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 September 30, 2019March 31, 2020

 

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

 

H-CYTE, INC

(Exact name of registrant as specified in its charter)

 

Nevada 46-3312262
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Ticker symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share HCYT OTC Capital Markets

 

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 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 or an emerging growth 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 November 14, 2019, 99,236,413May 19, 2020, 99,878,079 shares of the registrant’s common stock were outstanding.

Note Regarding Reliance on SEC Order

 

As result of the global outbreak of the COVID-19 virus, on May 13, 2020 the Company evaluated its ongoing effort to prepare and file its quarterly report on Form 10-Q for the quarter ended March 31, 2020. Certain Company officers and management as well as professional staff and consultants were then unable to conduct work required to prepare our quarterly report for the quarter ended March 31, 2020.

As a result, the Company was unable to compile and review certain information required in order to permit the Company to file a timely and accurate quarterly report on Form 10-Q for its quarter ended March 31, 2020 by the prescribed date without unreasonable effort or expense due to circumstances related to COVID-19.

On March 25, 2020 the Securities and Exchange Commission (the “SEC”) issued an Order under Section 36 (Release No. 34-88465) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as modified by Order issued by the SEC on March 25, 2020 (Release No. 34-88465, the “Order”). The Order provides that a registrant (as defined in Exchange Act Rule 12b-2) subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, where certain conditions are satisfied.

The Company relied on this Order for filing of its quarterly report on Form 10-Q for the quarter ended March 31, 2020.

 

 

 
 

 

H-CYTE, INC AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

  Page
PART I – FINANCIAL INFORMATION 
   
Item 1.Financial Statements4
 Consolidated Balance Sheets4
 Consolidated Statements of Operations5
 Consolidated Statements of Stockholders’ Equity (Deficit)Deficit6
 Consolidated Statements of Cash Flows7
 Notes to Consolidated Financial Statements8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2526
Item 3.Quantitative and Qualitative Disclosures About Market Risks3430
Item 4.Controls and Procedures3430
   
PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings3531
Item 1A.Risk Factors3531
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3532
Item 3.Defaults Upon Senior Securities3532
Item 4.Mine Safety Disclosures3532
Item 5.Other Information3532
Item 6.Exhibits3532
   
SIGNATURES3633

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”).

Item 1. Financial Statements

 

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 September 30, 2019 (Unaudited)  December 31, 2018  (Unaudited)
March 31, 2020
  December 31, 2019 
          
Assets                
                
Current Assets                
Cash $367,877  $69,628  $122,400  $1,424,096 
Accounts receivable  37,180   15,242��  11,333   22,667 
Other receivables  33,868   5,144   11,701   18,673 
Inventory  126,250    
Prepaid expenses  198,927   59,678   216,048   810,143 
Total Current Assets  764,102   149,692   361,482   2,275,579 
                
Right-of-use asset  859,134      606,897   738,453 
Property and equipment, net  235,225   266,916   197,596   219,703 
Intangibles, net  3,128,000    
Goodwill  12,564,401    
Other assets  29,239   38,288   36,042   36,877 
Total Assets $17,580,101  $454,896  $1,202,017  $3,270,612 
                
Liabilities and Stockholders’ Equity (Deficit)        
Liabilities, Mezzanine Equity and Stockholders’ Deficit        
                
Current Liabilities                
Interest payable $78,328  $158,371  $92,561  $53,198 
Accounts payable  1,952,500   851,604   1,676,532   1,471,688 
Accrued liabilities  543,137   183,183   393,499   324,984 
Other current liabilities  532,396   462,856   357,689   189,035 
Short-term note, related party  1,250,000   180,000 
Short-term financing payable  114,123   30,852 
Short-term convertible notes payable  774,615    
Short-term notes, related parties  2,135,000   1,635,000 
Short-term convertible note payable  424,615   424,615 
Notes payable, current portion  71,653      67,444   66,836 
Dividend payable  105,389      126,941   108,641 
Deferred revenue  1,364,658   326,064   770,031   1,046,156 
Lease liability, current portion  481,295      402,876   453,734 
Total Current Liabilities  7,268,094   2,192,930   6,447,188   5,773,887 
                
Long-Term Liabilities                
Lease liability, net of current portion  396,424      221,710   302,175 
Notes payable, net of current portion  22,920         11,545 
Convertible debt to related parties     4,306,300 
Derivative liability - warrants  332,150      140,877   315,855 
Deferred rent     22,206 
Redemption put liability  79,045   267,399 
Total Long-Term Liabilities  751,494   4,328,506   441,632   896,974 
                
Total Liabilities  8,019,588   6,521,436   6,888,820   6,670,861 
                
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 September 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 September 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 September 30, 2019 and December 31, 2018      
Common stock - $.001 par value: 199,000,000 and 49,500,000 shares authorized. 99,236,360 and 33,661,388 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively  99,237   33,661 
Mezzanine Equity        
Series D Convertible Preferred Stock - $.001 par value: 238,871 shares authorized, 149,448 and 146,998 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively  6,281,433   6,060,493 
Total Mezzanine Equity  6,281,433   6,060,493 
        
Stockholders’ Deficit        
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019      
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 6,100 shares issued and outstanding at March 31, 2020 and December 31, 2019  6   6 
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019      
Common stock - $.001 par value: 199,000,000 shares authorized, 99,878,079 and 99,768,704 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively  99,878   99,769 
Additional paid-in capital  25,818,913   3,566,339   28,117,978   28,172,146 
Accumulated deficit  (15,987,512)  (9,296,408)  (39,815,966)  (37,362,531)
Non-controlling interest  (370,132)  (370,132)  (370,132)  (370,132)
Total Stockholders’ Equity (Deficit)  9,560,513   (6,066,540)
Total Stockholders’ Deficit  (11,968,236)  (9,460,742)
                
Total Liabilities and Stockholders’ Equity (Deficit) $17,580,101  $454,896 
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit $1,202,017  $3,270,612 

 

See accompanying notes to the unaudited consolidated financial statements

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  2019  2018  2019  2018 
Revenues $2,742,442  $1,536,990  $6,498,404  $6,880,794 
Cost of Sales  (550,139)  (503,755)  (1,539,104)  (1,979,128)
Gross Profit  2,192,303   1,033,235   4,959,300   4,901,666 
                 
Operating Expenses                
Salaries and related costs  1,913,845   894,773   7,078,531   3,072,807 
Other general and administrative  2,025,980   809,119   5,309,791   2,482,789 
Advertising  1,467,691   278,942   4,188,087   1,435,784 
Depreciation & amortization  211,885   35,371   631,722   84,259 
Total Operating Expenses  5,619,401   2,018,205   17,208,131   7,075,639 
                 
Operating Loss  (3,427,098)  (984,970)  (12,248,831)  (2,173,973)
                 
Other Income (Expense)                
Other income  --   --   2,153   -- 
Foreign currency transaction gain  --   --   6,837   -- 
Change in fair value of derivative liability - warrants  883,527   --   883,527   -- 
Interest expense  (80,092)  (50,281)  (259,436)  (121,200)
Total Other Income (Expenses)  803,435   (50,281)  633,081   (121,200)
                 
Net Loss $(2,623,663) $(1,035,251) $(11,615,750) $(2,295,173)
                 
Dividend on outstanding Series B Preferred Stock  21,000   --   66,639   -- 
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 $  (2,644,663) $(1,035,251) $(12,119,365) $(2,295,173)
                 
Loss per share – Basic and Diluted $(0.03) $(0.03) $(0.13) $(0.07)
Weighted average outstanding shares used to compute basic and diluted net loss per share  98,991,805   33,661,388   96,150,811   33,661,388 

  Three Months Ended March 31, 
  2020  2019 
       
Revenues $1,016,776  $1,324,240 
Cost of Sales  (376,816)  (559,319)
Gross Profit  639,960   764,921 
         
Operating Expenses        
Salaries and related costs  1,224,353   1,532,789 
Other general and administrative  1,230,135   1,487,720 
Research and development  750,000    
Advertising  144,618   1,135,546 
Depreciation and amortization  22,108   211,218 
Total Operating Expenses  3,371,214   4,367,273 
         
Operating Loss  (2,731,254)  (3,602,352)
         
Other Income (Expense)        
Other income (expense)  2,538   (205)
Interest expense  (56,149)  (92,259)
Change in fair value of redemption put liability  193,659    
Change in fair value of derivative liability - warrants  174,978    
Total Other Income (Expense)  315,026   (92,464)
         
Net Loss $(2,416,228) $(3,694,816)
         
Accrued dividends on outstanding Series B Convertible Preferred Stock  18,300   24,639 
Deemed dividend on adjustment to exercise price on certain warrants     404,384 
Deemed dividend on Series D Convertible Preferred Stock  158,147    
Deemed dividend on Beneficial Conversion Features     32,592 
Net loss attributable to common stockholders $(2,592,675) $(4,156,431)
         
Loss per share - Basic and Diluted $(0.03) $(0.05)
         
Weighted average outstanding shares - basic and diluted  99,839,617   85,513,024 

 

See accompanying notes to the unaudited consolidated financial statements

 

5
 

 

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)DEFICIT

For the three and nine months ended September 30,March 31, 2020 and March 31, 2019

(Unaudited)

 

For the Three Months Ended Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’
(Deficit)
 
September 30, 2019 Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
Balances – June 30, 2019  7,000  $7   98,886,360  $98,887  $25,705,975  $(13,480,691) $(370,132) $11,954,046 
Issuance of common stock in connection with private placement offering        200,000   200   77,164         77,364 
Issuance of warrants in connection with private placement offering              22,636         22,636 
Issuance of common stock in exchange for consulting services        150,000   150   43,349         43,499 
Derivative liability adjustment (Note12)              (116,842)  116,842      

 

— 

Issuance of warrants pursuant to extension of maturity date on convertible debt              106,158         106,158 
Stock based compensation              1,473         1,473 
Dividends payable              (21,000)        (21,000)
Net loss                 (2,623,663)     (2,623,663)
Balances - September 30, 2019  7,000  $7     99,236,360  $  99,237  $  25,818,913  $(15,987,512) $(370,132) $9,560,513 

For the Nine Months Ended Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’
(Deficit)
 
September 30, 2019 Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
Balances - 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        17,700,000   17,700   4,402,087         4,419,787 
Issuance of warrants in connection with private placement offering              2,663,797         2,663,797 
Issuance of common stock pursuant to conversion of short-term debt        500,000   500   125,437         125,937 
Issuance of warrants pursuant 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 convertible 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 in exchange for consulting fees incurred        280,085   280   95,253         95,533 

Adjustment of exercise price on convertible debt 

              287,542   (287,542)      
Issuance of common stock to pay accrued dividends on Preferred Series B stock        32,313   32   12,894         12,926 
Beneficial conversion on 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 
Issuance of warrants pursuant to extension of maturity date on convertible debt              106,158         106,158 
Stock based compensation              93,632         93,632 
Dividends payable              (66,639)        (66,639)
Net loss                 (11,615,750)     (11,615,750)
Balances - September 30, 2019  7,000  $7     99,236,360  $99,237  $  25,818,913  $(15,987,512) $(370,132) $9,560,513 
  Series B Preferred Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’ 
  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Balances - January 1, 2019    $   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   6,442,182         6,466,908 
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 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        750,000   750   225,187         225,937 
Issuance of warrants pursuant to conversion of short-term debt in January 2019              74,063         74,063 
Issuance of additional exchange shares          17,263,889   17,264   (17,264)          
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 
                                 
Balances - January 1, 2020  6,100  $6   99,768,704  $99,769  $28,172,146  $(37,362,531) $(370,132) $(9,460,742)
Issuance of common stock in exchange for consulting fees incurred        109,375   109   34,891         35,000 
Issuance of warrants pursuant to short-term notes, related party              17,636         17,636 
Deemed dividend on Series D Convertible Preferred Stock              (120,940)  (37,207)     (158,147)
Issuance of warrants pursuant to private placement of Series D Convertible Preferred Stock              31,902         31,902 
Stock based compensation              643         643 
Accrued dividends on Series B Convertible Preferred Stock              (18,300)        (18,300)
Net loss                 (2,416,228)     (2,416,228)
Balances – March 31, 2020  6,100  $6   99,878,079  $99,878  $28,117,978  $(39,815,966) $(370,132) $(11,968,236)

 

See accompanying notes to the unaudited consolidated financial statements

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 Nine Months Ended  Three Months Ended March 31, 
 September 30, 2019  September 30, 2018  2020  2019 
Cash Flows from Operating Activities                
Net loss $(11,615,750) $(2,295,173) $(2,416,228) $(3,694,816)
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization  631,722   84,259   22,108   211,218 
Amortization of debt discount  151,881   --   912   63,578 
Interest and penalties on extension of short-term convertible notes  124,615   -- 
Stock-based compensation  1,783,886   -- 
Issuance of warrants pursuant to short-term notes, related party  17,636    
Stock based compensation  643   89,043 
Loss on write-off of inventory  5,205   --      2,191 
Common stock issued for consulting services  95,533   --   35,000   52,032 
Income from change in fair value adjustment of derivative liability - warrants  (883,527)  -- 
Issuance of warrants to extend short-term debt  106,158   -- 
Change in fair value of derivative liability – warrants and redemption put liability  (368,637)   
Bad debt expense  60,112   --   3,000   8,025 
Changes in operating assets and liabilities, net of purchase transaction:                
Accounts receivable  63,707   (6,903)  8,334   76,811 
Other receivables  (28,724)  --   6,972   (76,504)
Accounts receivable from related parties  --   (8,824)
Prepaid expenses and other assets  (140,304)  89,078   594,251   (260,065)
Interest payable  (25,381)  98,286   39,363   (78,987)
Accounts payable  486,196   207,265   204,843   (187,697)
Accrued liabilities  (102,099)  (96,667)  211,221   (202,412)
Other current liabilities  354,340   (57,801)  25,948   49,696 
Dividend payable  (12,928)  -- 
Deferred revenue  1,038,594   (391,938)  (276,125)  69,750 
        
Net Cash Used in Operating Activities  (7,906,764)  (2,378,418)  (1,890,759)  (3,878,137)
        
Cash Flows from Investing Activities                
Purchases of property and equipment  (17,238)  (207,895)     (4,730)
Purchase of business, net of cash acquired  (302,710)  --      (302,710)
assets not included in purchase transaction  (69,629)  -- 
Cash excluded in Merger     (69,629)
Net Cash Used in Investing Activities  (389,577)  (207,895)     (377,069)
        
Cash Flows from Financing Activities                
Payments on short-term related party notes  (180,000)  (4,944)
Proceeds from short-term related party notes  1,250,000   -- 
Proceeds from short-term notes, related parties  500,000    
Payment of dividends  (6,136)  --      (6,137)
Proceeds from debt obligations  277,519   50,020 
Payment on debt obligations  (130,377)  --   (10,937)   
Proceeds from common stock  4,419,787   -- 
Proceeds from warrants  2,663,797   -- 
Proceeds from shareholder contributions  300,000   -- 
Proceeds from convertible debt to a related party  --   2,367,724 
Proceeds from common stock, net of issuance costs     4,217,946 
Proceeds from warrants, net of issuance costs     2,565,638 
Proceeds from issuance of Series D Convertible Preferred stock  100,000    
Net Cash Provided by Financing Activities  8,594,590   2,412,800   589,063   6,777,447 
        
Net Increase (Decrease) in Cash  298,249   (173,513)
        
Net (Decrease) Increase in Cash  (1,301,696)  2,522,241 
Cash - Beginning of period  69,628   251,330   1,424,096   69,628 
        
Cash - End of period $367,877  $77,817  $122,400  $2,591,869 
                
Supplementary Cash Flow Information                
Cash paid for interest $132,937  $20,900  $15,874  $9,320 
                
Non-cash investing and financing activities                
Common stock issued to pay accrued dividends $12,928  $-- 
Deemed dividends $436,976  $-- 
Conversion of debt obligations to common stock $225,937  $-- 
Conversion of debt obligations to warrants $74,063  $-- 
Issuance of warrants to extend short-term debt $106,158  $-- 
Conversion of short-term related party notes payable to common stock $114,000  $-- 
Conversion of note and accrued interest to common stock and warrants $607  $-- 
Interest and penalties on extension of short-term convertible notes $253,607  $-- 
Dividends accrued $66,639  $-- 
Repurchase of non-controlling interest $--  $33,805 
Deemed dividend on adjustment to exercise price on certain warrants     404,384 
Deemed dividend on beneficial conversion features     32,592 
Issuance of common stock pursuant to conversion of debt obligations     225,937 
Issuance of warrants pursuant to conversion of short-term debt     74,063 
Deemed dividend on Series D Convertible Preferred Stock  158,147    
Issuance of Warrants in connection with Series D Convertible Preferred Stock  31,902    
Dividends accrued on Series B Convertible Preferred Stock  18,300   24,638 
Right-of-use asset additions     1,092,102 
Right-of-use liability additions     1,113,646 

 

See accompanying notes to the unaudited consolidated financial statements

H-CYTE, INC

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Description of the Company

 

On July 11, 2019, MedovexMedoveX Corp. (“MedoveX”) changed its namedname 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 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2013 as SpineZ Corp.

 

On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) 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 APA 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 APA and its amendment (collectively the “APA”), 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 toAs of the merger, of H-CYTE and RMS on January 8, 2019 (the “Merger”), the consolidated results for H-CYTE include the financial activities of Regenerative Medicine Solutions,following wholly-owned subsidiaries: H-CYTE Management, LLC LI, RMS Nashville, LLC (“Nashville”)(formerly Blue Zone Health Management, LLC), RMS Pittsburgh, LLC (“Pittsburgh”), RMS Scottsdale, LLC (“Scottsdale”), RMS Dallas, LLC (“Dallas”), State, LLC (“State”),MedoveX Corp, Cognitive Health Institute, ofLLC, and Lung Institute Tampa, (“CHIT”), RMS LI Management,LLC (formerly Blue Zone Lung Tampa, LLC) and Shareholder, H-CYTEthe results 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 Variable Interest Entities (“VIEs”).

As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: Additionally, H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), Cognitiveis the operator and manager of the various Lung Health Institute LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC). Additionally, H-CYTE has consolidated(LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale,Scottsdale.

In 2019, the Company had two divisions: the healthcare medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). In the first quarter of 2020, the Company decided to focus its available resources on the Biosciences division as VIEs.it represents a significantly greater opportunity than the DenerveX division as explained below. The Company is no longer manufacturing or selling the DenerveX device.

Healthcare Medical Biosciences Division (Biosciences division)

 

The Company’s RMSBiosciences division is a healthcare medical biosciences company that develops and implements advanced 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, RMSthis division consistently provides oversight and management of the highest quality care while producing positive medical 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 June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a disruptive cytotherapy technologyFDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics. This will be managed through a new Rion division of H-CYTE.

Rion has established a novel technology to harness the healing power of the body. Rion’s novelinnovative 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. This agreement provides for a ten-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.

 

With this agreement,these agreements, Rion will serve as the product supplier and co-develop a proprietary cellular platformco-developer of L-CYTE-01 with H-CYTE for the treatment of COPD, andchronic lung diseases. H-CYTE will control the commercial development and facilitate the 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”)FDA for treatment of COPD.

 

Proprietary Medical Device Business (DenerveX medical device division)

The Company is also in theCompany’s business of designing and marketing proprietary medical devices for commercial use in the United StatesU.S. and Europe.Europe began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System, and it is nowbecame commercially available throughout the European Union and several other countries that accept CE marking. In addition to the DenerveX device itself, the Company has developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device. Commercial production has been suspended since the first quarter of 2019. There was less than $100,000 in revenue from the product in 2019.

In the first quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and distributor options or other product monetizing relationships for the DenerveX product. Although the Company believes the DenerveX technology has value, the Company does not believe it will realize the value in the foreseeable future. The Company recorded an impairment charge for intangibles associated with the DenerveX intellectual property and wrote off related inventory balances as of December 31, 2019.

Note 2 - Liquidity, Going Concern and Management’s Plans

COVID-19 has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020, the Company took steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through at least the end of July. The Company made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, and Dallas. The Company will reevaluate when operations will recommence at these clinics as more information about COVID-19 becomes available.

The Company incurred net losses of approximately $2,416,000 and $3,695,000 for the three months ended March 31, 2020 and 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue activities are suspended and as the Company implements its business plan. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

The Company will incur losses until sufficient revenue is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process. Due to the coronavirus outbreak (“COVID-19”), the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled these patients to August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s first salequarter revenue 2020 was approximately $1,000,000 compared to fourth quarter 2019 revenue of approximately $1,800,000. The Company expects revenue for the DenerveX System occurred in July 2017.second quarter of 2020 will be nominal if any, and future quarters’ revenue is dependent on the timing of being able to treat patients again. The Company will continue to focus on its goal of taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. The Company is presently reevaluatingcurrently evaluating if its approachesprotocol has the potential to help people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached.

The Company incurred net losses of approximately $2,416,000 and $3,695,000 for the three months ended March 31, 2020 and 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue generation including the continuing use of its distribution channels, source of manufacturing,activities are suspended and evaluating joint venture opportunities. In July 2019,as the Company signed a new engineering feasibility proposal that would confirm a new sterilization process which would be a slightly less expensive option and expand the shelf life of DenerveX from six months to a minimum of one year and potentially up to three years.implements its business plan. The longer shelf life will help the distributors reach more end-users as many hospital systems and medical practitioners will not purchase medical products with less than a one-year shelf life. The Company still considersconsolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.

On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company to further cover the Company’s working capital needs, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further below in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor.

Note Purchase Agreement

On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,835,195. This sum included the issuance by the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.

As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.

Short-term notes, related parties

On March 27, 2020, the Company issued a target market and it remainsdemand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s goalworking capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to seek FDA approval.the Company, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, anticipates that it will do so once it is backwhich served as lead investor in productionthe Company’s recent Series D Convertible Preferred Stock Offering. As discussed further above in “Note Purchase Agreement”, this A&R Note was further amended and generating revenue through salessuperseded by an April Secured Note in Europe and other approved countries.the amount of $1,000,000 issued by the Company to the Investor.

 

8

The other short-term notes, related parties were issued by the Company during 2019, and as of March 31, 2020 and December 31, 2019 consist of five loans, totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes and had the terms as indicated below. The loans bear interest ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the respective maturity date ranging from March 26, 2020 to May 13, 2020. Some of these loans provided for the issuance of warrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans have been repaid and 840,000 warrants have been issued at an exercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing, which such price has not yet been established, and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of the warrant will be equal to the price per share obtained by dividing $3,000,000 by the number of fully diluted shares of the Company outstanding on October 31, 2020.

As of March 31, 2020, the Company had cash on hand of $122,400. Cash on hand at May 15, 2020 was approximately $3,117,000. The Company’s cash is insufficient to fund its operations over the next year and the Company will need to raise additional capital through debt or equity offerings to continue operations.

There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. In the event the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the Company may be forced to reduce expenses or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 23 – Basis of presentation and Summary of Significant Accounting Policies

 

Based on the terms of the APA, the former RMS members had voting control of the combined company as of the closing of the Merger. 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 (“U.S. GAAP”).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 H-CYTE are recorded as of the mergerMerger closing date at their estimated fair values (see Note 3).

The unaudited consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity (deficit), and the consolidated statements of cash flows do not reflect the historical financial information related to H-CYTE prior to the Merger as they only reflect the historical financial information related to RMS. For the unaudited consolidated statements 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 at the beginning of the periods presented. The unaudited consolidated statements of stockholders’ equity (deficit) reflect the activity from June 30, 2019 to September 30, 2019 and December 31, 2018 to September 30, 2019. For the comparable period from December 31, 2017 to September 30, 2018, the only activity in the unaudited consolidated statement of stockholders’ equity (deficit) were the losses totaling approximately $1,035,251 and $2,295,173 for the three and nine months ended September 30, 2018, respectively.values.

 

The accompanying unauditedinterim consolidated financial statements have been prepared in accordance withbased upon U.S. GAAP and with the rules and regulations of the Securities and Exchange Commission (“SEC”)rules that permit reduced disclosure for interim periods. The unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statementsTherefore, they do not include all information and in the opinionfootnote disclosures necessary for a complete presentation of management, reflect all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. The Company filed audited consolidated financial statements as of September 30,and for the fiscal years ended December 31, 2019 and December 31, 2018 which included all information and thenotes necessary for such complete presentation in conjunction with its 2019 Annual Report on Form 10-K.

The results of operations for the three and nine monthsinterim period ended September 30, 2019 and 2018 and statements of cash flows for the nine months ended September 30, 2019 and 2018.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto for the fiscal year ended DecemberMarch 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 the 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 nine months ended September 30, 20192020 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year endingended December 31, 2019, or for any other interim period or for any future year.

Principles of Consolidation

U.S. GAAP requires that a related entity be consolidated with a company when certain conditions exist. An entity is considered to be a VIE when it has equity investors who lackwhich are contained in 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 Parent would be required if it is determined that the Parent will absorb a majorityCompany’s 2019 Annual Report on Form 10-K. For further discussion of the VIE’s expected losses or residual returns if they occur, retainCompany’s significant accounting policies, refer to Note 3 – “Basis Of Presentation And Summary of Significant Accounting Policies” to the power to direct or control the VIE’s activities, or both.

The accompanying unaudited consolidated financial statements include the accountsand “Management’s Discussion and Analysis of the parent, its wholly-owned subsidiaries,Financial Condition and its VIEs.

Accounts Receivable

Accounts receivable 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 netResults 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 September 30, 2019Operations – Critical Accounting Policies and December 31, 2018, management believes no allowance is necessary. For the three and nine month periods ended September 30, 2019, the Company recorded bad debt expense of approximately $0 and $60,000, respectively.

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 forego 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.

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 goodwillEstimates” in the fourth quarter.

Intangibles acquired in a business combination are recorded at fair value using generally accepted valuation methods appropriateCompany’s Annual Report on Form 10-K for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment whenever events or 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 (as amended), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve 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. For the lease agreements in which the Company is lessee, under Topic 842, lessees are required to recognize a lease liability and right-of-use 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 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.

Other Receivables

Other receivables totaling approximately $34,000 at September 30, 2019 include receivables from the non-acquired Lung Institute, LLC due to Lung Institute Tampa, LLC for approximately $19,000, and approximately $9,000 reimbursement receivable for reimbursement of expenses from a joint study. The $19,000 receivable was a result of the Lung Institute, LLC being a transitory entity for Lung Institute Tampa, LLC while the merchant services accounts are being transferred.

Revenue Recognition

The Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606,Revenue From Contracts with Customers, which requires that five steps be completed 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 satisfies a performance obligation. The Company records revenue under ASC 606 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.

Biomedical Services

H-CYTE 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.

The Lung Health Institute locations offer two types of cellular therapy treatments to their patients. The first type of treatment includes medical services rendered typically over 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 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. Revenue is recognized 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 $1,365,000 and $326,000 at September 30, 2019 and December 31, 2018, respectively.

Use of Estimates

In preparing the unaudited consolidated 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, business acquisition accounting, the fair value of its warrant issuances and share-based payment arrangements.

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

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.

Income Taxes

From inception to September 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 September 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 September 30, 2019 or December 31, 2018. The Company has not undergone any tax examinations since inception.

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: 32,756,181 warrants and 517,509 common stock options outstanding were considered anti-dilutive and excluded for the three and nine month periods ended September 30, 2019. For the nine month period ended September 30, 2018, there were no dilutive securities as the accounting acquirer did not historically have stock compensation programs.

Note 3 – Business Acquisition

On January 8, 2019, MedoveX completed its business combination with RMS under which MedoveX purchased certain assets and assumed certain liabilities of RMS, otherwise referred to as the Merger. Pursuant to the terms of the APA, MedoveX 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 which automatically converted 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 APA, 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 MedoveX raised an additional $5.65 million via the issuance of new securities. On the date of closing the Company 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, an incremental 11,153 additional Exchange Shares were issued, for a total of 17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS and these Series C Preferred shares converted to 17,263,889 shares of common stock; no additional equity will be issued to RMS.

Because RMS shareholders owned approximately 55% of the voting stock of MedoveX after the transaction, RMS was 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 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 MedoveX (the “Acquiree”) are recorded as of the Merger closing date at their estimated fair values.

Under the terms of the APA, MedoveX purchased certain assets and assumed certain liabilities of RMS. The assets of RMS reported on the MedoveX consolidated balance sheet as of December 31, 2018 that were excluded in the Merger on January 8, 2019 was cash of approximately $70,000. The Merger included the following: convertible debt to a related party of approximately $4,300,000, 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 8, 2019 RMS reverse acquisition.

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 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 September 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 and depreciation and amortization related to some of these assets and liabilities.

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

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

Just prior to the transaction, MedoveX 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 MedoveX 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 MedoveX common stock is above the fair value of its net assets. The MedoveX net asset value is primarily comprised of definite-lived 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 MedoveX 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. During the three months ended September 30, 2019 the Company revised its purchase price allocation for the acquisition. As a result, the Company recorded a measurement period adjustment of $1,215,677 as an increase to goodwill adjusting the amount recorded as of January 8, 2019. The adjustment resulted in a corresponding increase to a derivative liability (see Note 12).

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

Cash $(302,710)
Accounts receivable  145,757 
Inventory  131,455 
Prepaid expenses  46,153 
Property and equipment  30,393 
Other  2,751 
Intangibles  3,680,000 
Goodwill  12,564,401 
Total assets acquired $16,298,200 
Accounts payable and other accrued liabilities  1,645,399 
Derivative liability  

1,215,677

 
Interest-bearing liabilities and other  755,216 
Net assets acquired $12,681,908 

Intangible assets are 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 
Short-term convertible notes payable  598,119 
Dividend payable  57,813 
Deferred rent  267 
Total interest-bearing and other liabilities $755,216 

Notes payable relate to promissory notes assumed by Acquiree in a 2015 acquisition, which was later divested in 2016, with the assumed promissory notes being retained by Acquiree. The Company finalized an eighteen-month extension on the notes extending the maturity date to March 1, 2021. Payments on both of the notes are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. The promissory notes had outstanding balances of $95,000 as of September 30, 2019. The promissory notes had outstanding balances of approximately $99,000 plus accrued interest of approximately $3,000 at January 8, 2019 (see Note 11).

In the third quarter of 2018, convertible notes were issued pursuant to a securities purchase agreement with select accredited investors, whereby the Acquiree offered up to 1,000,000 units (the “Units”) at a purchase price of $50,000 per Unit. Each Unit consisted 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 of Units, 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.

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. Due to the notes maturing during the third quarter of 2019, the warrants have fully accreted as of September 30, 2019. 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.

The convertible notes had maturity dates between August and September 2019 and were renegotiated during the third quarter of 2019 (see Note 11).

The 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  Nine Months Ended 
  September 30, 2019  September 30, 2019 
Revenues $28,405  $63,910 
Net loss attributable to MedoveX  (7,203)  (1,956,705)

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.

  For the Three Months Ended September 30, 2018 
  RMS  MedoveX  Pro Forma 
Revenues $1,536,990  $206,159  $1,743,149 
Net loss  (1,035,251)  (1,382,275)  (2,417,526)
Net loss attributable to common shareholders  (1,035,251)  (1,512,326)  (2,547,577)
             
Loss per share- basic and diluted $(0.03) $(0.06) $(0.04)

  For the Nine Months Ended September 30, 2018 
  RMS  MedoveX  Pro Forma 
Revenues $6,880,794  $598,773  $7,479,567 
Net loss  (2,295,173)  (3,721,958)  (6,017,131)
Net loss attributable to common shareholders  (2,295,173)  (4,119,068)  (6,414,241)
             
Loss per share- basic and diluted $(0.07) $(0.18) $(0.11)

Note 4 - Inventory

Inventory consists only of finished goods and is valued at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method. Inventories were acquired in the Merger and therefore there were no inventories prior to January 8,ended December 31, 2019.

 

Inventory consisted solely of

Certain reclassifications have been made to amounts previously reported and some disclosures for prior periods have been added to conform with the Pro-40 Generators totaling approximately $126,000 and $0 at September 30, 2019 and December 31, 2018, respectively.current period presentation.

Note 54Right-of-use Asset And Lease LiabilityBusiness Acquisition

 

Upon adoption of ASU No. 2016-02 (as amended) (See Note 2), additional currentOn January 8, 2019, MedoveX completed its business combination with RMS under which MedoveX purchased certain assets and assumed certain liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding ROU assets of approximately $1,167,000 were recognized, based onRMS, otherwise referred to as the present valueMerger. Pursuant to the terms of the remaining minimum rental payments underAPA, MedoveX issued to the shareholders of RMS 33,661 shares plus 6,111 additional Exchange Shares (based on closing the sale of $2,000,000 of new leasing standardssecurities) for existing operating leases.a total of 39,772 shares of Series C Preferred Stock where each share of Series C Preferred stock automatically converted into 1,000 shares of common stock and represent approximately 55% of the outstanding voting shares of the Company.

 

The unaudited consolidated balance sheet at September 30, 2019 reflects current lease liabilitiesUnder the terms of approximately $481,000the APA, the Company issued additional “Exchange Shares” to the shareholders of RMS to maintain the 55% ownership and long-term liabilitiesnot be diluted by the sale of $396,000, with corresponding ROU assetsconvertible securities (“New Shares Sold”) until MedoveX raised an additional $5,650,000 via the issuance of $859,000.

Operating lease expense and cash flows from operating leases fornew securities. On the three and nine months ending September 30, 2019 totaled approximately $140,000 and $389,000, respectively, anddate of closing the Company issued 6,111 additional Exchange Shares to RMS Shareholders as a result of the issuance of additional securities, which are included in the “Other general and administrative” section39,772 shares above. Subsequent to the closing of the unaudited consolidated statementpurchase transaction, an incremental 11,153 additional Exchange Shares were issued, for a total of operations.17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS and these Series C Preferred shares converted to 17,263,889 shares of common stock; no additional equity will be issued to RMS.

Because RMS shareholders owned approximately 55% of the voting stock of MedoveX after the transaction, RMS was 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 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 MedoveX (the “Acquiree”) are recorded as of the Merger closing date at their estimated fair values.

Purchase Price Allocation

 

The Company leases corporate office space in Tampa, FLpurchase price for the acquisition of the Acquiree has been allocated to the assets acquired and Atlanta, GA. liabilities assumed based on their estimated fair values.

The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA,acquisition-date fair value of the consideration transferred is as follows:

Common shares issued and outstanding  24,717,270 
Common shares reserved for issuance upon conversion of the outstanding Series B Preferred Stock  2,312,500 
Total Common shares  27,029,770 
Closing price per share of MedoveX Common stock on January 8, 2019 $0.40 
   10,811,908 
Fair value of outstanding warrants and options  2,220,000 
Cash consideration to RMS  (350,000)
Total consideration $12,681,908 

Prior to the transaction, MedoveX had 24,500,000 shares of common stock outstanding at a market capitalization of $9,800,000. The estimated fair value of the net assets of MedoveX was $8,400,000 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 MedoveX common stock was above the fair value of its net assets. The MedoveX net asset value was primarily comprised of definite-lived intangibles as of the closing and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increasesthe RMS interest in the consumermerger is significantly related to obtaining access to the public market. Therefore, the fair value of the MedoveX stock price index or agreed upon rates. Each location hasand market capitalization as of the closing date is considered to be the best indicator of the fair value and, therefore, the purchase price consideration.

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

Cash $(302,710)
Accounts receivable  145,757 
Inventory  131,455 
Prepaid expenses  46,153 
Property and equipment  30,393 
Other  2,751 
Intangibles  3,680,000 
Goodwill  12,564,401 
Total assets acquired $16,298,200 
Accounts payable and other accrued liabilities  1,645,399 
Derivative liability  1,215,677 
Interest-bearing liabilities and other  755,216 
Net assets acquired $12,681,908 

Intangible assets are recorded as definite-lived assets and amortized over the estimated period of economic benefit. Intangible assets represent the fair value of patents and related proprietary technology for the DenerveX System. During the fourth quarter of 2019 the Company recorded an impairment charge of $2,944,000 related to the carrying value of its own expiration date ranging from April 30, 2020 to August 31, 2023. The Company expects to renew each lease upon expiration in order to continue operations.intangible assets.

 

AsGoodwill is calculated as the difference between the acquisition-date fair value of September 30,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. During the fourth quarter of 2019 the undiscounted minimum future maturitiesCompany recorded an impairment charge of leaseapproximately $12,564,000 related to the carrying value of goodwill.

The derivative liability relates to the liability associated with warrants issued with the securities purchase agreements executed in May 2018, which liability was assumed in the Merger (see Note 12).

Total interest-bearing liabilities and other liabilities assumed are as follows:

 

Remainder of 2019 $138,000 
2020  482,000 
2021  155,000 
2022  103,000 
2023  69,000 
  $947,000 
Notes payable $99,017 
Short-term convertible notes payable  598,119 
Dividend payable  57,813 
Deferred rent  267 
Total interest-bearing and other liabilities $755,216 

For further discussion of the notes payable and short-term convertible notes payable, refer to Note 11-“ Short-term Debt “ to these interim financial statements.

Note 5 – Right-of-use Asset And Lease Liability

On January 9, 2019, the Company adopted ASU No. 2016-02 (as amended), and additional current liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding ROU assets of approximately $1,167,000 were recognized, based on the present value of the remaining minimum rental payments under the new leasing standards for existing operating leases.

The consolidated balance sheet at March 31, 2020 reflects current lease liabilities of approximately $403,000 and long-term liabilities of $222,000, with corresponding ROU assets of $607,000.

The audited consolidated balance sheet at December 31, 2019 reflects current lease liabilities of approximately $454,000 and long-term liabilities of $302,000, with corresponding ROU assets of $738,000.

The components of lease expense for the three months ended March 31, 2020 and 2019, respectively, are as follows:

  Three months ended
March 31,
 
  2020  2019 
Operating lease expense $150,564  $136,943 

Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2020 and 2019, respectively, are as follows:

  Three months ended
March 31,
 
  2020  2019 
Operating cash flows from operating leases $150,564  $136,943 

Supplemental balance sheet and other information related to operating leases are as follows:

  March 31, 2020  December 31, 2019 
       
Operating leases right-of-use assets $606,897  $738,453 
Lease liability, current portion  402,876   453,734 
Lease liability, net of current portion  221,710   302,175 
Total operating lease liabilities $624,586  $755,909 
Weighted average remaining lease term  2.16 years   2.25 years 
Weighted average discount rate  7.75%  7.75%

Future maturities of operating lease liabilities as of March 31, 2020 are as follows:

  Operating leases 
    
Remainder of 2020 $353,601 
2021  154,559 
2022  102,891 
2023  69,333 
Total lease payments  680,384 
Less interest  (55,798)
Total $624,586 

Operating lease expense and cash flows from operating leases for the three months ended March 31, 2020 and 2019, totaled approximately $150,000 and $137,000, respectively, and are included in the “Other general and administrative” section of the consolidated statement of operations.

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. Each location has its own expiration date ranging from April 30, 2020 to August 31, 2023. In May 2020, due to COVID-19, the Company entered into a three-month extension for the lease that expired on April 30, 2020.

 

Note 6 - Property And Equipment

 

Property and equipment, net, consists of the following:

 

 Useful Life September 30, 2019 December 31, 2018  Useful Life March 31, 2020 December 31, 2019 
Furniture and fixtures 5-7 years $147,870  $149,285  5-7 years $231,222  $231,222 
Computers and software 3-7 years  361,986   278,234  3-7 years  244,039   244,039 
Leasehold improvements 15 years  157,107   156,133  15 years  157,107   157,107 
    666,963   583,652     632,368   632,368 
Less accumulated depreciation    (431,738)  (316,736)    (434,772)  (412,665)
                    
Total   $235,225  $266,916    $197,596  $219,703 

 

Depreciation expense was approximately $28,000$22,000 and $80,000, respectively,$27,000 for the three and nine months ended September 30, 2019. Depreciation expense was approximately $35,000March 31, 2020 and $84,000, respectively, for2019, respectively. The Company uses the three and nine months ended September 30, 2018.

straight-line depreciation method to calculate depreciation expense.

Note 7 - Intangible Assets And Goodwill

As of September 30, 2019, intangible assets acquired as part of the Merger, net of accumulated amortization of $552,000, totaled approximately $3,128,000. Amortization expense was $184,000 and $552,000 for the three and nine months ended September 30, 2019.

 

The following is a schedule of expected future amortization ofCompany’s intangible assets are patents and related proprietary technology for the DenerveX System for which an impairment charge was made in the fourth quarter of 2019 writing off this asset as of September 30, 2019:December 31, 2019.

 

Remainder of 2019 $184,000 
2020  736,000 
2021  736,000 
2022  736,000 
2023  736,000 
Total $3,128,000 

For the three months ended March 31, 2020 and 2019, total amortization expense related to acquisition-related intangible assets was $0 and $184,000, respectively, and is included in operating expense in the accompanying consolidated statement of operations.

Goodwill represents the excess of purchase price over fair value of net identified tangible and intangible assets and liabilities acquired in the Merger. As of December 31, 2019, the Company’s goodwill balance was determined to be impaired as of the balance sheet date and as a result, the Company recorded a goodwill impairment charge writing off the goodwill balance.

 

Note 8 – Related Party Transactions

 

Consulting Expense

 

TheEffective February 1, 2019, 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 in addition to regular quarterly board meeting fees. This arrangement has no specified termination date.Effective March 25, 2020, the Company reduced the advisory services to $5,000 per month and the fees per quarter as the Audit Committee Chair to $2,500. For the three and nine months ended September 30,March 31, 2020 and 2019, the Company has expensed approximately $35,000$30,000, and $90,000$35,000 in compensation to Mr. Monteleone, respectively.

 

The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For three months ended March 31, 2019, the Company expensed approximately $27,000 in consulting fees to St. Louis Family Office.

The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve months, unless otherwise terminated by giving thirty days prior written notice. A close family member of the Company’s CEO is a partner in Strategos. The monthly fee started at $4,500 and increased to approximately $7,500 per month. Strategos provided information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by LHI, advocated for legislation that supports policies beneficial to patient access and opposed 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. The Company terminated this agreement in March 2020. For the three months ended March 31, 2020 and 2019, the Company expensed approximately $15,000 and $0, respectively.

Officers andBoard MemberMembers and Related Expenses

In connection with the April Offering, the Company’s CEO William Horne entered into an amendment letter to his employment agreement which provides that his salary will be reduced to $0 per month; provided that on the date that the Company receives FDA approval to commence clinical trials for its products, Mr. Horne’s salary will be increased to a total of $18,750 per month, or $225,000 per annum.

  

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company paid $0 and $5,000 each forin Board of Director fees to Michael Yurkowsky and to Raymond Monteleone for a total of $0 and $10,000, respectively.Monteleone.

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. On March 13, 2018, the entire $1,856,350 line of credit received from the Member and the CEO, including contributions from 2017, was transferred to the BioCell Capital, LLC debt instrument, (“BioCell Capital Line of Credit”).

The BioCell Capital Line of Credit also consisted of capital contributions fromshort-term notes, related parties totaling approximately $4,306,000, inclusive of the aforementioned $1,856,300, to RMSare detailed in 2018. The BioCell Capital Line of Credit was converted to RMS members’ equityNote 2 - “Liquidity, Going Concern and was excluded from 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,Management’s Plans” in the amount of $180,000 in December 2018 for working capital needs. Approximately $66,000 of the advance was repaid in January 2019 and approximately $114,000 was converted to equity as part of the APA on January 8, 2019.this Form 10-Q.

Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne, advanced funds for operations totaling $900,000 on July 25, 2019. These loans accrue interest at 5.5% and are due and payable upon demand of the creditor.

In addition, Horne Management, LLC loaned H-CYTE $350,000 on September 26, 2019, for working capital purposes. The terms of the loan as follows:

12% interest rate with a maturity date of March 26, 2020.
If the Company does not pay back the principal and interest by November 26, 2019, the Company shall issue to Lender a three-year warrant to purchase 400,000 shares of the Company’s common stock with a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of March 26, 2020, the interest rate increases to 15%.

 

Note 9 - Equity Transactions

 

For the consolidated statementsstatement of stockholders’ equity (deficit)deficit as of December 31, 2018,January 1, 2019, 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 presentedthat date and the historical accumulated deficit of RMS. As of the closing of the Merger, before the contingent additional exchange shares impact from the sale of new securities, the stock received by RMS was 33,661 shares of Series C Preferred Stock, which was later converted 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 and non-controlling interest of RMS as of the closing was approximately $9,296,000.$9,296,000 and $370,000, respectively.

 

Common Stock Issuance

 

On January 8, 2019, the Company entered into a securities purchase agreement (the “SPA”��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 at a purchase price of $.075$0.75 per share. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000 Units, and subsequently increased the maximum amount to $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of i) the closingFor further discussion of the subscription of the Maximum Amount and ii) March 31, 2019 (the “Termination Date”), subjectSPA, refer to Note 9 - “Equity Transactions” to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Steve Gorlin,consolidated financial statements in the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to himAnnual Report on Form 10-K is incorporated by the Company in exchange for four (4) Units on the same terms as all other Purchasers. Mr. Gorlin subsequently converted the promissory note underlying the Units into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.reference herein.

 

Each Convertible Note had an interest rate of 12% per annum, a principal amount of $50,000 maturity date of January 8, 2020, and will be convertible into shares of common stock at a price of $0.40 subject to adjustment as provided for in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Note 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. If defaulted, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, each Warrant is exercisable 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 agreement. All Convertible 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,$7,000,000, as of that latest date.April 5, 2019, excluding the shares issued for conversion of short-term debt, discussed below

 

As a result of the sales of new securities of at least $5,650,000, the Company issued an additional 17,264 Series C Preferred Stock whichto RMS members in accordance with the provisions of the APA in the first quarter of 2019. These shares automatically converted to 17,263,889 shares of common stock.

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.

stock at closing on January 8, 2019.

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 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 $0.40 per share to Mr. William E. Horne, the Company’s CEO, in a restricted stock award which was 100% vested when issued. The Company recognized approximately $1,690,000 of compensation expense in the quarter ended June 30, 2019 related to the restricted stock award. 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 Merger. 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 Merger.

During the third quarter of 2019, the Company raised $100,000 by selling 200,000 shares of common stock at $0.50 per share. They also issued the investors 100,000 warrants with an exercise price of $1.00 per share.

$52,033. In the third quarter ofAugust 2019, the Company issued 150,000 shares of common stock to a consultantconsultants in consideration of consulting services rendered to the Company. At the time of issuance, the fair market value of the shares was $0.29, and, as a result, $43,500 was expensed infor the three and nine months ended September 30,year ending December 31, 2019.

 

DuringIn February 2020, the nine months ended September 30, 2019, 636,480Company issued LilyCon Investments $35,000 in shares were issued pursuant to conversions of somethe Company’s common stock at a weighted average share price of our Series B Convertible Preferred Stock (“Stock B Preferred”) and accrued dividends thereunder.$0.32 per share for a total of 109,375 shares per the terms of the consulting agreement executed in February 2019. 

 

Series B Preferred Stock Preferences

 

Voting Rights

 

Holders of our Series B Preferred Stock (“Series B Holders”) 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 Series B Holder shall vote on each matter submitted to them with the holders of common stock.

 

Liquidation

 

Upon the liquidation dissolution or winding updissolution of the business of the Company, whether voluntary or involuntary, each Series B Holder shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefore, a preferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the Series B Holders 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.stock but after the Series D Holders receive their respective liquidation value. The Company accrues these dividends as they are earned each period.

 

On January 8, 2019, the Company completed the issuance of Convertible Notes with a conversion price of $0.40. As a result, the exercise price on all of the warrants issued with the Series B Preferred Stock was adjusted downward to 90% of that conversion price, or $0.36.

 

TheIn the first quarter of 2019, the Company recognized a beneficial conversion feature related to the Series B Preferred Stock of approximately $33,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. BecauseSince the Series B Preferred Stock 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 and Repurchase

 

During the nine monthsyear ended September 30,December 31, 2019, 9,250 shares of Series B Preferred Stock, par value $0.001, and accrued dividends were assumed with the Merger and an aggregate of 2,2502,650 shares of Series B Preferred Stock, and accrued dividends, were subsequently converted into an aggregate of 604,167715,279 shares of the Company’s common stock.

 

Debt Conversion

 

Convertible Notes and Promissory Note to Related Party

 

The $750,000 convertible notes payable assumed in the Merger 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 of common stock at $0.40 per share, in accordance with the SPA.

 

In connection with the APA, 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 on 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

 

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

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 nine months ended September 30, 2019 was approximately $1,473 and $1,786,500, respectively. The nine months ended September 30, 2019 includes $1,690,000 of compensation expense 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 reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued.

Stock Option Activity

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company recognized approximately $1,500$600 and $94,000,$89,000, respectively, as compensation expense with respect to vested stock options. No compensation expense was recorded prior to the Merger. Since these stock options were assumed on January 8, 2019 as part of the Merger, there were no historical costs related to this prior to January 8, 2019. The expense for the ninethree months ended September 30,March 31, 2019 is primarily related to a fully-vestedan option to purchase 250,000 shares of the Company’s common stock that was issued to the Company’s CEO pursuant to his employment agreement, which stated that this option grant would be fullyagreement. These options were immediately vested if it was not issued within fifteen days of the Merger. The option was not granted within that time frame and was fully vested when issued.upon issuance.

 

As of September 30, 2019, there were 9,501 shares of unvestedMarch 31,2020, all outstanding stock options were fully vested, and unrecognizedrelated compensation expense totaled approximately $2,400. The remaining expense will be recognized as an expense on a straight-line basis over a remaining weighted average service period.recognized.

 

The following is a summary of stock option activity for the nine monthsquarters ending September 30, 2019:March 31, 2019 and March 31, 2020:

 

  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   6.06 
Other activity since January 8, 2019:            
Granted  250,000  $0.40   9.27 
Cancelled  (289,774) $2.46    
Outstanding at September 30, 2019  517,508  $1.81   7.62 
Exercisable at September 30, 2019  508,007  $1.81   7.62 

  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 
Granted  250,000  0.40    
Expired  (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 
             
Outstanding at December 31, 2019  425,000  $1.38   7.71 
Granted         
Expired         
Outstanding and exercisable at March 31, 2020  425,000  $1.38   7.46 

 

Non-Controlling Interest

For the three months ended March 31, 2020 and 2019, the Company consolidated the results for LI Dallas, LI Nashville, LI Pittsburgh and LI Scottsdale as VIEs. The Company owns no portion of any of these four entities which own their respective clinics; however, the Company maintains control through their management role for each of the clinics, in accordance with each clinic’s respective management agreement. Based on these agreements, the Company (RMS and RMS Management and now H-CYTE) has the responsibility to run and make decisions on behalf of the clinics, except for medical procedures. Beginning in January 2018, the Company adopted the policy for all of the VIEs that the management fee charged by the Company would equal the amount of net income from each VIE on a monthly basis, bringing the amount of the net income each month for each VIE to a net of zero. Due to this change in policy, there was no change in the non-controlling interest for the three months ended March 31, 2020 or 2019 related to the net income as it was $0 each month through the management fee charged by the Company.

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: 45,319,643 warrants and 425,000 common stock options outstanding were considered anti-dilutive and excluded for the three months ended March 31, 2020. At March 31, 2020, the only potentially dilutive shares would be from the conversion of the convertible debt and the conversion of preferred stock, Series B and Series D totaling 38,308,600 of common stock to be issued upon conversion of all these securities. There were no option or warrant exercises that would have been potentially dilutive.

Note 10 – Commitments & Contingencies

 

Biotechnology Agreement

On June 21, 2019, the Company entered into a 10-year exclusive and extendable product supply agreement with Rion that will enhance its existing cytotherapy product line, developing a disruptive technology for 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 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 $2,000 per month recognized by the Company as rental income.

Consulting Agreements

The Company has reached a new 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 $5,000 per month. The Company incurred expense of approximately $10,000 and $50,000, for the three and nine months ended September 30, 2019, respectively, related to this consulting agreement. Since this agreement was assumed on January 8, 2019 as part of the Merger, 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 negotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The duration of the consulting agreement is for a period of twelve 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 (to be calculated using an annual Variable Weighted Average Price from February 2019 through January 2020) to be granted on the one-year anniversary of this agreement, if the agreement has not been terminated prior to that date. Either party may terminate this agreement with or without cause upon 30 days written notice. For the three and nine months ended September 30, 2019, the Company expensed a total of $37,500 and $115,000 in compensation to LilyCon Investments, respectively.

The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For the three and nine months ended September 30, 2019, the Company expensed $0 and $71,000 in consulting fees to St. Louis Family Office, respectively.

The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve months, unless otherwise terminated by giving thirty 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 nine months ended September 30, 2019, the Company expensed $22,500 and $48,500, respectively.

The Company entered into a consulting agreement with Goldin Solutions, effective August 4, 2019, for media engagement and related efforts, including both proactive public relations and crisis management services. The agreement has a minimum term of six months, with a $33,000 monthly fee payable each month, with the exception of a first month discount of $12,000. For the three and nine months ended September 30, 2019, the Company expensed $54,000.

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 2020 The Company paid a fixed monthly fee of €4,500 (approximately $5,000) 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 $10,080 and $40,080, respectively, for the three and nine months ended September 30, 2019. Since this agreement was assumed on January 8, 2019 as part of the 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 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 nine months ended September 30, 2019, all of which was included in accounts payable at September 30, 2019. Since this agreement was assumed on January 8, 2019 as part of the Merger, there were no historical costs related to this prior to January 8, 2019.

Litigation

 

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 the Company in the future, and these matters could relate to prior, current or future transactions or events. As of March 31, 2020, the Company had no litigation matters which required any accrual or disclosure.

 

Guarantee

 

The Company has guaranteed payments based upon the terms found in the management services agreements to two affiliated physicians related to LI Dallas, LI Nashville, LI Scottsdale,Pittsburgh, LI Pittsburgh,Scottsdale, and LI Dallas.Tampa. For the three and nine months ending September 30,ended March 31, 2020 and 2019, payments totaling approximately $42,000$22,000 and $105,000$22,000, respectively, were made to these affiliates.physicians’ legal entities. Due to the Company ceasing operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, and LI Tampa, the guaranteed payments for these clinics will be suspended until operations recommence at the aforementioned clinics.

Manufacturer Liability Dispute

The Company selected an FDA registered contract manufacturer, to manufacture the DenerveX product. In 2019, the Company became aware of events which resulted in the manufacturer not meeting certain contract performance requirements. As a result, the Company is in a dispute with the manufacturer. The Company intends to vigorously defend its position that the manufacturer did not meet its contract performance obligations. The Company believes the likelihood of incurring a material loss regarding the dispute with the manufacturer is reasonably possible but is unable to estimate the amount of the loss based on information available at this time. As such, the Company has not recorded a loss as of March 31, 2020 or December 31, 2019. The Company is not aware of any legal action regarding this matter.

 

Note 11 – Short-term Debt

 

Notes Payable

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

These financing arrangements require aggregate monthly payments of approximately $18,000, with interest rates ranging from 7% to 12.8% and are to be paid in full by July 2020. The financing arrangements had balances of approximately $114,000 at September 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these arrangements was approximately $2,000 and $4,300 for the three and nine months ended September 30, 2019, respectively, and was $0 for the three and nine months ended September 30, 2018 respectively.

Two promissory notes payable assumed in the Merger are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. EachConvertible note originally had a maturity date of August 1, 2019. During the third quarter, the Company finalized an eighteen-month extension that extended the maturity date to March 1, 2021. The promissory notes have an aggregate outstanding balance of approximately $95,000 at September 30, 2019. The Company incurred interest expense related to the promissory notes for the three and nine months ended September 30, 2019 in the amount of approximately $400 and $2,500, respectively; no interest expense was incurred during 2018 as these notes were assumed on January 8, 2019.

The Company’s interest expense of approximately $50,000 and $121,000 for the three and nine months ended September 30, 2018, respectively, was related to convertible debt not assumed in the Merger as of January 8, 2019.

Convertible Notes

 

The Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in the Merger. The debt assumed by the Company consisted of $750,000 of units (the “Units”) with 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 Convertible 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. Interest expense related to the discount on these convertible notes for the three and nine month period ending September 30, 2019 was approximately $24,000 and $151,900, respectively. The Company recognized approximately $19,300 and $60,500, respectively, in unpaid accrued interest expense related to the notes for the three and nine months ended September 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 Notes was 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 251,667 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. TheIn 2019, the Company redeemed $350,000 of convertible notes had maturity dates between Augustpayable in principal and September 2019.

The Company negotiated a short-term extension with two$52,033 in interest payable for three of the three noteholders through the expected closing of the Series D Security Purchase Agreement (the “Short-term Extension Notes”). As of September 30, 2019, approximately $479,000, which includes the principal balance of $350,000, fees and penalties of approximately $80,000 and accrued interest of approximately $49,000 is due to the two Short-term Extension Notes noteholders.

 

The Company also reached an extension with the thirdremaining noteholder which extended the maturity date of the loan for one year, until September 30, 2020. This note hashad a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total amount dueadjusted principal balance upon renewal of approximately $425,000 (the “New Principal”) as of September 30,March 31, 2020 and December 31, 2019. This amount has been rolled into a new note effective September 30, 2019 (the “One Year Extended Note”). Additionally, approximately 424,000 warrants were issued on September 15, 2019 in connection with the One Year Extended Note. The fair market valueextension of the warrants on September 18, 2019, the day the warrantsnote.

Notes Payable

Notes payable were issued, was approximately $106,000, which the Company recognized as an expenseassumed in the three months ended September 30,Merger and are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. Each note originally had a maturity date of August 1, 2019. The Company finalized an eighteen-month extension to March 1, 2021. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 at March 31, 2020 and December 31, 2019.

 

InOn March 27, 2020, the aggregate,Company issued a Note in the new principal balanceamount of $500,000 to the Investor for a total of $500,000 in exchange for a loan in such amount to cover working capital needs. The Note bears an interest rate of 8.0% per annum and is due on these convertible notes asdemand. If any amounts payable under this Note are not paid within ten days after they are due, the interest rate shall accrue on the Principal in the amount of September 30, 201918.0% per annum. The Investor is approximately $775,000 which is comprisedan affiliate of a pre-existing shareholder of the original principal balance of $350,000 onCompany having been the Short-term Extension Notes plus $425,000 forlead investor in the New Principal on the One Year Extended Note.Company’s recent Series D Convertible Preferred Stock Offering.

 

Note 12 – Derivative Liability - Warrants

Financial assets and liabilities carried at fair value as of March 31, 2020 and December 31, 2019 are classified in the tables below in one of the three categories:

  Fair Value Measurement at
March 31, 2020 (1)
 
  Using
Level 3
  Total 
Liability:        
Derivative Liability - Warrants $140,877  $140,877 
Derivative Put Liability $79,045  $79,045 

  Fair Value Measurement at
December 31, 2019 (1)
 
  Using
Level 3
  Total 
Liability:        
Derivative Liability - Warrants $315,855  $315,855 
Derivative Put Liability $267,399  $267,399 

(1) The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of March 31, 2020 and December 31, 2019.

The Company’s derivative liabilities are classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation models. These assumptions included estimated future stock prices, potential down-round financings for the Warrants, and potential redemptions for the Redemption Put Liability.

The following is a reconciliation of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2020 and the year ended December 31, 2019:

Derivative Liability - Warrants   
    
Balance at December 31, 2019 $315,855 
Fair value adjustments  (174,978)
Balance at March 31, 2020 $140,877 

Redemption Put Liability

   
    
Balance at December 31, 2019 $267,399 
Issuance of Series D Convertible Preferred Stock  5,305 
Fair value adjustments  (193,659)
Balance at March 31, 2020 $79,045 

Derivative Liability- Warrants

 

In connection with the securities purchase agreements executed in May 2018 (which the Company issuedassumed in the Merger), whereby 108,250 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Shares”) and warrants were issued to purchase 2,312,500 shares of the Company’s common stock.stock (“Series B Warrants”). The warrantsSeries B Warrants had a three-year term at an exercise price of $0.75. The warrantsSeries B Warrants contain two features such that in the event of a downward price adjustment the Company is required to reduce the strike price of the existing warrants (first feature or “down round”) and issue additional warrants to the award holders such that the aggregate exercise price after taking into account the adjustment, will equal the aggregate exercise price prior to such adjustment (second feature or “additional issuance”).

 

On January 8, 2019, the Company issued equity securities which triggered the down round and additional issuance warrant features. As a result, the exercise price of the warrants was lowered from $0.75 to $0.40 and 2,023,438 additional warrants were issued. The inclusion of the additional issuance feature caused the warrants to be accounted for as liabilities in accordance with ASC Topic 815.

 

The fair market value of the warrants, approximately $1,200,000, has beenwas recorded as a derivative liability in the purchase price allocation as a measurement period adjustment duringto the period ended September 30, 2019 (see Note 3).purchase price allocation in the third quarter of 2019. The derivative liability has been remeasured to fair value at the end of each reporting period and the cumulative change in fair value, of approximately $884,000,$175,000 and $0, has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months ended March 31, 2020 and nine month period ended September 30, 2019.2019, respectively. The fair value of the derivative liability included on the consolidated balance sheet was approximately $332,000$141,000 and $316,000 as of September 30, 2019.March 31, 2020 and December 31, 2019, respectively.

Fair values for the Series B Warrants were determined using a Lattice model which considered randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation.

The Company estimated the fair value of the warrant derivative liability as of March 31, 2020 and December 31, 2019, respectively, using the following assumptions:

  March 31, 2020  December 31, 2019 
       
Fair value of underlying stock $0.051  $0.13 
Exercise price $0.40  $0.40 
Risk free rate  0.17 – 0.23%  1.58 – 1.59%
Expected term (in years)  1.09 – 1.77   1.34 – 2.02 
Stock price volatility  156 – 166%  143 - 154%
Expected dividend yield  —    —  

Due to the down round provision contained in the warrants, which could provide for the issuance of additional warrant shares as well as a reduction in the exercise price, the model also considered subjective assumptions related to the shares that would be issued in a down-round financing and the potential adjustment to the exercise price. The fair value of the warrants will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the down-round provisions.

On November 15, 2019, the Company redeemed a shareholder’s Series B Preferred shares for its initial face value, plus accrued dividends.

In conjunction with the Series D Preferred financing (See Note 14), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock with a fair value of approximately $73,000. On the date of the exchange, the Series B Warrants were first adjusted to fair value with the change in fair value being recorded in earnings.

Redemption Put Liability

As described in Note 14, the redemption put provision embedded in the Series D financing required bifurcation and measurement at fair value as a derivative. If the redemption put provision is triggered, it allows either payment in cash or the issuance of “Trigger Event Warrants”. Accordingly, the fair value of the Redemption put liability considered management’s estimate of the probability of cash payment versus payment in Trigger Event Warrants and was valued using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the redemption factor. The Company estimated the fair value of the Trigger Event Warrant portion of the redemption put liability using the following assumptions on March 31, 2020 and December 31, 2019:

  March 31, 2020  December 31, 2019 
       
Fair value of underlying stock $0.019  $0.056 
Exercise price $0.20409  $0.20409 
Risk free rate  0.70%  1.92%
Expected term (in years)  9.7   9.9 
Stock price volatility  95%  92%
Expected dividend yield  —    —  

The fair market value of the redemption put liability at inception was approximately $614,000 which has been recorded as a liability and is remeasured to fair value at the end of each reporting period. The change in fair value of approximately $194,000 and $0 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months ended March 31, 2020 and 2019, respectively. The fair value of the redemption put liability included on the consolidated balance sheet was approximately $79,000 and $267,000 as of March 31, 2020 and December 31, 2019, respectively.

21

Note 13 - 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 nine monthsquarters ended September 30, 2019 is as follows:March 31, 2020 and March 31, 2019:

 

  Shares  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Life
 
Assumed as of the January 8, 2019 merger  12,108,743  $1.38   1.78 
             
Issued  20,647,437  $0.72   2.36 
Outstanding and exercisable at September 30, 2019  32,756,180  $.96(1)(2)  2.15 

  Shares  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life

 
Assumed as of the January 8, 2019 merger  12,108,743  $1.38   2.60 
Issued  17,500,000  0.75   2.84 
Outstanding and exercisable at March 31, 2019  29,608,743  $1.00   2.63 
             
Outstanding and exercisable at December 31, 2019  44,806,076  $0.78   4.59 
Issued  513,567  0.75   6.13 
Outstanding and exercisable at March 31, 2020  45,319,643  $0.78   4.61 

 

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 September 30, 2019 as of their respective issue dates are as follows:

 

Event
Description
 Date H-CYTE
Stock Price
  Exercise Price of Warrant  Grant Date Fair Value  Life
of Warrant
 Risk Free Rate of Return (%)  Annualized Volatility Rate (%)  Date Number of Warrants 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 5,000,000 $0.40 $0.75 $0.24 3 years 2.57 115.08 
Antidilution provision(3)(1) 1/8/2019 $0.40  $0.40  $0.28  3 years  2.57   115.08  1/8/2019 2,023,438 $0.40 $0.40 $0.28 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 6,000,000 $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 1,250,000 $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 437,500 $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 750,000 $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 375,000 $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 125,000 $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 150,000 $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 2,475,000 $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 500,000 $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 375,000 $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 62,500 $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  4/4/2019 500,000 $0.48 $0.75 $0.29 3 years 2.29 112.77 
Private placement 7/15/2019 $0.53  $1.00  $0.31  3 years  1.80   115.50  7/15/2019 200,000 $0.53 $1.00 $0.31 3 years 1.80 115.50 
Convertible debt extension 9/18/2019 $0.40  $0.75  $0.25  3 years  1.72   122.04  9/18/2019 424,000 $0.40 $0.75 $0.25 3 years 1.72 122.04 
Private placement of Series D Convertible Preferred Stock 11/15/2019 14,669,757 $0.28 $0.75 $0.19 10 years 1.84 89.75 
Short-term note related party 11/26/2019 400,000 $0.20 $0.75 $0.13 3 years 1.58 144.36 
Short-term note, related party 12/30/2019 171,429 $0.14 $0.75 $0.08 3 years 1.59 145.29 
Short-term note, related party 1/13/2020 268,571 $0.12 $0.75 $0.07 3 years 1.60 145.76 
Private placement of Series D Convertible Preferred Stock 1/17/2020 244,996 $0.15 $0.75 $0.13 10 years 1.84 144.32 

 

(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)The Company had warrants that triggered the required issuance of an additional 2,023,438 warrants as a result of the Company’s capital raise that gave those new investors a $0.40 per share investment price which required the old warrant holders to receive additional warrants since their price was $0.75 per share.

 

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.

 

22

Note 14- Mezzanine Equity and Series D Convertible Preferred Stock

Series D Convertible preferred Stock

On November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered (i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants are exercisable for a period of 10 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional equity restructurings and reorganizations.

On November 21,2019, the Company entered into a securities purchase agreement with FWHC HOLDINGS, LLC (“FWHC”) an accredited investor for the purchase of 146,998 shares of Series D Preferred Stock, par value $0.001 per share and the Series D Warrant resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). For further discussion of the Series D Shares, refer to Note 14 - Liquidity, Going Concern“Mezzanine Equity and Management’s PlansSeries D Convertible Preferred Stock” on the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019.

The Company determined that the nature of the Series D Shares was more analogous to an equity instrument, and that the economic characteristics and risks of the embedded conversion option was clearly and closely related to the Series D Shares. As such, the conversion option was not required to be bifurcated from the host under ASC 815,Derivatives and Hedging. The Company recognized a beneficial conversion feature related to the Series D Shares of approximately $623,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series D 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. Since the Series D Shares are redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, they have been classified as mezzanine equity in the Consolidated Balance Sheets.

 

The Company incurred net lossesdetermined that the economic characteristics and risks of the embedded redemption provision were not clearly and closely related to the Series D Shares. The Company assessed the embedded redemption provision further, and determined it met the definition of a derivative and required classification as a derivative liability at fair value. The redemption put liability as of March 31, 2020 and December 31, 2019, was approximately $11,616,000$79,000 and $2,295,000 for the nine months ended September 30, 2019 and 2018,$267,000, respectively.

 

The Biomedical productsCompany’s approach to the allocation of the proceeds to the financial instruments was to first allocate basis to the redemption put liability at its fair values and services division will incur losses until sufficient revenue volumethe residual to the Series D Shares and geographical coveragethe Series D Warrants. Based upon the amount allocated to the Series D Shares the Company was required to determine if a beneficial conversion feature (“BCF”) was present. A BCF represents the intrinsic value in the convertible instrument, adjusted for amounts allocated to other financial instruments issued in the financing. The effective conversion price is attained utilizingcalculated as the infusionamount allocated to the convertible instrument divided by the number of capital resourcesshares to expand marketingwhich it is indexed. However, a BCF is limited to the basis initially allocated. After allocating a portion of the proceeds to the other instruments, the effective conversion price was $0.24 compared to the share price of $0.28, resulting in a BCF of $623,045 or $0.04 per share.

Based upon the above accounting conclusions and sales initiatives.the additional information provided below, the allocation of the proceeds arising from the Series D Preferred financing transaction is summarized in the table below:

November 21, 2019 Series D Convertible Preferred and warrant financing: Proceeds Allocation  Financing Cost Allocation  Total Allocation 
Gross proceeds $6,000,000  $  $6,000,000 
Financing costs paid in cash     (111,983)  (111,983)
  $6,000,000  $(111,983) $5,888,017 
             
Derivative Liability:            
Derivative Put Liability $(614,095) $  $(614,095)
Deferred Financing costs     8,100   8,100 
             
Redeemable preferred stock:            
Series D Convertible Preferred Stock  (2,869,854)     (2,869,854)
Financing costs (APIC)     1,106   1,106 
Financing costs (Retained Earnings)     66,265   66,265 
Beneficial Conversion Feature  (623,045)     (623,045)
             
Investor Warrants (equity classified):            
Proceeds allocation  (1,893,006)     (1,893,006)
Financing costs (APIC)     36,512   36,512 
  $(6,000,000) $111,983  $(5,888,017)

Since the Series D Convertible Preferred Stock is perpetual and convertible at any time, the resulting discount of $3,130,146 was accreted as a Preferred Stock dividend on the date of issuance to record the Series D Convertible Preferred Stock to its redemption value of $6,000,000.

 

In April 2019,On January 17, 2020, the Company determined that their contract manufacturer was not able to meet the quality and quantity requirements for producing the DenerveX product. Asentered into 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, including strategic partnerships. The H-CYTE operations will continue to incur losses until the plansecurities purchase agreement with an accredited investor for the DenerveX System monetization is determined and executed.

The 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 the Company’s consolidated financial statements for the year ended December 31, 2018. The presencepurchase of the going concern explanatory paragraph suggests that the Company may not have sufficient liquidity or minimum cash levels to operate the business. Since inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until its products can generate enough revenue to offset its operating expenses. The Company, through September 2019, raised $7,100,000 (excluding $200,0002,450 shares of debt conversions) year to date.

The Company pursued 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 $0.50Series D Preferred Stock, par value $0.001 per share and a three-year warrantSeries D Warrant resulting in $100,000 in gross proceeds to purchase such number of shares of common stock equal to fifty percent (50%)the Company. The Series D Preferred Stock and Warrants had the same terms as the FWHC Investment. There was no BCF associated with this financing because the effective conversion price after allocating a portion of the numberproceeds to the other instruments was higher than the share price.

January 17, 2020 Series D Convertible Preferred and warrant financing: Proceeds Allocation 
Gross proceeds $100,000 
Financing costs paid in cash   
  $100,000 
     
Derivative Liability:    
Derivative Put Liability $(5,305)
     
Redeemable preferred stock:    
Series D Convertible Preferred Stock  (62,793)
     
Investor Warrants (equity classified):    
Proceeds allocation  (31,902)
     
  $(100,000)

Since the Series D Convertible Preferred Stock is perpetual and convertible at any time, the resulting discount of shares$37,207 was accreted as a Preferred Stock dividend on the date of common stock issuable as partissuance to record the Series D Convertible Preferred Stock to its redemption value of this offering (the “Warrants”), at an exercise price of $1.00 per share. The Company raised $100,000 from these new private placement securities since June 30, 2019. The aforementioned security offering has been terminated.$100,000.

 

On October 26, 2019,For the Boardthree months ended March 31, 2020, the Company recorded $158,147 in deemed dividends on the Series D Convertible Preferred stock in accordance with the 8% stated dividend resulting in a total balance of Directors approved a new private placement securities offering up to $9,750,000Series D Convertible Preferred stock of $6,281,433 at March 31, 2020.

24

Series D CONVERTIBLE Preferred Stock Preferences

Voting Rights

Holders of our Series D Preferred Stock (“Series D Preferred”Holders”). The terms have the right to receive notice of this offering are up to $9,750,000 to be raised at $.41 per share with 100% warrant coverage at $.75 per share for a termany meeting of ten years. Theholders of common stock or Series D Preferred will carry an annual 8% cumulative dividend payableStock and to vote upon any matter submitted to a vote of the holders of common stock or Series D Preferred Stock. Each Series D Holder shall vote on each matter submitted to them with the holders of common stock.

Liquidation

Upon the liquidation, dissolution or redemption. For any other dividends,winding up of the Company, whether voluntary or involuntary, each Series D Holder shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefore, a preferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the Series D Preferred will participateHolders 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 Series B and common stock on an as-converted basis.stock. The Company accrues these dividends as they are earned each period.

Note 15 - Subsequent Events

 

On July 25 and July 26, 2019,April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company issued two promissory notesto further cover the Company’s working capital needs, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “Notes”“A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further below in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor.

Note Purchase Agreement

On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $900,000$3,835,195. This sum included the issuance by the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.

As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.

Debt and Other Obligations

On April 23, 2020, Horne Management, LLC and controlled by Mr. William E. Horne,agreed to convert the Chief Executive Officershort-term notes, related parties totaling $1,635,000 as of March 31, 2020 plus accrued interest into (i) 4,368,278 shares of common stock of the Company. The Notes bearCompany and (ii) a ten-year warrant to purchase up to an interest rateequivalent number of 5.5%shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per annumshare at which securities are offered to investors for purchase at the Qualified Financing, which such price has not yet been established, and are dueis exercisable beginning on demand. The Company has received the funds representedday immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of the warrant will be equal to the price per share obtained by dividing $3,000,000 by the Notes. number of fully diluted shares of the Company outstanding on October 31, 2020.

The description of the April SPA, the April Secured Note, the April Warrant, the Security Agreement, the Intellectual Property Security Agreement and the Amendment to William Horne Employment Agreement and the Hawes Note, are each qualified in their entirety by the full text of such agreements which are filed as Exhibits to the Annual Report on Form 10-K.

On September 26, 2019,April 29, 2020, the Company issued a promissory note to Horne Management, LLC, for $350,000. The Terms of the Note are:

12% interest rate with a maturity date of March 26, 2020.
If the Company is unable to pay the loan as of March 26, 2020, the interest rate increases to 15%.
If the Company does not pay back the principal and interest by November 26, 2019, the Company shall issue to Lender a three-year warrant to purchase 400,000 shares of the Company’s common stock at a purchase price of $0.75 per share.

The Company has certain convertible promissory notes in the aggregate principal amount of approximately $650,000 that originally matured in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company negotiated an extension with two of the three noteholders through the expected closing of the Series D Preferred .There were certain fees and penalties that were negotiated along with these extensions in the aggregate amount of approximately $80,000. The Company also reached an extension with the third noteholder which extended the maturity date of the loan for one year, until September 30, 2020, plus interest and penalties. The penalties associated with the extension of this loan were approximately $125,000 as outlined in the terms of the original agreement. The total liability on these notes including principal, accrued interest, and penalties is approximately $904,000.

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. Cash as of September 30, 2019 was approximately $368,000. The present level of cash and the fourth quarter raise to date may not be sufficient to satisfy the Company’s current operating requirements, as such, the additional raising of funds is required.

The unaudited consolidated financial statements do not include any adjustments$809,082 to the carrying valueBank of amounts of its assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 15 - Subsequent Events

Horne Management, LLC loaned H-CYTE $150,000 on October 28, 2019, for working capital purposes. The terms of the loan are as follows:

12% interest rate with a maturity date of April 28, 2020.
If the Company does not pay back the principal and interest by December 28, 2019, the Company shall issue to Lender a three-year warrant to purchase 171,429 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

On November 13, 2019 the Company issued a promissory note (the “Note”)Tampa in connection with a principalloan in such amount of $235,000 to Horne Management, LLC.made under the Payroll Protection Program (“PPP Loan”). The NotePPP Loan bears an interest at a rate of 12%1% per annum and is due on demand. The termspayable in eighteen monthly payments of $45,533 commencing six months from the date of the note are:on November 29, 2020. While the note is dated April 29, 2020, the loan was not formally approved and funded until May 7, 2020.

 

12% interest rate with a maturity date of May 13, 2020.
If the Company does not pay back the principal and interest by January 13, 2020, the Company shall issue to Lender a three-year warrant to purchase 268,571 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

The Company can apply for loan forgiveness in an amount equal to the sum of the following costs incurred by the Company:

1) payroll costs;

2) any payment of interest on covered mortgage obligations;

3) any payment on a covered rent obligation; and

4) any covered utility payment

The amount forgiven will be calculated (and may be reduced) in accordance with the Paycheck Protection Program. Not more than 25% of the amount forgiven can be attributed to non-payroll costs.

On May 7, 2020, William Horne, the Company’s CEO and Chairman resigned as CEO effective when the Company finds a suitable replacement who has more FDA experience. Until such successor is retained, Mr. Horne will remain as the CEO. Mr. Horne’s resignation does not go to his position as Chairman of the Board or as a Director. The resignation was not as a result of any disagreement with the Company or its policies and practices.

The Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued for events requiring recording or disclosure in the March 31, 2020 consolidated financial statements.

Item 2. 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

On 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 15, 2019.

 

On October 18, 2018, H-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 division 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 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 June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a disruptive cytotherapy technologyFDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics. This will be managed through a new Rion division of H-CYTE. Rion has established a novel technology to harness the healing power of the body. Rion’s novelinnovative 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. This agreement provides for a ten-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.

 

With this agreement,these agreements, Rion will serve as the product supplier and will co-develop a proprietary cellular platformco-developer of L-CYTE-01 with H-CYTE for the treatment of COPD.chronic lung diseases. H-CYTE will control the commercial development and facilitate the 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 tyby the U.S. Food and Drug Administration (“FDA”)FDA for treatment of COPD.

 

Due to COVID-19, all of the LHI clinics are closed. The Company will evaluate reopening these clinics at the appropriate time. The Company is also innot expecting to be able to generate revenue until, at the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe.earliest, August 2020. The Company received CE marking in June 2017has contacted its patients that are scheduled for treatment, both first time patients and recurring patients, and have rescheduled these patients for August 2020. However, there is no guarantee that the DenerveX System,Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and itgenerate revenue. Future quarters’ revenue is now commercially available throughoutdependent on the European Union and several other countries that accept CE marking. The Company’s first saletiming of the DenerveX System occurred in July 2017.being able to treat patients again. The Company planswill continue to seek approval forfocus on its goal of taking the DenerveX System fromL-CYTE-01 protocol to the FDA in the United States.for treatment of chronic lung diseases. The Company is presently reevaluatingcurrently evaluating whether or not its approachesprotocol has the potential to revenue generation includinghelp people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached. With the continuing use of distribution channels, source of manufacturing, and evaluating joint venture opportunities.

In April,Company’s revenue-generating activities suspended, the Company determined that their contract manufacturer was not ablewill need to meetraise cash from debt and equity offerings to continue with its efforts to take the quality and quantity requirementsL-CYTE-01 protocol to the FDA for producing the DenerveX product. As a result, the manufacturetreatment 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 notifiedchronic lung diseases. There can be no assurance 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, including joint venture opportunities.will be successful in doing so.

 

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In July 2019, the Company signed a new engineering feasibility proposal that will confirm a new sterilization process will be a slightly less expensive option and expand the shelf life of DenerveX from six months to a minimum of one year and potentially up to three years. The longer shelf life will help the distributors reach more end-users as many hospital systems and medical practitioners will not purchase medical products with less than a one-year shelf life. The Company still considers the United States to be a target market and it remains the Company’s goal to seek FDA approval. The Company anticipates that it will do so once it is back in production and generating revenue through sales in Europe and other approved countries.

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles. The preparation of these 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 a continual basis, we evaluate our estimates and judgments, including those described in greater detail below.

 

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, 2018,2019, included in the Company’s Annual Report on Form 10-K as well as in the notes to our unaudited consolidated financial statements for the nine months ended September 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 10-K reflect the historical financial information of the H-CYTE (formerly MedoveX) business and do not include the RMS financial information. With the reverse merger accounting, historical financial information for periods prior to the Merger on January 8, 2019 presented in the comparative consolidated financial statements and footnotes included in the 2019 Quarterly Reports on Form 10-Q will only reflect the historical financial information related to RMS.10-K.

 

Results of Operations - Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018

 

Revenue, Cost of Sales and Gross Profit

 

The Company recorded gross revenue for the three and nine months ended September 30,March 31, 2020 and 2019 of approximately $2,742,000$1,017,000 and $6,498,000, respectively. The Company recorded gross revenue for the three and nine months ended September 30, 2018 of approximately $1,537,000 and $6,881,000$1,324,000, respectively. The decrease in revenue for the ninethree months ended September 30, 2019March 31, 2020 is mainly attributable to a decrease in the number of treatments provided by the biomedical services business (RMS). The revenue for the nine months ended September 30, 2019 is derived predominantly from RMS and the revenue for the nine months ended September 30, 2018 is exclusively RMS.Biosciences division partially because of cancelling all treatments effective March 23, 2020.

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company incurred approximately $550,000$377,000 and $1,539,000,$559,000 in cost of sales, respectively. For the three and nine months ended September 30, 2018 the Company incurred approximately $504,000 and $1,979,000,The decrease in costs of sales, respectively. The cost of sales for the three and nine months ended September 30, 2019March 31, 2020 is derived predominantly from RMS andmainly attributable to a decrease in the costnumber of sales fortreatments provided by the three and nine months ended September 30, 2018 is exclusively from the RMS business.

Biosciences division. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the biomedical services business, RMS.Biosciences division. Medical supplies are predominantly variable costs and based on the number of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments currently being provided can bewere handled adequately with the Company’s presentcurrent 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 treatment volume beyond that capacity, the Company will need to hire additional personnel.

 

The increase in cost of sales forFor the three months ending September 30, 2019 as compared to the prior year is attributable to more treatments being completed. The decrease in cost of sales for the nine months ending September 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 volumeended March 31, 2020 and the ability to perform treatments using fewer staff members.

For the three and nine months ended September 30, 2019 the Company generated a gross profit totaling approximately $2,192,000 (80%$640,000 (63%) and $4,959,000 (76%$765,000 (58%), respectively. For the three and nine months ended September 30, 2018, the Company generated aThe decrease in gross profit totaling $1,033,000 (67%) and $4,902,000 (71%), respectively.was due to the reduction in revenue, net of the cost of sales efficiencies. The increase in gross margin percentage for the three months ending September 30, 2019 as compared to the prior year is attributable to increased revenue and less than proportional cost of sales increases from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members. The increase in gross margin for the nine months ended September 30, 2019,March 31, 2020, is due to reduceda greater proportionate reduction in cost of sales from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members net of revenue decline.than the reduction in revenue.

 

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Operating Expenses

 

Salaries and Related Costs

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company incurred approximately $1,914,000$1,224,000 and $7,079,000$1,533,000 in salaries and related costs, respectively. For the three and nine months ended September 30, 2018, the Company incurred approximately $895,000 and $3,073,000, in salaries and related costs, respectively. Included in salaries and related costs for the three and nine months ended September 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 E. Horne on April 25, 2019. These shares were fully-vested upon the issuance of a restricted stock award, pursuant to his employment agreement with the Company, which stated that this award would be fully vested if it was not issued within fifteen days of the Merger. The restricted stock award was not issued within that time frame and was fully vested when issued. The Company recognized approximately $1,690,000 of compensation expense in the quarter ended June 30, 2019. The remaining increasedecrease in salaries and related costs is primarilymainly attributable to the three and nine months ended September 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, thea reduction in executive compensation. The Company anticipates that salaries and related costs will continue at a comparable orbe further reduced level in 2020 as the future. Salary-related expenses are currently under review in order to determine cost-saving measures to assist the Companycompany shifts its business model in its pursuit of becoming a leading biomedical services company and the Company may or may not reduce these expenses going forward.due to its recent cost reduction measures effective in March 2020.

 

Other General and Administrative

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company incurred approximately, $2,026,000$1,230,000, and $5,310,000 in other general and administrative costs, respectively. For the three and nine months ended September 30, 2018, the Company incurred approximately $809,000 and $2,483,000,$1,488,000 in other general and administrative costs, respectively. The increasedecrease is primarily attributable to reduction in operating activities in the three and nine months ended September 30, 2018 reflecting only the expenses of the RMS business and 2019 reflecting the consolidated business costs for RMS and H-CYTE.DenerveX division.

 

Of the total other general and administrative costs, for the three and nine months ended September 30,March 31, 2020 and 2019, professional fees were approximately $523,000$316,000 and $1,379,000, respectively. For the three and nine months ended September 30, 2018, professional fees were approximately $183,000 and $318,000,$369,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs incurred in 2019 to maintain CE Mark in Europe. The Company has incurred additional accounting, consulting and legal fees due to the cost of being a public company and costs related to the reverse acquisition accounting in 2019 and 2018.

 

The Company anticipates that the 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.

 

Research and Development

For the three months ended March 31, 2020 and 2019, the Company incurred approximately $750,000 and $0 in research and development expenses, respectively. The expense was in connection with the Rion services agreement. An additional $750,000 in expense will be incurred upon the achievement of certain milestones in the services agreement. At this time, the Company is not able to estimate when these milestones will occur.

Advertising

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company had approximately $1,468,000$145,000 and $4,188,000$1,136,000 respectively, in advertising costs, as comparedcosts. The decrease is attributable mainly to $279,000 and $1,436,000the Company determining that its marketing channels were not yielding the expected results for the three and nine months ended September 30, 2018. The increases were attributable to increased marketing efforts to promotepromoting the Company’s healthcare medical biosciences business. We expectBiosciences division. The Company expects these expenses will continue at a comparable rate as we expand penetration in existing markets.these reduced rates until the LHI clinics are reopened and patients are being treated again.

 

Depreciation and Amortization

 

For the three and nine months ended September 30,March 31, 2020 and 2019, the Company recognized approximately $212,000$22,000 and $632,000$211,000 respectively, in depreciation and amortization expense. Of that,The decrease is mainly attributable to amortization expense declining from $184,000 in the Company recognized approximately $184,000 and $552,000three months ended March 31, 2019 to $0 in the three months ended March 31, 2020 due to the complete write-off of intangibles at fiscal year-end 2019.

Other Income (Expense)

Interest expense for the three and nine months ended September 30,March 31, 2020 and 2019 respectively,was approximately $56,000 and $92,000, respectively. The decrease is attributable to the inclusion of debt instrument accretion for the period ended March 31, 2019 in amortization expensethe amount of $64,000.

The change in fair value of redemption put liability and change in fair value of the derivative liability - warrants for the three months ended March 31, 2020 were approximately $194,000 and $175,000, respectively. The redemption put liability is related to the technology intangibles that aroseSeries D Convertible Preferred Stock financing in the fourth quarter 2019.The Series B Convertible Preferred Stock’s derivative liability-warrants was recorded as a resultmeasurement period adjustment to the purchase price allocation related to the Merger in the third quarter of the reverse merger by RMS of H-CYTE. For the three and nine months ended September 30, 2018, the Company recognized approximately $28,000 and $80,000 respectively, in depreciation expense.2019.

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Departure of Directors and Certain Officers, Election of Directors, Appointment of New Board Members and Officers.

 

On January 8, 2019, in connection with the APA, the Board of Directors ofFebruary 29, 2020, the Company (“the Board”) appointed Michael Yurkowsky and Raymond Monteleone as additional members of the Board.

Mr. Michael Yurkowsky is to receive $5,000 per Board meeting. Besides this arrangement, there are no arrangements or understandings between the Company and Mr. 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.

Mr. Raymond Monteleone is to receive $5,000 per Board meeting. Besides this arrangement and the consulting agreement (see Note 8), there are no arrangements or understandings between the Company and Mr. 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 accepted the resignationresignations of Mr. Charles Farrahar as theBriley Cienkosz, Chief FinancialMarketing Officer effective immediately. Mr. Farrahar resigned as theand Gary Mancini, Chief FinancialRelationship 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.disagreements.

 

On February 4, 2019,May 7, 2020, William Horne, the Board ofCompany’s CEO and Chairman tendered his resignation as CEO effective when the Company appointedfinds a suitable replacement with more FDA experience. Until such successor is retained, Mr. Jeremy DanielHorne will remain as the Chief Financial Officer of the Company. There are no arrangements or understandings between the Company andCEO. Mr. Daniel.

On February 15, 2019, Dennis Moon resigned fromHorne’s resignation does not go to his position as the Executive Vice PresidentChairman of the Company, effective immediately. Mr. Moon resigned from his position at the Company for personal reasons,Board or as a Director. The resignation was 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 appointed Briley Cienkosz as Chief Marketing Officer, Gary Mancini as Chief Relationship Officer, and Ann Miller as Chief Operating Officer of the Company. There are no arrangements or understandings between the Company and these new officers. There are no family relationships between the new officers and any other director or executive officer ofdisagreement with the Company or any person nominated or chosen by the Company to become a director or executive officer.

On July 29, 2019, the Board appointed Dr. Andre Terzic to the Board. Dr. Andre Terzic, 57, has served as a director at the Center for Regenerative Medicine of Mayo Clinic in Rochester, Minnesota for the last five years. Dr. Andre Terzic is the Chair of the Pharmaceutical Scienceits policies 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. 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 worked 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. 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.practices.

 

Funding Requirements

 

We anticipate our cash expenditures will increase as weThe Company has historically incurred losses from operations and expects to continue to operategenerate negative cash flows as a publicly traded entity, as we move forward with increased sales and marketing initiatives for the Biomedical products and services and investing in the Rion divisionCompany’s generating activities are temporarily suspended and as we incur losses associated with temporarily suspending the manufacture and sale of the DenerveX product. In addition, the Company is pursuingimplements its business plan to focus on taking the acquisitionL-CYTE-01 protocol to the FDA for treatment of new technologies to expand the business lines and with the intent of increasing profitability.

The present level of cash is insufficient to satisfy our current operating requirements.chronic lung diseases. The Company is seeking additional sources of fundswill need to raise cash from the sale ofdebt and equity or debt securities or through a credit facility.offerings to continue its operations. There can be no assurancesassurance that wethe Company 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 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 raised $100,000 from these new private placement securities since June 30, 2019. This offering was terminated on August 30, 2019.

The Company expects to close on $6,000,000 of the Series D Preferred offering replacing the $8,500,000 offering adopted by the Board on June 7, 2019, with an offering for up to $9,750,000. Such closing is expected to be completed by the end of November 2019.successful in doing so.

 

Going Concern

 

The Company incurred net losses of approximately $11,615,000$2,416,000 and $2,295,000$3,695,000 for the ninethree months ended September 30,March 31, 2020 and 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 H-CYTE 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 the Company’s ability to continue as a going concern in its report on the Company’s consolidated financial statements for the year ended December 31, 2018.2019. 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 its inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until its products can generate enough revenue to offset its operating expenses. The Company, through September 2019, had raised $7,100,000 (excluding $200,000 of debt conversions) year to date in additional cash to sustain the Company. Cash as of September 30, 2019 was approximately $368,000. The present level of cash is insufficient to satisfy our current operating requirements.

 

The Company is pursuing raising additional funds from the sale of equity securities. In the third quarter of 2019, the Company raised $100,000 by selling 200,000 shares of commons stock at $0.50 per share. The Company also issued the investors 100,000 warrants with an exercise price of $1.00 per share. The Company expects to close on $6,000,000 of the Series D Preferred offering replacing the $8,500,000 offering adopted by the Board on June 7, 2019, with an offering for up to $9,750,000. Such closing is expected to be completed by the end of November 2019.

There can be no assurances that the Company will be able to obtain additional financing on commercially reasonable terms, if at all. Ifevent the Company is requiredunable to curtailfund its operations there wouldfrom existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the Company may be substantial doubt aboutforced to reduce our expenses, or discontinue operations. The consolidated financial statements do not include any adjustments relating to the Company’s abilityrecoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Liquidity and Capital Resources

Since its inception, the Company has incurred losses and anticipates that we will continue to incur losses for the foreseeable future.

Sources of Liquidity

 

Equity

On January 8, 2019,With the Company entered into a securities purchase agreement (the “SPA”) with four purchasers (the “Purchasers”) pursuant to whichhistorically having experienced losses, the four Purchasers invested in the Company an aggregate amountprimary source of $2,000,000, with $1,800,000 in cashliquidity has been raising capital through debt 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 basisequity offerings, 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.

below.

 

Debt

 

On July 25 and July 26, 2019,April 17, 2020, the Company issued two promissory notes (the “Notes”)entered into the April SPA with the Purchasers pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale to the Purchasers of the April Secured Notes and April Warrants to purchase shares of common stock of the Company in the April Offering. After taking into account subsequent closings occurring after April 17, 2020, an aggregate of thirty-three Purchasers participated in the April Offering by purchasing April Secured Notes and April Warrants. The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes in an aggregate principal amount of $900,000$2,835,195. As part of the April Offering, the Notes previously issued by the Company to the Investor on March 27, 2020 and April 9, 2020 were amended and superseded by an April Secured Note in the amount of $1,000,000 issued to the Investor. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.

As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.

The short-term notes, related parties, as of March 31, 2020 totaling $2,135,000 is comprised of loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne aggregating $1,635,000 and a Note in the amount of $500,000 from the Investor. On April 17, 2020, Mr. Horne agreed to convert the notes plus accrued interest owed to Horne Management, LLC, and controlled by Mr. William E. Horne,at the Chief Executive Officer (“CEO”)time 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 September 26, 2019, the Company issued a promissory note to Horne Management, LLC, for $350,000. The Terms of the Note are:

12% interest rate with a maturity date of April 28, 2020.
If the Company does not pay back the principal and interest by December 28, 2019, the Company shall issue to Lender a three-year warrant to purchase 171,428 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

On October 28, 2019 the Company issued a promissory note (the “Note”) with a principal amount of $150,000 to Horne Management, LLC and controlled by Mr. William E. Horne, the CEO of the Company. The Note bears an interest rate of 12% per annum and is due on demand. The terms of the note are:

12% interest rate with a maturity date of April 28, 2019
If the Company does not pay back the principal and interest by December 28, 2019, the Company shall issue to Lender a three-year warrant to purchase 171,429 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

On November 13, 2019 the Company issued a promissory note (the “Note”) with a principal amount of $235,000 to Horne Management, LLC and controlled by Mr. William E. Horne, the CEO of the Company. The Note bears an interest rate of 12% per annum and is due on demand. The terms of the note are:

12% interest rate with a maturity date of May 13, 2020.
If the Company does not pay back the principal and interest by January 13, 2020, the Company shall issue to Lender a three-year warrant to purchase 268,571 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

The $750,000 convertible notes payable assumed in the Merger, 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 convertedQualified Offering, into an aggregate of 250,0004,368,278 shares of common stock eliminating $100,000and a ten-year warrant to purchase up to an equivalent number of shares 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 the assets of the Company.

During the third quarter, the Company negotiated extensions of for two of these convertible notes until the closing of the Series D Preferred. The third note was extended to September 2020. The total liability covered by these notes is $775,000. The extensions required certain interest adjustments and transaction fees.

The Company has certain promissory notes with outstanding balances of approximately $95,000 at September 30, 2019. The notes had a maturity date of August 1, 2019, but the Company successfully reached an agreement on August 12, 2019 for an eighteen-month extension on the notes.

In connection with the APA, 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.

stock.

Cash activity for the ninethree months ended September 30,March 31, 2020 and 2019 and the twelve months ended December 31, 2018 is summarized as follows:

 

Working Capital Deficit

 

 As Of  As Of 
 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
Current Assets $764,000  $150,000  $361,000  $2,275,000 
Current Liabilities  7,268,000   2,193,000   6,447,000   5,774,000 
Working Capital Deficit $6,504,000  $2,043,000  $6,086,000  $3,499,000 

 

Cash Flows

 

Cash activity for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 is summarized as follows:

 

  Nine Months Ended September 30, 
  2019  2018 
Cash used in operating activities $(7,906,764) $(2,378,418)
Cash used in investing activities  (389,577)  (207,895)
Cash provided by financing activities  8,594,590   2,412,800 
Net increase (decrease) in cash $298,249  $(173,513)

  Three Months Ended March 31, 
  2020  2019 
Cash used in operating activities $(1,890,759) $(3,878,137)
Cash used in investing activities  

   (377,069)
Cash provided by financing activities  589,063   6,777,447 
Net (decrease) increase in cash $(1,301,696) $2,522,241 

 

As of September 30, 2019,March 31, 2020, the Company had approximately $368,000$122,000 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 ObligationsThe short-term notes, related parties, as of March 31, 2020 totaling $2,135,000 is comprised of loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne aggregating $1,635,000 and a Note in the amount of $500,000 from the Investor. On April 17, 2020, Mr. Horne agreed to convert the notes plus accrued interest owed to Horne Management. LLC, at the time of the Qualified Offering, into 4,368,278 shares of common stock and a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock. The Note bears an interest rate of 8.0% per annum and is due on demand. If any amounts payable under this Note are not paid within ten days after they are due, the interest rate shall accrue on the principal in the amount of 18.0% per annum.

 

Contractual debt obligations relate to financing arrangements for D&O and general liability insurance premiums that were financed at various points throughout 2018 andThe extended maturity date of the first quartershort-term convertible notes payable of 2019, and two promissory notes and Convertible Notes assumed in the Merger.approximately $425,000 is September 30, 2020. No payments of principal or interest are due until maturity.

 

These insurance financing arrangements require aggregate monthly paymentsNotes payable of approximately $18,000, reflect interest rates ranging from 7% to 12.8% and are to be paid in full by April 2020 and had balances of approximately $114,000 September 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these insurance financing arrangements was approximately $2,200 and $5,200 for the three and nine months ended September 30, 2019, respectively, and was $0 for the three and nine months ended September 30, 2018 respectively.

Payments on both promissory notes assumed$67,000 are due in aggregate monthly installments of approximately $5,700$5,800 and carry an interest rate of 5%. Both notes had a maturity date of August 1, 2019 and the Company was successful in reaching an agreement resulting in the extension on the notes until March 1, 2020 with no change in the interest rate and no penalties were incurred. The promissory notes had outstanding balances of approximately $103,000 at date of the Merger and approximately $95,000 at September 30, 2019.

The Convertible Notes represent a securities purchase agreement with select accredited investors, which were assumed in the Merger. The debt consisted of $750,000 of 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 the assets of the Company. The Company successfully negotiated an extension to the maturity date; for two of the three notes ($350,000) until the initial closing of the Series D Preferred and for the third note ($300,000) until September 30, 2020.

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 $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.

In addition, awaiting the funding of the capital raise to be closed in the early part of the fourth quarter, the Chief Executive Officer loaned H-CYTE $350,000 on September 26, 2019, for working capital purposes. The terms of the loan as follows:

12% interest rate with a maturity date of March 26, 2020.
If the Company is unable to pay the loan as of March 26, 2020, the interest rate increases to 15%.
If the Company does not pay back the principal and interest by November 26, 2019, the Company shall issue to Lender a three-year warrant to purchase 400,000 shares of the Company’s common stock at a purchase price of $0.75 per share.

On October 28, 2019 the Company issued a promissory note (the “Note”) with a principal amount of $150,000 to Horne Management, LLC and controlled by Mr. William E. Horne, the CEO of the Company. The Note bears an interest rate of 12% per annum and is due on demand. The terms of the note are:

12% interest rate with a maturity date of April 28, 2019
If the Company does not pay back the principal and interest by December 28, 2019, the Company shall issue to Lender a three-year warrant to purchase 171,429 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

On November 13, 2019 the Company issued a promissory note (the “Note”) with a principal amount of $235,000 to Horne Management, LLC and controlled by Mr. William E. Horne, the CEO of the Company. The Note bears an interest rate of 12% per annum and is due on demand. The terms of the note are:

12% interest rate with a maturity date of May 13, 2020.
If the Company does not pay back the principal and interest by January 13, 2020, the Company shall issue to Lender a three-year warrant to purchase 268,571 shares of the Company’s common stock at a purchase price of $0.75 per share.
If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%.

Commitments

Biotechnology Agreement

The Company entered into a 10-year exclusive and extendable supply agreement with 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 $2,000 per month.

Consulting Agreements

The Company has reached a new 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 $5,000 per month. The Company incurred expense of $10,000 and $49,999, for the three and nine months ended September 30, 2019 related to this consulting agreement. Since this agreement was assumed January 8, 2019 as part of the 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 negotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The duration of the is for a period of twelve 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 on the one-year anniversary of this agreement, if the agreement has not been terminated prior to that date. Either party may terminate this agreement with or without cause upon 30 days written notice. For the three and nine months ended September 30, 2019, the Company has expensed a total of $37,500 and $115,000 in compensation to LilyCon Investments, respectively.

The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For the three and nine months ended September 30, 2019, the Company has expensed $0 and $71,000 in consulting fees to St. Louis Family Office, respectively.

The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve months, unless otherwise terminated by giving thirty 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 nine months ended September 30, 2019, the Company has expensed $22,500 and $48,500, respectively.

The Company entered into a consulting agreement with Goldin Solutions for media engagement and related efforts. The agreement was effective August 4, 2019 for a minimum period of six months including both proactive public relations and crisis management services, with a $33,000 monthly fee payable each month with a first month discount of $12,000. For the three and nine months ended September 30, 2019, the Company has expensed $54,000 and $54,000, respectively.

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 exported to the EU through June 2019. The Company pays a fixed monthly fee of €4,500 (approximately $5,000) 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 $10,080 and $40,080, respectively, for the three and nine months ended September 30, 2019. Since this agreement was assumed January 8, 2019 as part of the reverse merger transaction, there were no historical costs related to this prior to January 8, 2019. The Company reported a higher expense amount related to this agreement in the second quarter of 2019, but it was deemed an immaterial amount.

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 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 nine months ended September 30, 2019, all of which was included in accounts payable at September 30, 2019. Since this agreement was assumed January 8, 2019 as part of the Merger, 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 nine months ending September 30, 2019, payments totaling approximately $42,000 and $105,000 respectively were made to these affiliates.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains “disclosureWe maintain disclosure controls and procedures” as definedprocedures designed to provide reasonable assurance that information required to be disclosed in Rules 13a-15(e) and 15d-15(e)reports filed 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 specified time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’sour management, including its Chief Executive Officer, Chief Financial Officer,our principal executive officer and Board of Directors,principal accounting officer, as appropriate to allow timely decisions regarding required disclosures.disclosure.

Our Chief Executive Officer (our “CEO”) and our Chief Financial Officer (our “CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2020. 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.

 

The Company’s management, including itsBased on such evaluation, our Chief Executive Officer and Chief Financial Officer evaluated the effectivenesshave concluded that, as of the design and operation ofMarch 31, 2020, the Company’s disclosure controls and procedures aswere not effective because of September 30, 2019 and concluded that the Company has a material weakness in disclosure controlsour internal control over financial reporting as discussed below, and procedures as of September 30, 2019.

a result, the Company engaged consultants to help mitigate this material weakness.

 

The Company has an ineffectiveA material weakness is a deficiency, or combination of deficiencies, in internal control environment due toover financial reporting, such that there is a lackreasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of March 31, 2020, we determined that control deficiencies existed that constituted material weaknesses:

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.
The Company lacks qualified accounting personnel with appropriate knowledge and experience of generally accepted accounting principles for the complexity of some of the Company’s transactions.
The Company lacks a robust accounting system infrastructure to handle the timeliness of the reporting requirements necessary for a public company.

In light of the Company’s more complex transactions. Management believes this lack ofconclusion that our internal expertise has been somewhat mitigated by continuing to retain consultants with this expertise in the quarter ended September 30, 2019. This material weakness in the Company’s disclosure controls were ineffective as of March 31, 2020, we have applied procedures and procedures will be further remediatedprocesses as necessary to ensure the reliability of our financial reporting in 2019.regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

During the ninethree months ended September 30, 2019,March 31, 2020, there were no changes in the 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, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

During the three months ended September 30, 2019,March 31, 2020, the Company received proceeds of $100,000 and issued 200,0002,449,960 of commonpreferred stock at a price of $0.50$0.41 per share, and a three-yearten-year warrant to purchase 100,000244,996 shares of common stock at an exercise price of $1.00$0.75 per share.

 

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.

35

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: November 14, 2019May 21, 2020

 

 H-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)

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.

34