,000, respectively, for the three and six months ended March 31, 2019June 30, 2019. Depreciation expense amounted to approximately $25,000 and 2018.$49,000 respectively, for the three and six months ended June 30, 2018.

 

Note 87 - Goodwill And Intangible Assets

Goodwill

The Company performs a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. The assumptions used in the analysis are based on the Company’s internal budget. The Company projected revenue, operating margins and cash flows for a period of five years, and applied a perpetual long-term growth rate thereafter. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results. The values assigned to each of the key assumptions reflect management’s past experience as their assessment of future trends, and are consistent with external/internal sources of information. As of March 31, 2019, no indicators of impairment existed.

Intangible Assets

 

The following table presents the changes in intangible assets during the period:

 

Balance at December 31, 2018 $  $ 
Acquisition during the period  3,680,000   3,680,000 
Balance at March 31, 2019  3,680,000 
Amortization during the three months ended March 31, 2019  (184,000)
Balance at June 30, 2019  

3,680,000

 
Amortization during the six months ended June 30, 2019  (368,000)
Intangible assets, net $3,496,000  $3,312,000 

 

The following is a schedule of expected future amortization of intangible assets as of March 31,June 30, 2019:

 

 Amount  Amount 
Remainder of 2019 $552,000  $368,000 
2020  736,000  736,000 
2021  736,000  736,000 
2022  736,000  736,000 
2023  736,000   736,000 
Total $3,496,000  $3,312,000 

15

Note 8 – Related Party Transactions

Consulting Expense

As described in Note 10, the Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee, in which Mr. Monteleone receives $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. This arrangement has no specified termination date. For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.

Board Member Expenses

For the three and six months ended June 30, 2019, the Company paid $5,000 each for Board of Director fees to Michael Yurkowsky and to Raymond Monteleone for a total of $10,000 and $10,000 respectively.

Debt and Other Obligations

The Company had various related party transactions in 2018. For the period of January 1, 2018 to March 13, 2018, the Company received $528,175 from one of its shareholders (RMS members) and $228,175 from its CEO (RMS CEO) as part of a line of credit that was established in 2017. The entire line of credit between the Member and the CEO in the amount of $1,856,350, including contributions from 2017, was transferred to the BioCell Capital, LLC debt instrument on March 13, 2018.

The BioCell Capital Line of Credit also consisted of related parties which contributed approximately $4,306,000, inclusive of the aforementioned $1,856,300, to the Company in 2018. The BioCell Capital Line of Credit was converted to equity as part of the APA on January 8, 2019.

The Company also received a short-term advance from one of its shareholders (RMS members), who was also the CEO of H-CYTE, in the amount of $180,000 in December 2018 for working capital needs. Approximately $114,000 of the advance was repaid in January 2019 and approximately $66,000 was converted to equity as part of the APA on January 8, 2019.

 

Note 9 - Equity Transactions

 

For the Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) as of December 31, 2018, the common stock, preferred stock and additional paid in capital reflect the accounting for the stock received by the RMS members as of the merger as if it was received as of the beginning of the periods presented and the historical accumulated deficit of RMS. As of the acquisition closing, before the contingent additional exchange shares impact from the sale of new securities),securities, the stock received by RMS was 33,661 shares of Series C Preferred Stock, converted immediately into approximately 33,661,000 shares of common stock, with common stock par value of approximately $33,700 and additional paid-in capital of approximately $3,566,000. The historical accumulated deficit of RMS as of the closing was approximately $9,293,000.$9,296,000.

 

Common Stock Issuance

 

On January 8, 2019, the Company entered into a securities purchase agreement (the “SPA”) with four purchasers (the “Purchasers”) pursuant to which the four Purchasers invested in the Company an aggregate amount of $2,000,000, with $1,800,000 in cash and $200,000 by cancellation of debt as explained below, in exchange for forty (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the principal amount of $50,000 and a warrant (the “Warrant”) to purchase common stock (the “Common Stock”) of the Company. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000, and subsequently increased to a maximum of $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of i) the closing of the subscription of the Maximum Amount and ii) March 31, 2019 (the “Termination Date”), subject to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company in exchange for four (4) Units on the same terms as all other Purchasers. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.

 

Each Convertible Note offered by the Company as part of the Unit bears an interest rate of 12% per annum, hashad a principal amount of $50,000, shall mature in one year from the original issue date on January 8, 2019, and will be convertible into shares of Common Stock at a price of $0.40 subject to adjustment stated in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Notes shall not own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of such Convertible Note. Upon default,If defaulted, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, pursuant to the SPA, the Company offers, as part of the Unit, Warrants to purchase the Common Stock at a price of $0.75 per share (the “Exercise Price”), subject to adjustments stated therein. The holder of each Warrant may purchase the number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of each Convertible Note while the Warrant is exercisable. The Warrants have a term of three years and shall be exercised in cash or on a cashless basis as described in the Warrant. All of such notes have been converted into an aggregate of 18,000,000 shares of common stock.

 

As reported on Form 8-K filings on January 25, 2019, February 8, 2019, March 15, 2019 and April 5, 2019, the Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,200,000, as of that latest date.

 

On February 28, 2019, the Company’s board authorized the increase limit to the offering to $8 million dollars and with the same terms extended the termination date of the offering to April 30, 2019.

As a result of the sales of new securities of at least $5.65 million, total additional Exchange shares of approximately 17,264 Series C Preferred Stock were issued and automatically converted to 17,263,889 shares of Common Stock.

16

 

All the Convertible Notes from the SPA as well as the shares of Series C Preferred Stock issued to RMS members were automatically converted into shares of Common Stock.

 

The foregoing description of the SPA, Convertible Note, and Warrant is qualified in its entirety by reference to the respective agreements.

 

In February 2019, 250,000 shares of common stock were issued pursuant to conversion of short-term debt and accrued interest.

In March 2019, the Company issued an aggregate of 130,085 shares of common stock at $0.40 per share shares for consulting fees in an amount equivalent to $52,034.

On April 25, 2019, the Company issued 4,225,634 shares of common stock valued at $.40 per share to Mr. William Horne, the Company’s CEO, in a restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this restricted stock award (as well as the incentive stock options issued in the quarter ended March 31, 2019) would be fully vested if not issued within fifteen days of the RMS merger transaction. Neither award was issued within that time frame and both awards became fully vested when issued. The aggregate number of shares of common stock from these two awards is 4,475,634 and was calculated based on 7% of the Company’s issued and outstanding common stock as of the closing of the RMS merger.

 

The Company recognized approximately $1,690,000 of compensation expense in the quarter ended June 30, 2019 related to the restricted stock award. This expense should have been recognized in the quarter ended March 31, 2019. Though the quantitative impact is material, the Company believes the qualitative aspects of this misstatement should be the primary driver in determining whether or not this misstatement is material. The Company believes this misstatement to be immaterial to the quarter ended March 31, 2019 and June 30, 2019 financial statements from a qualitative impact evaluation.

During the six months ended June 30, 2019, 636,480 shares were issued pursuant to convertible Preferred Series B Stock and accrued dividends conversion.

 

Series B Preferred Stock Preferences

 

Voting Rights

 

Preferred Series B Stock holdersStockholders have the right to receive notice of any meeting of holders of Common Stock or Series B Preferred Stock and to vote upon any matter submitted to a vote of the holders of Common Stock or Series B Preferred Stock. Each holder of Series B Preferred Stock shall vote on each matter submitted to them with the holders of Common Stock.

 

Liquidation

 

Upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series B Preferred Stock shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefor, a preferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the holders of Series B Preferred Stock in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company’s to the holders of the Company’s Common Stock. The Company accrues these dividends as they are earned each period.

 

On January 8, 2019, the Company completed the issuance of convertible debt in the SPA transaction with a conversion price of $0.40$0.40. As a result, accordingly the exercise price on all of the warrants issued with the Series B Shares were adjusted downward to 90% of that conversion price or $0.36. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $117,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.

 

The Company recognized a beneficial conversion feature related to the Series B Shares of approximately $33,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series B Shares can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders.

 

Series B preferred Stock Conversions

 

During the threesix months ended March 31,June 30, 2019, 9,250 Series B Preferred Stock with a par value of $.001 were assumed with the merger transaction and an aggregate of 2,0502,250 shares of Series B Preferred Stock, and accrued dividends, were subsequently converted into an aggregate of 512,500562,500 shares of authorized common stock, par value $0.001 per share.

 

Debt Conversion

 

Convertible Notes

 

The $750,000 convertible notes payable assumed in the acquisition transaction, had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 of the outstanding convertible notes was converted into an aggregate of 250,000 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.40 per share, which was the conversion price per the SPA.

 

17

In connection with the Asset Purchase Agreement (“APA”) and APA Amendment, on January 8, 2019, Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company pursuant to the same terms of the SPA entered into by other investors to consummate the acquisition inon January 8, 2019. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.

 

Stock-Based Compensation Plan

 

2013Stock Option Incentive Plan

 

We utilizeThe Company utilizes the Black-Scholes valuation method to recognize stock-based compensation expense over the vesting period. The expected life represents the period that ourthe stock-based compensation awards are expected to be outstanding.

 

For the three and six months ended March 31,June 30, 2019, the Company recognized approximately $89,000$3,000 and $92,000 as compensation expense with respect to vested stock options. No compensation expense was recorded prior to the RMS reverse merger transaction. Since these stock options were assumed on January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019. The expense for the six months ended June 30, 2019 is related to an option for 250,000 shares that were awarded to the Company’s CEO that were 100% vested and were issued pursuant to his employment agreement. This option was granted pursuant to his employment agreement with the Company, which stated that this option grant would be fully vested if not issued within fifteen days of the RMS reverse merger transaction. The option was not granted within that time frame and was fully vested when issued.

Including the expense of approximately $1,690,000 related to the restricted stock award to the Company’s CEO, total stock-based compensation expense for the three and six months ended June 30, 2019 were approximately $1,693,000 and $1,782,000, respectively. The three and six months ended June 30 include $1,690,254 related to the Company’s CEO restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this option grant would be fully vested if not issued within fifteen days of the RMS reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued. 

 

Stock Option Activity

 

As of March 31,June 30, 2019, there were 31,1399,502 shares of unvested stock options. Unrecognized compensation cost amountsamounted to approximately $17,800$3,900 as of March 31,June 30, 2019 and will be recognized as an expense on a straight-line basis over a remaining weighted average service period of 0.87 years.1 year.

 

The following is a summary of stock option activity for the threesix months ending March 31,June 30, 2019:

 

  Shares  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining Term
(Years)
 
Outstanding at December 31, 2018    $    
             
Assumed with the RMS merger transaction  557,282  $2.78   6.99 
Other activity since January 8, 2019:            
Granted  250,000  $0.40    
Cancelled  (80,725) $1.52    
Outstanding at March 31, 2019  726,557  $1.95   7.74 
Exercisable at March 31, 2019  695,418  $1.96   7.74 

  Shares  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Term
(Years)
 
Outstanding at December 31, 2018    $    
             
Assumed with the RMS merger transaction  557,282  $2.78   6.99 
Other activity since January 8, 2019:            
Granted  250,000  $0.40   9.53 
Cancelled  (289,774) $2.59    
Outstanding at June 30, 2019  517,508  $1.81   7.87 
Exercisable at June 30, 2019  508,006  $1.81   7.87 

 

Note 10 – Commitments & Contingencies

Biotechnology Agreement

 

The Company, on June 21, 2019, entered into a 10-year exclusive and extendable product supply agreement with Rion LLC (“Rion”) that will enhance its existing cytotherapy product line, developing a disruptive technology for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a unique exosome technology to harness the healing power of the body. Rion’s novel exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. With this agreement, Rion will serve as the product supplier and will co-develop a proprietary cellular platform with H-CYTE for the treatment of COPD. H-CYTE will control the commercial development and facilitate clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the U.S. Food and Drug Administration (“FDA”) for treatment of COPD.

18

Sublease Agreement

The Company entered into a sub-lease agreement for the lease in Alpharetta, Georgia. The period of the lease is from July 1, 2019 to December 31, 2020 and sublessee shall pay to sublessor a minimum rent, of two thousand dollars ($2,000) per month.

Consulting Agreements

 

The Company has an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $13,333 per month, which expired March 31, 2019.month. The Company is in the process of negotiating a new contract with Mr. Crowne. The Company incurred expense of $0 and $39,999, for the three and six months ended March 31,June 30, 2019 related to this consulting agreement. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

 

The Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 for services related to evaluation and shall continuenegotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The contract duration is for a period of twelve (12) months in the amount of $12,500 per month with a $15,000 signing bonus which was paid in full during the quarter ending March 31, 2019. The agreement also provides LilyCon Investments with $35,000 in stock (calculated using an annual Variable Weighted Average Price from February 2019 through January 2020) to be granted upon completionon the one year anniversary of this agreement, if the consulting services first year.agreement has not been terminated prior to that date. Either party may terminate this agreement with or without cause upon (30)30 days written notice. Through March 31,For the three and six months ended June 30, 2019, the Company has expensed a total of $40,000$37,500 and $77,500 in compensation to LilyCon Investments.Investments, respectively.

 

The Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee, in which Mr. Monteleone received $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. This arrangement has no specified termination date. Through March 31,For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone.Monteleone, respectively.

 

The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, (Jimmycontrolled by Jimmy St. Louis, former CEO of RMS)RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. This arrangement has no specified termination date. Through March 31,The Company terminated this agreement effective June 30, 2019. For the three and six months ended June 30, 2019, the Company has expensed $27,000$44,000 and $71,000 in consulting fees to St. Louis Family Office.Office, respectively.

The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve (12) months, unless otherwise terminated by giving thirty (30) days prior written notice. Strategos will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by the Lung Health Institute, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the three and six months ended June 30, 2019, the Company has expensed $26,000 and $26,000 to Strategos Group for consulting services.

 

Distribution center and logistic services agreement

 

The Company has a non-exclusive distribution center agreement with a logistics service provider in Berlin, Germany pursuant to which they manage and coordinate the DenerveX System products which the Company exports to the EU through June 2019. The Company pays a fixed monthly fee of €6,900€4,500 (approximately $7,900)$5,040) for all accounting, customs declarations and office support, and a variable monthly fee ranging from €1,900 to €6,900 (approximately $2,300 to $8,300), based off volume of shipments, for logistics, warehousing and customer support services.

 

Total expenses paidincurred for the distribution center and logistics agreement waswere approximately $22,500 and $45,000, respectively, for the three and six months ended March 31,June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

 

Patent Assignment and Contribution Agreements

 

The terms of a Contribution and Royalty Agreement dated January 31, 2013 with Dr. Scott Haufe, M.D was assumed in the merger transaction as of January 8, 2019. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.

 

The Company incurred approximately $0 and $1,100, respectively, in royalty expense under the Contribution and Royalty agreement for the three months and six months ended March 31,June 30, 2019, all of which was included in accounts payable at March 31,June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

 

Note 11 – Short Term LiabilitiesLitigation

 

From time to time, the Company may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect the Company’s financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect the Company due to legal costs and expenses, diversion of management attention and other factors. The Company expenses legal costs in the period incurred. The Company cannot assure that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against it in the future, and these matters could relate to prior, current or future transactions or events.

19

Guarantee

The Company has guaranteed payments based upon the terms found in the management services agreements to two affiliated physicians related to LI Nashville, LI Scottsdale, LI Pittsburgh, and LI Dallas. For the three and six months ending June 30, 2019, payments totaling approximately $34,000 and $56,000, respectively were made to these affiliates. For the three and six months ending June 30, 2018, payments totaling approximately $20,000 and $59,000, respectively were made to these affiliates.

Note 11 - Short Term and Long-term Debt

Short Term Liabilities

Notes Payable

 

Short-term notes payable relates to financing arrangements for Directors and Officers and general liability insurance premiums that were financed at various points throughout 2018 and first quarter 2019 and two promissory notes assumed in the merger transaction.

 

These insurance financing arrangements require aggregate monthly payments of approximately $ 17,000,$18,000 reflect interest rates ranging from 7% to 11.5%12.8% and are to be paid in full by January 16,April 2020 and had balances of approximately $145,000$95,000 at March 31,June 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these insurance financing arrangements was approximately $900$2,000 and $2,300 for the three and six months ended June 30, 2019 and was $0 for the three and six months ended March 31, 2019 andJune 30, 2018 respectively.

 

Payments on both Bothof the promissory notes payable assumed in the merger are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019. The Promissory Notes had outstanding balances of approximately $99,000 at date of merger transaction and approximately $99,000 at March 31,June 30, 2019. No scheduled payments have been made on these notes since the scheduled payment for January 2018.2018 except for a $5,700 payment made in June 2019. Both of the notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes.

 

The Company incurred interest expense related to the promissory notes for the three and six months ended March 31,June 30, 2019 and 2018 in the amount of approximately $400$1,300 and $0, respectively,$2,100, respectively; no interest expense was incurred during 2018 as these notes were assumed on January 8, 2019.

 

The Company’s interest expense of approximately $29,000$42,000 and $71,000 for the three and six months ended March 31,June 30, 2018 was related to convertible debt not assumed in the RMS acquisition as of January 8, 2019.

 

Convertible Notes

 

The Convertible notes payable represents a securities purchase agreement with select accredited investors, which were assumed in the merger transaction. The debt consisted of $750,000 in units at a purchase price of $50,000 per unit were assumed. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants were initially exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. The notes are secured by all of the assets of the Company.

 

The Company recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of $505,424 and $244,576, respectively. AccretionInterest expense related to the discount on these convertible notes for the three and six month period ending March 31,June 30, 2019 was approximately $63,600.$63,600 and $127,900, respectively. The Company recognized approximately $21,500 and $41,200, respectively, in unpaid accrued interest expense related to the notes as of March 31,for the three and six months ended June 30, 2019.

 

The convertible notes sold in the offering were initially convertible into an aggregate of 1,875,000 shares of common stock. The down round feature was triggered on January 8, 2019, and the conversion price of the convertible debt were adjusted to $0.36. The Company recognized the down round as a deemed dividend of approximately $288,000 which reduced the income available to common stockholders.

 

On February 6, 2019, $100,000 of the Company’s $750,000 outstanding convertible notes plus accrued interest was converted into an aggregate of 277,778251,667 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the SPA subsequent to the trigger of the down round feature. The convertible notes have maturity dates between August and September 2019. The Company is in the process of negotiating a 30-day extension of the maturity dates. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes. 

Long-Term Debt

The convertible debt to related parties was the BioCell Capital Line of Credit which was converted to equity as part of the APA on January 8, 2019. (See Note 8.)

20

 

Note 12 - Common Stock Warrants

 

Fair value measurement valuation techniques, to the extent possible, should maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s fair value measurements of all warrants are designated as Level 1 since all of the significant inputs are observable and quoted prices used for volatility were available in an active market.

 

A summary of the Company’s warrant issuance activity and related information for the threesix months ended March 31,June 30, 2019 is as follows:

 

 Shares  Weighted Average
Exercise
Price
  Weighted
Average
Remaining Contractual Life
  Shares Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Life
 
Assumed as of the January 8, 2019 merger  12,108,743  $1.38   2.6   12,108,743  $1.38  2.6 
                   
Issued  17,500,000  $0.75   2.84   18,000,000 $0.75  2.59 
Outstanding and exercisable at March 31, 2019  29,608,743  $1.00(1)(2)  2.63 
Outstanding and exercisable at June 30, 2019  30,108,743 $0.95(1)(2)  2.38 

 

The fair value of all warrants issued are determined by using the Black-Scholes valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued.

 

The inputs used in the Black-Scholes valuation technique to value each of the warrants issued at March 31,June 30, 2019 as of their respective issue dates are as follows:

 

Event
Description
 Date MDVX
Stock Price
 Exercise Price of Warrant Grant Date Fair Value Life
of Warrant
 Risk Free Rate of Return (%) Annualized Volatility Rate (%)  Date H-CYTE
Stock Price
 Exercise Price of Warrant Grant Date Fair Value Life
of Warrant
 Risk Free Rate of Return (%) Annualized Volatility Rate (%) 
Private placement  1/8/2019  $0.40  $0.75  $0.24  3 years  2.57   115.08   1/8/2019 $0.40 $0.75 $0.24 3 years 2.57 115.08 
Private placement  1/18/2019  $0.40  $0.75  $0.23  3 years  2.60   114.07   1/18/2019 $0.40 $0.75 $0.23 3 years 2.60 114.07 
Private placement  1/25/2019  $0.59  $0.75  $0.38  3 years  2.43   113.72   1/25/2019 $0.59 $0.75 $0.38 3 years 2.43 113.72 
Private placement  1/31/2019  $0.54  $0.75  $0.34  3 years  2.43   113.47   1/31/2019 $0.54 $0.75 $0.34 3 years 2.43 113.47 
Private placement  2/7/2019  $0.57  $0.75  $0.36  3 years  2.46   113.23   2/7/2019 $0.57 $0.75 $0.36 3 years 2.46 113.23 
Private placement  2/22/2019  $0.49  $0.75  $0.30  3 years  2.46   113.34   2/22/2019 $0.49 $0.75 $0.30 3 years 2.46 113.34 
Private placement  3/1/2019  $0.52  $0.75  $0.33  3 years  2.54   113.42   3/1/2019 $0.52 $0.75 $0.33 3 years 2.54 113.42 
Private placement  3/8/2019  $0.59  $0.75  $0.38  3 years  2.43   113.53   3/8/2019 $0.59 $0.75 $0.38 3 years 2.43 113.53 
Private placement  3/11/2019  $0.61  $0.75  $0.40  3 years  2.45   113.62   3/11/2019 $0.61 $0.75 $0.40 3 years 2.45 113.62 
Private placement  3/26/2019  $0.51  $0.75  $0.32  3 years  2.18   113.12   3/26/2019 $0.51 $0.75 $0.32 3 years 2.18 113.12 
Private placement  3/28/2019  $0.51  $0.75  $0.31  3 years  2.18   112.79   3/28/2019 $0.51 $0.75 $0.31 3 years 2.18 112.79 
Private placement  3/29/2019  $0.51  $0.75  $0.31  3 years  2.21   112.79   3/29/2019 $0.51 $0.75 $0.31 3 years 2.21 112.79 
Private placement  4/4/2019 $0.48 $0.75 $0.29 3 years 2.29 112.77 

 

(1)Warrants issued with the May 2018 private placement and debt conversion had an initial exercise price of $0.75 and contain a contingent feature which would adjust the exercise price of the warrant in the event the Company issues any shares of common stock or common stock equivalents in a private placement of equity or debt securities at a price less than $0.75 per share. On August 8, 2018, the Company completed the issuance of convertible debt at an initial conversion price of $0.40. Accordingly, the exercise price on these warrants was adjusted downward to $0.40.

 

(2)Warrants issued with the August 8, 2018 and September 28, 2018 convertible notes had an initial exercise price of $0.75 and contain a contingent feature which would adjust the exercise price of the warrants in the event the Company issued any shares of common stock or common stock equivalents in a private placement of equity or debt securities to 90% of the issuance price if it is less than $0.75.

 

(3)On January 8, 2019, the Company completed the issuance of convertible debt in the SPA transaction with a conversion price of $0.40. As a result, accordingly the exercise price on all of the warrants issued with the Series B Shares were adjusted downward to 90% of that conversion price or $0.36. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $117,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

Note 13 - Income Taxes

21

 

Frominception to March 31, 2019, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses is fully reserved as of March 31, 2019 and December 31, 2018, since it is currently more likely than not that the benefit will not be realized in future periods.

As a result of the acquisition, the Company is required to file federal income tax returns and state income tax returns in the states of Arizona, Florida, Georgia, Minnesota, Pennsylvania, Tennessee, and Texas. There are no uncertain tax positions at March 31, 2019 or December 31, 2018. The Company has not undergone any tax examinations since inception.

Note 14 - Net Loss Per Share

Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are antidilutive due to the Company’s net losses. For the periods presented, there is no difference between the basic and diluted net loss per share: 30,108,743 warrants and 726,557 common stock options outstanding were considered anti-dilutive and excluded for the period ended March 31, 2019. For the three-month period ended March 31, 2018, there were no dilutive securities as the accounting acquirer did not historically have stock compensation programs.

 

Note 1513 - Liquidity, Going Concern and Management’s Plans

 

The Company incurred net losses of approximately $3,694,000$8,992,000 and $897,000$1,260,000 for the threesix months ended March 31,June 30, 2019 and 2018, respectively.

 

The RMS products and services division will incur losses until sufficient revenue volume and geographical coverage is attained utilizing the infusion of capital resources to expand marketing and sales initiatives.

In April 2019, the Company determined that their contract manufacturer was not able to meet the quality and quantity requirements for producing the DenerveX product. As a result, the manufacture of the DenerveX product has been temporarily suspended while the Company sources alternative manufacturing options. Additionally, in the Company’s review and evaluation of its current distribution channels, the Company has determined that many of these channels were not cost effective. As a result of the above evaluations, certain European distributor agreements were terminated, and all other representatives have been notified that the Company is temporarily suspending the manufacture and sale of the DenerveX product while the Company sources alternative manufacturing and distributor options as well as considers other product monetizing strategies. The MedoveX operations will continue to incur losses until the plan for the DenerveX System commercializationmonetization is determined and executed (see Note 16).executed.

 

OurThe Company’s independent registered public accounting firm has included an explanatory paragraph with respect to our ability to continue as a going concern in its report on ourthe Company’s consolidated financial statements for the year ended December 31, 2018. The presence of the going concern explanatory paragraph suggests that the Company may not have sufficient liquidity or minimum cash levels to operate the business. Since our inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until ourits products can generate enough revenue to offset ourits operating expenses. The Company through AprilJuly 2019 has raised $7,000,000$7,100,000 (excluding $200,000 of debt conversions) year to date in additional cash to sustain the Company. Cash as of March 31,June 30, 2019 was approximately $2,592,000.$300,000. The present level of cash is insufficient to satisfy ourthe Company’s current operating requirements.

On July 25 and July 26, 2019, the Company issued two promissory notes (the “Notes”) in the aggregate principal amount of $900,000 to Horne Management, LLC, and controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.

The Company has certain convertible promissory notes in the aggregate principal amount of approximately $650,000 that mature in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.

The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing a plan to seekan eighteen-month extension on the notes.

The Company is pursuing raising additional sources of funds from the sale of equity or debtsecurities. On June 7, 2019 the Board of Directors approved a new private placements securities or throughoffering up to $8,500,000 of Common Stock at a credit facility.price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurances that the Company will be able to obtain additional financing on commercially reasonable terms, if at all. If the Company is required to curtail operations, there would be substantial doubt about the Company’s ability to continue as a going concern.

 

The unaudited condensed consolidated financial statements do not include any adjustments to the carrying value of amounts of its assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 1614 - Subsequent Events

On July 11, 2019, MedoveX changed its named to H-CYTE by filing the Amendment to the Company’s Certificate of Incorporation with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT became effective with FINRA on July 15, 2019.

 

In April,On July 25 and July 26, 2019, H-CYTE, Inc. issued two promissory notes (the “Notes”) in the principal amount (the “Principal Amount”) of an aggregate of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.

On July 29, 2019, the board of directors (the “Board”) of the Company determined that their contract manufacturer was not ableappointed Dr. Andre Terzic to meet the quality and quantity requirementsBoard. Dr. Andre Terzic, 57, has served as a director at the Center for producingRegenerative Medicine of Mayo Clinic in Rochester, Minnesota for the DenerveX product. As a result,last five years. Dr. Andre Terzic is the manufactureChair of the DenerveX productPharmaceutical Science and Clinical Pharmacology Advisory Committee of Food and Drug Administration, the President of the American Society for Clinical Pharmacology & Therapeutics, and one of the co-founders of Rion LLC. Rion is a Minnesota Bio-tech Company focused on cutting-edge regenerative technologies. Dr. Terzic received his M.D. at University of Belgrade in Paris, France in 1985 and his Ph.D. from the Department of Pharmacology of University of Illinois in 1991.

On July 30, 2019, the Board appointed Dr. Atta Behfar as a member of the Board. Dr. Atta Behfar, 42, has been temporarily suspended whileworked as a cardiologist at the Department of Cardiovascular Medicine of Mayo Clinic for the last five years. Dr. Atta Behfar is a Director of the Van Cleve Cardiac Regenerative Medicine program at Mayo Clinic and one of the founders of Rion LLC. Dr. Behfar received a Bachelor of Science degree in Biochemistry from Marquette University in 1998 and a M.D. and Ph.D. from Mayo Clinic College of Medicine, Mayo Graduate School in 2006.

The Company sources alternative manufacturing options. Additionally,has certain convertible promissory notes in the Company’s reviewaggregate principal amount of approximately $650,000 that mature between August 8, 2019 and evaluation of its current distribution channels, the Company has determined that many of these channels were not cost effective. As a resultSeptember 28, 2019. The convertible notes are secured by all of the above evaluations, certain European distributor agreements were terminated and all other representatives have been notified thatassets of the Company. The Company is currently negotiating a 30-day extension to the maturity date. If the Company is temporarily suspendingunable to extend the manufacturematurity date, the notes will go into default until additional funding is received to payoff these notes and salethe mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the DenerveX product whileoutstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.

The company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the Company sources alternative manufacturing and distributor options as well as considers other product monetizing strategies.process of finalizing an eighteen-month extension on the notes.

22

 

IITEMtem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.

 

Overview

 

MedoveX was incorporated in NevadaOn July 11, 2019, Medovex Corp. (“MedoveX”) changed its named to “H-CYTE, Inc.” (H-CYTE or the Company) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 30, 2013 as SpineZ Corp. MedoveX is the parent company of Debride Inc., (“Debride”), which was incorporated under the laws of Florida on October 1, 2012 but did not commence operations until February 1, 2013. SpineZ Corp. changed its name to MedoveX Corp. and effected a 2-for-1 reverse split of its stock in March 2014.

The MedoveX business designs and markets proprietary medical devices for commercial use in the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company still intends to seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the United States.15, 2019.

 

On October 18, 2018, MedoveXH-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the Asset Purchase Agreement was amended and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the Asset Purchase Agreement and its amendment, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.

 

The Company’s RMS was incorporated in Delaware on December 26, 2012. RMSdivision is a healthcare medical biosciences company that develops and implements advance innovative treatment options in regenerative medicine to treat an array of debilitating medical conditions. In addition, the company is the operator and manager of the various Lung Health Institute.Institute clinics. Committed to an individualized patient-centric approach, RMS consistently provides oversight and management of the highest quality care while producing positive outcomes. RMS offices are located in Tampa, Florida. The Lung Health Institute located in Tampa, Florida is a wholly owned subsidiary of RMS. RMS also provides oversight and management to the Lung Health Institutes located in Nashville, TN, Scottsdale AZ, Pittsburgh, PA, and Dallas, TX.

 

The MedoveXCompany is also in the business designsof designing and marketsmarketing proprietary medical devices for commercial use in the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company still intendsplans to seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the United States. The Company is presently reevaluating its approaches to revenue generation including the continuing use of distribution channels.

In April, the Company determined that their contract manufacturer was not able to meet the quality and quantity requirements for producing the DenerveX product. As a result, the manufacture of the DenerveX product has been temporarily suspended while the Company sources alternative manufacturing options. Additionally, in the Company’s review and evaluation of its current distribution channels, the Company has determined that many of these channels were not cost effective. As a result of the above evaluations, certain European distributor agreements were terminated, and all other representatives have been notified that the Company is temporarily suspending the manufacture and sale of the DenerveX product while the Company sources alternative manufacturing and distributor options as well as considers other product monetizing strategies.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.

23

 

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Our significant accounting policies are described in more detail in the notes to our consolidated financial statements for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10K as well as in the notes to our unaudited condensed consolidated financial statements for the threesix months ended March 31,June 30, 2019 included in this Quarterly Report on Form 10-Q. The December 31, 2018 financial information included in the Company’s Annual Report on Form 10K reflect the historical financial information of H-CYTE (formerly Medovex) business and do not include the RMS financial information. With the reverse merger, historical financial information for periods prior to the merger on January 8, 2019 presented in the comparative financial information included in the 2019 Quarterly Reports on Form 10-Q will only reflect the historical financial information related to RMS prior to the merger.

 

Results of Operations-Operations - Three and Six Months Ended March 31,June 30, 2019 and 2018

 

Revenue, Cost of Sales and Gross Profit

 

We

The Company recorded gross revenue for the three and six months ended March 31,June 30, 2019 of approximately $2,432,000 and March 31,$3,756,000 respectively. The Company recorded gross revenue for the three and six months ended June 30, 2018 of approximately $1,324,000$2,441,000 and $2,903,000$5,344,000 respectively. The decrease in revenue for the six-month period ended June 30, 2019 is mainly attributable to a decrease in the number of treatments provided by the biomedical services business (RMS). The revenue for the threesix months ended March 31,June 30, 2019 is derived predominantly from the RMS business and the revenue for the threesix months ended March 31,June 30, 2018 is exclusively the RMS business.RMS. As a result of the reverse merger accounting, the historical financials prior to January 8, 2019 represent the RMS business only.

Revenue from sales of RMS services has declined due to insufficient cash resources to fund sales and marketing efforts.

 

For the three and six months ended March 31,June 30, 2019 the Company incurred approximately $492,000 and $989,000, in costs of sales, respectively. For the three and six months ended June 30, 2018 the Company incurred approximately $559,000$644,000 and $859,000,$1,475,000, in costs of sales, respectively. The cost of sales for the three and six months ended March 31,June 30, 2019 is derived predominantly from the RMS business and the revenuecost of sales for the three and six months ended March 31,June 30, 2018 is exclusively the RMS business.

The decline in the costsCompany’s cost of sales fromis comprised of two main components: medical supplies and personnel costs for the three months ended March 31, 2018 tobiomedical services business, RMS. Medical supplies are variable costs and based on the three months ended March 31, 2019, is attributable to the reduced costs associatednumber of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments currently being provided can be handled adequately with the declineCompany’s present level of personnel. The Company possesses the opportunity to increase the number of treatments performed without increasing personnel costs as it can leverage the current personnel’s availability until the Company’s treatment volume reaches critical mass. However, upon an increase in revenue.treatment volume beyond that capacity, the Company will need to hire additional personnel.

 

Gross profitThe decrease in cost of sales for the three months ending June 30, 2019 as compared to the prior year is attributable to reduced costs for medical supply purchases from cost control initiatives and the ability to perform treatments using fewer staff members. The decrease in cost of sales for the six months ending June 30, 2019 as compared to the prior year is attributable to reduced costs for medical supply purchases from cost control initiatives as well as reduced variable costs associated with reduced revenue volume and the ability to perform treatments using fewer staff members.

For the three and six months ended March 31,June 30, 2019 and 2018 wasthe Company generated a gross profit totaling approximately $765,000 (58%$1,940,000 (80%) and $2,044,000 (70%$2,767,000 (74%)., respectively. For the three and six months ended June 30, 2018, the Company generated a gross profit totaling $1,797,000 (74%) and $3,868,000 (72%), respectively. The increase in gross margin for the three months ending June 30, 2019 as compared to the prior year is attributable to reduced cost of sales from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members. The decline was a result ofin gross margin for the six months ended June 30, 2019 as compared to the prior year is attributable to the decline in revenue, net of the decline in cost of sales.

 

Operating Expenses

 

We classify our operating expenses into threefour categories: salaries and related costs, other general and administrative, sales and marketing,advertising, and depreciation and amortization.

 

General

Salaries and Administrative ExpensesRelated Costs

 

For the three and six months ended March 31,June 30, 2019, the Company incurred approximately, $3,480,000 and $5,165,000 in salaries and related costs, respectively. For the three and six months ended June 30, 2018, the Company incurred approximately $3,021,000$889,000 and $2,150,000,$2,178,000, in salaries and related costs, respectively. Included in salaries and related costs for the three and six months ended June 30, 2019 was approximately $1,690,000 in compensation expense related to the 4,225,634 shares of common stock valued at $.40 per share issued to Mr. William Horne on April 25, 2019. These shares were granted in a restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this award would be fully vested if not issued within fifteen days of the RMS reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued. The Company recognized approximately $1,690,000 million of compensation expense in the quarter ended June 30, 2019. The remaining increase in salaries and related costs is primarily attributable to the three and six months ended June 30, 2018 reflecting only the expenses of the RMS business and 2019 reflecting the consolidated costs for RMS and H-CYTE. Excluding the stock compensation expense of approximately $1,690,000, the Company anticipates that salaries and related costs will continue at a comparable rate in the future.

Other General and Administrative

For the three and six months ended June 30, 2019, the Company incurred approximately, $1,885,000 and $3,284,000 in other general and administrative costs, respectively. For the three and six months ended June 30, 2018, the Company incurred approximately $785,000 and $1,674,000, in other general and administrative costs, respectively. The increase is primarily attributable to the three and six months ended March 31,June 30, 2018 reflecting only the expenses of the RMS business and 2019 reflectsreflecting the consolidated business costs for RMS and MedoveX.H-CYTE.

24

 

Of the total other general and administrative costs, approximately $1,595,000for the three and $1,289,000 were personnel costs. Professionalsix months ended June 30, 2019, professional fees were approximately $440,000$416,000 and $89,000, respectively, for$856,000, respectively.

For the three and six months ended March 31, 2019June 30, 2018, professional fees were approximately $46,000 and 2018,$135,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs incurred to maintain CE Mark in Europe. The Company has incurred additional accounting and legal fees due to the reverse acquisition in the first quarter 2019.

General and administrative related travel expenses were approximately $52,000 and $27,000, respectively, for the three months ended March 31, 2019 and 2019, respectively.2018 did not reflect patent and public company compliance costs.

 

We anticipateThe Company anticipates that ourthe other general and administrative expenses will continue at a comparable rate in the future and include the continued costs of operating as a public company.

 

Sales and MarketingAdvertising Expenses

 

For the three and six months ended March 31,June 30, 2019, and 2018, the Company incurredhad approximately $1,136,000$1,585,000 and $738,000,$2,720,000 respectively, in sales and marketing expenses. Of these, advertising costs, as compared to $419,000 and $1,157,000 for the three and six months ended June 30, 2018. The increases were $1,118,000 and $737,000, respectively, relatedattributable to increased marketing efforts to promote the RMSCompany’s healthcare medical biosciences business. We expect these expenses will continue to increaseat a comparable rate as we expand in new markets and expand penetration in existing markets.

 

Depreciation and Amortization

 

For the three and six months ended March 31,June 30, 2019, and 2018, the Company recognized approximately $211,000$209,000 and $24,000$420,000 respectively, in depreciation and amortization expense. Of that, the Company recognized approximately $184,000 and $0,$368,000 respectively, in amortization expense for the three and six months ended March 31,June 30, 2019. For the three and six months ended June 30, 2018, the Company recognized approximately $24,000 and $49,000 respectively, in depreciation and amortization expense. The 2019 and 2018. The amortization expense is related to the technology intangibles that arose as a result of the reverse merger by RMS of MedoveX.H-CYTE.

 

Departure of Directors and Certain Officers, Election of Directors.Directors, Appointment of Certain Officer;Officer, Compensatory Agreement of Certain Officers

 

On January 8, 2019, in connection with the Asset Purchase Agreement and APA Amendment, the Board of the Company appointed Michael Yurkowsky and Raymond Monteleone as additional members of the Board.

 

ThereMr. Michael Yurkowsky is to receive $5,000 per Board Meeting. Besides this arrangement, there are no arrangements or understandings between the Company and Mr. Michael Yurkowsky and any other person or persons pursuant to which Mr. Yurkowsky was appointed as a member of the Board and there is no family relationship between Mr. Yurkowsky and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.

 

ThereMr. Raymond Monteleone is to receive $5,000 per Board Meeting. Besides this arrangement and the consulting agreement (see Note 11), there are no arrangements or understandings between the Company and Mr. Raymond Monteleone and any other person or persons pursuant to which Mr. Monteleone was appointed as a member of the Board and there is no family relationship between Mr. Monteleone and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.

 

On February 4, 2019, the board of directors of the Company accepted the resignation of Mr. Charles Farrahar as the Chief Financial Officer, effective immediately. Mr. Farrahar resigned as the Chief Financial Officer for personal reasons and not as a result of any disputes or disagreements between Mr. Farrahar and the Company on any matter relating to the Company’s operations, policies, accounting policies, or practices.

 

On February 4, 2019, the board of directors of the Company appointed Mr. Jeremy Daniel as the Chief Financial Officer of the Company.

There are no arrangements or understandings between the Company and Mr. Jeremy Daniel and any other person or persons pursuant to which Mr. Jeremy Daniel was appointed as the Chief Financial Officer of the Company and there is no family relationship between Mr. Daniel and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.

 

25

On February 15, 2019, Dennis Moon resigned from his position as the executive vice president of MedoveX Corp., a Nevada company (the “Company”),the Company, effective immediately. Mr. Moon resigned from his position at the Company for personal reasons, not as a result of or caused by any disagreements between Mr. Moon and the Company on any matter relating to the Company’s operations, policies, or practices.

 

On June 7, 2019, the board of directors of the Company appointed Briley Cienkosz as the Chief Marketing Officer, Ann Miller as the Chief Operating Officer, and Gary Mancini as the Chief Relationship Officer. There are no arrangements or understandings and there is no family relationship with any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer between the Company and Ann Miller, Briley Cienkosz, or Gary Mancini.

On July 29, 2019, the board of directors (the “Board”) of the Company appointed Dr. Andre Terzic to the Board. On July 30, 2019, the Board appointed Dr. Atta Behfar as a member of the Board. There are no arrangements or understandings among the Company, Dr. Andre Terzic and Dr. Atta Behfar and any other person or persons pursuant to which Dr. Andre Terzic or Dr. Atta Behfar was appointed as a member of the Board of the Company and there is no family relationship between each of Dr. Andre Terzic and Dr. Atta Behfar and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.

Funding Requirements

 

We anticipate our cash expenditures will increase as we continue to operate as a publicly traded entity, as we move forward with increased sales and marketing initiatives for the RMS services and as we incur losses associated with temporarily suspending the manufacture and sale of the DenerveX product. In addition, the Company is pursuing the acquisition of new technologies to expand the business lines and with the intent of increasing profitability.

 

The Company has certain convertible promissory notes in the aggregate principal amount of approximately $650,000 that mature in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30 day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of this note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes. 

The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes.

The present level of cash is insufficient to satisfy our current operating requirements. WeThe Company will need to seek additional sources of funds from the sale of equity or debt securities or through a credit facility. There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, if at all.

The Company is pursuing raising additional funds from the sale of equity securities. On June 7, 2019 the Board of Directors approved a new private placements securities offering up to $8,500,000 of Common Stock at a price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurances that the Company will be able to obtain additional financing on commercially reasonable terms, if at all.The sale of additional equity or convertible debt securities would likely result in dilution to our current stockholders.

 

Going Concern

 

OurThe Company incurred net losses of approximately $8,992,000 and $1,260,000 for the six months ended June 30, 2019 and 2018, respectively.

The RMS products and services division will incur losses until sufficient revenue volume and geographical coverage is attained utilizing the infusion of capital resources to expand marketing and sales initiatives. The MedoveX operations will continue to incur losses until the plan for the DenerveX System commercialization is determined and executed.

The Company’s independent registered public accounting firm has included an explanatory paragraph with respect to ourthe Company’s ability to continue as a going concern in its report on ourthe Company’s consolidated financial statements for the year ended December 31, 2018. The presence of the going concern explanatory paragraph suggests that wethe Company may not have sufficient liquidity or minimum cash levels to operate the business. Since ourits inception, we havethe Company has incurred losses and anticipateanticipates that wethe Company will continue to incur losses until ourits products can generate enough revenue to offset ourits operating expenses. The Company through AprilJuly 2019 has raised $7,000,000$7,100,000 (excluding $200,000 of debt conversions) year to date in additional cash to sustain the Company. Cash as of March 31,June 30, 2019 was approximately $2,592,000.$300,000. The present level of cash is insufficient to satisfy our current operating requirements. We

On July 25, 2019 and July 26, 2019, the Company issued two promissory notes in the aggregate principal amount of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.

26

The Company has certain convertible promissory notes in the aggregate amount of $650,000 that mature in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30 day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.

The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing a plan to seekan eighteen month extension on the notes.

The Company is pursuing raising additional sources of funds from the sale of equity or debtsecurities. On June 7, 2019 the Board of Directors approved a new private placements securities or throughoffering up to $8,500,000 of Common Stock at a credit facility.price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurances that wethe Company will be able to obtain additional financing on commercially reasonable terms, if at all. If we arethe Company is required to curtail operations, there would be substantial doubt about the Company’s ability to continue as a going concern.

 

Liquidity and Capital Resources

 

Since ourits inception, we havethe Company has incurred losses and anticipateanticipates that we will continue to incur losses in foreseeable future.

 

Sources of Liquidity

 

Equity

 

On January 8, 2019, the Company entered into a securities purchase agreement (the “SPA”) with four purchasers (the “Purchasers”) pursuant to which the four Purchasers invested in the Company an aggregate amount of $2,000,000, with $1,800,000 in cash and $200,000 by cancellation of debt as explained below, in exchange for forty (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the principal amount of $50,000 and a warrant (the “Warrant”) to purchase common stock (the “Common Stock”) of the Company. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000, and subsequently increased to a maximum of $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of i) the closing of the subscription of the Maximum Amount and ii) March 31, 2019 (the “Termination Date”), subject to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company in exchange for four (4) Units on the same terms as all other Purchasers.

 

Each Convertible Note offered by the Company as part of the Unit bears an interest rate of 12% per annum, has a principal amount of $50,000, shall mature in one year from the original issue date on January 8, 2019, and will be convertible into shares of Common Stock at a price of $0.40 subject to adjustment stated in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Notes shall not own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of such Convertible Note. Upon default, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, pursuant to the SPA, the Company offers, as part of the Unit, Warrants to purchase the Common Stock at a price of $0.75 per share (the “Exercise Price”), subject to adjustments stated therein. The holder of each Warrant may purchase the number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of each Convertible Note while the Warrant is exercisable. The Warrants have a term of three years and shall be exercised in cash or on a cashless basis as described in the Warrant. All of such notes have been converted into an aggregate of 18,000,000 shares of common stock.

 

Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company pursuant to the same terms of the SPA entered into by other investors to consummate the acquisition in January 8, 2019. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.

 

As reported on Form 8-K filings on January 25, 2019, February 8, 2019, March 15, 2019 and April 5, 2019 the Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,200,000, as of that latest date.

 

Debt

 

The $750,000 convertible notes payable assumed in the acquisition transaction with RMS, had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 of the outstanding convertible notes was converted into an aggregate of 250,000 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.40 per share, which was the conversion price per the securities purchase agreement. The $650,000 remaining principal balance of these convertible notes, mature in August and September 2019. The convertible notes are secured by all of the assets of the Company.

The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.

27

The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on the notes.

In connection with the Asset Purchase Agreement and APA Amendment, on January 8, 2019, Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company pursuant to the same terms of the security purchase agreement entered into by other investors to consummate the acquisition in January 8, 2019. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.

 

Cash activity for the threesix months ended March 31,June 30, 2019 and 2018 is summarized as follows:

 

Working Capital Deficit

 

 March 31, December 31,  Six Months Ended June 30, 
 2019 2018  2019  2018 
Current Assets $3,244,000  $150,000  $804,000  $150,000 
Current Liabilities  3,501,000   2,189,000   4,260,000   2,193,000 
Working Capital Deficit $(257,000) $(2,039,000) $(3,456,000) $(2,043,000)

 

Cash Flows

 

Cash activity for the threesix months ended March 31,June 30, 2019 and 2018 is summarized as follows:

 

 Three Months Ended March 31,  Six Months Ended June 30, 
 2019  2018  2019  2018 
Cash used in operating activities $(4,171,000) $(1,362,000) $(6,592,000) $(1,584,000)
Cash used in investing activities  (377,000)  (194,000)  (386,000)  (204,000)
Cash provided by financing activities  7,070,000   1,467,000   7,208,000   1,973,000 
Net increase (decrease) in cash $2,522,000  $(89,000)
Net increase in cash $230,000  $185,000 

 

As of March 31,June 30, 2019, the Company had approximately $2,592,000$300,000 of cash on hand.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

 

Contractual Obligations and Commercial Commitments

 

Contractual Debt Obligations

 

Contractual debt obligations relate to financing arrangements for D&O and general liability insurance premiums that were financed at various points throughout 2018 and the first quarter of 2019, and two Promissory Notes and Convertible Notes assumed in the merger transaction.

 

These insurance financing arrangements require aggregate monthly payments of approximately $17,000,$18,000, reflect interest rates ranging from 7% to 11.5%12.8% and are to be paid in full by January 16,April 2020 and had balances of approximately $145,000 at March 31,$251,000 June 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these insurance financing arrangements werewas approximately $900$2,100 and $3,000 for the three and six months ended June 30, 2019 and was $0 for the three and six months ended March 31, 2019 andJune 30, 2018 respectively.

 

Payments on both of the Promissory Notespromissory notes assumed are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019. The Promissory Notes had outstanding balances of approximately $99,000$103,000 at date of reverse merger transaction and approximately $99,000 at March 31,June 30, 2019. No scheduled paymentsThe notes have been madea maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on these notes since the scheduled payment for January 2018.notes.

The Convertible Notes represent a securities purchase agreement with select accredited investors, which were assumed in the reverse merger transaction. The debt consisted of $750,000 in units at a purchase price of $50,000 per Unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants were initially exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants.

The $750,000 convertible notes payable assumed in the acquisition transaction with RMS, had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 of the outstanding convertible notes was converted into an aggregate of 250,000 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.40 per share, which was the conversion price per the securities purchase agreement. The $650,000 remaining principal balance of these convertible notes, mature in August and September 2019. The convertible notes are secured by all of the assets of the Company.

The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes. 

28

 

On February 6, 2019, $100,000 of the Company’s $750,000 outstanding convertible notes was converted into an aggregate of 277,778 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the securities purchase agreement subsequent to the trigger of the down round feature.

 

On July 25, 2019 and July 26, 2019, H-CYTE, Inc. (the “Company”) issued two promissory notes (the “Notes”) in the principal amount (the “Principal Amount”) of an aggregate of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.

Commitments

Biotechnology Agreement

The Company entered into a 10-year exclusive and extendable supply agreement with Rion LLC (“Rion”) that will enhance its existing cytotherapy product line, developing a disruptive technology for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s novel exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. With this agreement, Rion will serve as the product supplier and will co-develop a proprietary cellular platform with H-CYTE for the treatment of COPD. H-CYTE will control the commercial development and facilitate clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the U.S. Food and Drug Administration (“FDA”) for treatment of COPD.

Sublease Agreement

The Company entered into a sub-lease agreement for the lease in Alpharetta, Georgia. The period of the lease is from July 1, 2019 to December 31, 2020 and sublessee shall pay to sublessor a minimum rent, of two thousand dollars ($2,000) per month.

Consulting Agreements

 

The Company has an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $13,333 per month, which expired March 31, 2019.Themonth. The Company is in the process of negotiating a new contract with Mr. Crowne. The Company incurred expense of $0 and $39,999, for the three and six months ended March 31,June 30, 2019 related to this consulting agreement. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

 

The Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 and shall continue for a period of twelve (12) months in the amount of $12,500 per month with a $15,000 signing bonus which was paid in full during the quarter ending March 31, 2019. The agreement also provides LilyCon Investments with $35,000 in stock (calculated using an annual Variable Weighted Average Price from February 2019 through January 2020) to be granted upon the one year anniversarycompletion of the consulting agreement.services first year. Either party may terminate this agreement with without cause upon (30) days written notice. For the three and six months ended June 30, 2019, the Company has expensed a total of $37,500 and $77,500 in compensation to LilyCon Investments, respectively.

 

The Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee, in which Mr. Monteleone receivesreceived $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. This arrangement has no specified termination date. For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.

 

The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC (Jimmy St. Louis, former CEO of RMS) in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. This arrangementThe Company terminated this agreement effective June 30, 2019. For the three and six months ended June 30, 2019, the Company has no specified termination date.expensed $34,000 and $71,000 in consulting fees to St. Louis Family Office, respectively.

29

The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve (12) months, unless otherwise terminated by giving thirty (30) days prior written notice. Strategos will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by the Lung Health Institute, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the three and six months ended June 30, 2019, the Company has expensed $26,000 and $26,000 to Strategos Group for consulting services.

Distribution center and logistic services agreement

 

The Company has a non-exclusive distribution center agreement with a logistics service provider in Berlin, Germany pursuant to which they manage and coordinate the DenerveX System products which the Company exports to the EU through June 2019. The Company pays a fixed monthly fee of €6,900€4,500 (approximately $7,900)$5,040) for all accounting, customs declarations and office support, and a variable monthly fee ranging from €1,900 to €6,900 (approximately $2,300 to $8,300), based off volume of shipments, for logistics, warehousing and customer support services.

Total expenses incurred for the distribution center and logistics agreement were approximately $22,500 and $43,000, respectively, for the three and six months ended June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

Patent Assignment and Contribution Agreements

 

The terms of a Contribution and Royalty Agreement dated January 31, 2013 with Dr. Scott Haufe, M.D was assumed in the merger transaction as of January 8, 2019. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.

The Company incurred approximately $0 and $1,100, respectively, in royalty expense under the Contribution and Royalty agreement for the three months and six month ended June 30, 2019, all of which was included in accounts payable at June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.

Guarantee

The Company has guaranteed payments based upon the terms found in the management services agreements to two affiliated physicians related to LI Nashville, LI Scottsdale, LI Pittsburgh, and LI Dallas. For the three and six months ending June 30, 2019, payments totaling approximately $34,000 and $56,000, respectively were made to these affiliates. For the three and six months ending June 30, 2018, payments totaling approximately $20,000 and $59,000, respectively were made to these affiliates.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

30

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and the Company necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

OurThe Company’s management, assessedincluding its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reportingthe design and operation of the Company’s disclosure controls and procedures as of March 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Based on our assessment, managementJune 30, 2019 and concluded that while there was sufficient segregation of routine duties, the Company lacked thehas a material weakness in disclosure controls and procedures as of June 30, 2019.

The Company has an ineffective control environment due to a lack of internal resources with expertise to determine entries and disclosures related to some of the Company’s more complex transactions. Management believes this lack of internal expertise has been somewhat mitigated by hiringcontinuing to retain consultants with this expertise in the quarter ended March 31,June 30, 2019. This material weakness in our financial reportingthe Company’s disclosure controls and our disclosure controlsprocedures will be further improvedremediated in 2019.

Changes in Internal Control Over Financial Reporting

 

During the quartersix months ended March 31,June 30, 2019, there were no changes in ourthe Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We areThe Company is not a party to any pending legal proceeding, nor is ourthe Company’s property the subject of a pending legal proceeding. None of ourthe Company’s directors, officers or affiliates are involved in a proceeding adverse to our business or has a material interest adverse to ourthe Company’s business.

 

ITEM 1A. RISK FACTORS.

 

We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

InDuring the first quarter ofsix month period ending June 30, 2019, the Company issued an aggregate of $7,000,000$7,200,000 of convertible promissory notes and an aggregate of 17,000,00018,000,000 warrants to purchase common stock. The convertible notes convertautomatically converted into common stock at $0.40 per share and the warrants are exercisable at $0.75 per share to certain accredited investors under Regulation D. As of the date hereof, all of such convertible notes have been converted into an aggregate of 17,000,00018,000,000 shares of common stock.

 

InDuring the first quarter ofsix month period ending June 30, 2019, the Company issued RMS Shareholders, LLC an aggregate of 50,925,277 shares of common stock upon the conversion of Series C Preferred Stock issued to RMS in the merger.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

Not applicable.

 

ITEM 6. EXHIBITS.

 

The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.

31

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 15,August 14, 2019

 

 MEDOVEX CORPH-CYTE, INC
   
 By:/s/ William E. Horne
  William E. Horne
  

Chief Executive Officer

(Principal Executive Officer)

   
 By:/s/ Jeremy Daniel
  Jeremy Daniel
  

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

32

EXHIBIT INDEX

 

31.1 Section 302 Certification of Principal Executive Officer*
31.2 Section 302 Certification of Principal Financial Officer*
32.1 Section 906 Certification of Principal Executive Officer and Principal Financial Officer***
101.INS XBRL Instance Document **
101.SCH XBRL Taxonomy Extension Schema Document **
101.CAL XBRL Taxonomy Calculation Linkbase Document **
101.LAB XBRL Taxonomy Labels Linkbase Document **
101.PRE XBRL Taxonomy Presentation Linkbase Document **
101.DEF XBRL Definition Linkbase Document **

 

*Filed herewith.
  
**Pursuant to Rule 406T of Regulation S-T adopted by the SEC, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.
  
***This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 3033