UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20202021
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 | ||
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 [ ] |
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of May 19, 2020, 99,878,07912, 2021, 144,434,230 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
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.
3 |
(Unaudited) March 31, 2020 | December 31, 2019 | (Unaudited) | ||||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 122,400 | $ | 1,424,096 | $ | 332,310 | $ | 1,640,645 | ||||||||
Accounts receivable | 11,333 | 22,667 | 40,500 | - | ||||||||||||
Other receivables | 11,701 | 18,673 | 1,137 | 22,123 | ||||||||||||
Prepaid expenses | 216,048 | 810,143 | 209,461 | 94,434 | ||||||||||||
Total Current Assets | 361,482 | 2,275,579 | 583,408 | 1,757,202 | ||||||||||||
Right-of-use asset | 606,897 | 738,453 | 204,546 | 278,552 | ||||||||||||
Property and equipment, net | 197,596 | 219,703 | 129,126 | 139,175 | ||||||||||||
Other assets | 36,042 | 36,877 | 29,239 | 29,239 | ||||||||||||
Total Assets | $ | 1,202,017 | $ | 3,270,612 | ||||||||||||
Total assets | $ | 946,319 | $ | 2,204,168 | ||||||||||||
Liabilities, Mezzanine Equity and Stockholders’ Deficit | ||||||||||||||||
Liabilities and Stockholders’ Deficit | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Interest payable | $ | 92,561 | $ | 53,198 | ||||||||||||
Accounts payable | 1,676,532 | 1,471,688 | $ | 1,149,597 | $ | 1,006,968 | ||||||||||
Accrued liabilities | 393,499 | 324,984 | 236,777 | 276,415 | ||||||||||||
Other current liabilities | 357,689 | 189,035 | 324,601 | 154,812 | ||||||||||||
Short-term notes, related parties | 2,135,000 | 1,635,000 | ||||||||||||||
Short-term convertible note payable | 424,615 | 424,615 | ||||||||||||||
Notes payable, current portion | 67,444 | 66,836 | 67,444 | 67,444 | ||||||||||||
Dividend payable | 126,941 | 108,641 | ||||||||||||||
PPP Loan, current portion | 746,845 | 606,811 | ||||||||||||||
Interest payable | 10,838 | 6,898 | ||||||||||||||
Deferred revenue | 770,031 | 1,046,156 | 581,259 | 634,149 | ||||||||||||
Lease liability, current portion | 402,876 | 453,734 | 87,939 | 139,189 | ||||||||||||
Total Current Liabilities | 6,447,188 | 5,773,887 | 3,205,300 | 2,892,686 | ||||||||||||
Long-Term Liabilities | ||||||||||||||||
Long-term Liabilities | ||||||||||||||||
Lease liability, net of current portion | 221,710 | 302,175 | 134,295 | 157,050 | ||||||||||||
Notes payable, net of current portion | — | 11,545 | ||||||||||||||
Derivative liability - warrants | 140,877 | 315,855 | ||||||||||||||
Redemption put liability | 79,045 | 267,399 | ||||||||||||||
Total Long-Term Liabilities | 441,632 | 896,974 | ||||||||||||||
PPP Loan, net of current portion | 62,237 | 202,271 | ||||||||||||||
Total Long-term Liabilities | 196,532 | 359,321 | ||||||||||||||
Total Liabilities | 6,888,820 | 6,670,861 | 3,401,832 | 3,252,007 | ||||||||||||
Commitments and Contingencies (Note 10) | ||||||||||||||||
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 | ||||||||||||||
Stockholders’ Equity (Deficit) | ||||||||||||||||
Preferred Stock - $.001 par value: 1,000,000,000 shares authorized; Series A Preferred Stock - $.001 par value: 800,000,000 shares authorized, 528,429,575 and 538,109,409 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 528,429 | 538,109 | ||||||||||||||
Common stock - $.001 par value: 1,600,000,000 shares authorized, 136,839,298 and 127,159,464 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 136,839 | 127,159 | ||||||||||||||
Additional paid-in capital | 28,117,978 | 28,172,146 | 42,515,999 | 42,515,999 | ||||||||||||
Accumulated deficit | (39,815,966 | ) | (37,362,531 | ) | (45,266,648 | ) | (43,858,974 | ) | ||||||||
Non-controlling interest | (370,132 | ) | (370,132 | ) | (370,132 | ) | (370,132 | ) | ||||||||
Total Stockholders’ Deficit | (11,968,236 | ) | (9,460,742 | ) | (2,455,513 | ) | (1,047,839 | ) | ||||||||
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 1,202,017 | $ | 3,270,612 | ||||||||||||
Total Liabilities and Stockholders’ Deficit | $ | 946,319 | $ | 2,204,168 |
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Revenues | $ | 376,168 | $ | 1,016,776 | ||||
Cost of Sales | (198,649 | ) | (376,816 | ) | ||||
Gross Profit | 177,519 | 639,960 | ||||||
Operating Expenses | ||||||||
Salaries and related costs | 661,775 | 1,224,353 | ||||||
Other general and administrative | 830,113 | 1,230,135 | ||||||
Research and development | - | 750,000 | ||||||
Advertising | 77,228 | 144,618 | ||||||
Depreciation and amortization | 11,571 | 22,108 | ||||||
Total Operating Expenses | 1,580,687 | 3,371,214 | ||||||
Operating Loss | (1,403,168 | ) | (2,731,254 | ) | ||||
Other Income (Expense) | ||||||||
Other Income (Expense) | 1,278 | 2,538 | ||||||
Interest expense | (5,784 | ) | (56,149 | ) | ||||
Change in fair value of redemption put liability | - | 193,659 | ||||||
Change in fair value of derivative liability - warrants | - | 174,978 | ||||||
Total Other Income (Expense) | (4,506 | ) | 315,026 | |||||
Net Loss | $ | (1,407,674 | ) | $ | (2,416,228 | ) | ||
Accrued dividends on outstanding Series B Convertible Preferred Stock | - | 18,300 | ||||||
Deemed dividend on Series D Convertible Preferred Stock | - | 158,147 | ||||||
Net loss attributable to common stockholders | $ | (1,407,674 | ) | $ | (2,592,675 | ) | ||
Loss per share - Basic and Diluted | $ | (0.01 | ) | $ | (0.03 | ) | ||
Weighted average outstanding shares - basic and diluted | 128,283,919 | 99,839,617 |
See accompanying notes to the consolidated financial statements
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS’ EQUITY (DEFICIT)
For the three months ended March 31, 2020 and 2021
(Unaudited)
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 |
Preferred Series A Stock | Preferred Series B Stock | Common Stock | Additional Paid-in | Accumulated | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||
Balances - January 1, 2021 | 538,109,409 | $ | 538,109 | - | - | 127,159,464 | $ | 127,159 | $ | 42,515,999 | $ | (43,858,974 | ) | $ | (370,132 | ) | $ | (1,047,839 | ) | |||||||||||||||||||||
Conversion of Series A Preferred Stock to common stock | (9,679,834 | ) | (9,680 | ) | - | - | 9,679,834 | 9,680 | - | - | - | - | ||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | (1,407,674 | ) | - | (1,407,674 | ) | ||||||||||||||||||||||||||||
Balances – March 31, 2021 | 528,429,575 | $ | 528,429 | - | - | 136,839,298 | $ | 136,839 | $ | 42,515,999 | $ | (45,266,648 | ) | $ | (370,132 | ) | $ | (2,455,513 | ) |
See accompanying notes to the consolidated financial statements
6 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the three months ended March 31, 2020 and March 31, 2019CASH FLOWS
(Unaudited)
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 | ) |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (1,407,674 | ) | $ | (2,416,228 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 11,571 | 22,108 | ||||||
Amortization of debt discount | — | 912 | ||||||
Issuance of warrants pursuant to short-term notes, related party | — | 17,636 | ||||||
Stock based compensation | — | 643 | ||||||
Common stock issued for consulting services | — | 35,000 | ||||||
Change in fair value of derivative liability - warrants and redemption put liability | — | (368,637 | ) | |||||
Bad debt expense | — | 3,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (40,500 | ) | 8,334 | |||||
Other receivables | 20,986 | 6,972 | ||||||
Prepaid expenses and other assets | (115,026 | ) | 594,251 | |||||
Interest payable | 3,940 | 39,363 | ||||||
Accounts Payable | 142,629 | 204,843 | ||||||
Accrued liabilities | (39,638 | ) | 211,221 | |||||
Other current liabilities | 169,789 | 25,948 | ||||||
Deferred revenue | (52,890 | ) | (276,125 | ) | ||||
Net Cash Used in Operating Activities | (1,306,813 | ) | (1,890,759 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchase of property and equipment | (1,522 | ) | — | |||||
Net Cash Used in Investing Activities | (1,522 | ) | — | |||||
Cash Flows from Financing Activities | ||||||||
Proceeds from short-term related party notes | — | 500,000 | ||||||
Payments on debt obligations | — | (10,937 | ) | |||||
Proceeds from issuance of Series D Convertible Preferred Stock | — | 100,000 | ||||||
Net Cash Provided by Financing Activities | — | 589,063 | ||||||
Net Decrease in Cash | (1,308,335 | ) | (1,301,696 | ) | ||||
Cash - Beginning of period | 1,640,645 | 1,424,096 | ||||||
Cash - End of period | $ | 332,310 | $ | 122,400 | ||||
Supplementary Cash Flow Information | ||||||||
Cash paid for interest | $ | 1,844 | $ | 15,874 | ||||
Non-cash investing and financing activities | ||||||||
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 |
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (2,416,228 | ) | $ | (3,694,816 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 22,108 | 211,218 | ||||||
Amortization of debt discount | 912 | 63,578 | ||||||
Issuance of warrants pursuant to short-term notes, related party | 17,636 | — | ||||||
Stock based compensation | 643 | 89,043 | ||||||
Loss on write-off of inventory | — | 2,191 | ||||||
Common stock issued for consulting services | 35,000 | 52,032 | ||||||
Change in fair value of derivative liability – warrants and redemption put liability | (368,637 | ) | — | |||||
Bad debt expense | 3,000 | 8,025 | ||||||
Changes in operating assets and liabilities, net of purchase transaction: | ||||||||
Accounts receivable | 8,334 | 76,811 | ||||||
Other receivables | 6,972 | (76,504 | ) | |||||
Prepaid expenses and other assets | 594,251 | (260,065 | ) | |||||
Interest payable | 39,363 | (78,987 | ) | |||||
Accounts payable | 204,843 | (187,697 | ) | |||||
Accrued liabilities | 211,221 | (202,412 | ) | |||||
Other current liabilities | 25,948 | 49,696 | ||||||
Deferred revenue | (276,125 | ) | 69,750 | |||||
Net Cash Used in Operating Activities | (1,890,759 | ) | (3,878,137 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | — | (4,730 | ) | |||||
Purchase of business, net of cash acquired | — | (302,710 | ) | |||||
Cash excluded in Merger | — | (69,629 | ) | |||||
Net Cash Used in Investing Activities | — | (377,069 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Proceeds from short-term notes, related parties | 500,000 | — | ||||||
Payment of dividends | — | (6,137 | ) | |||||
Payment on debt obligations | (10,937 | ) | — | |||||
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 | 589,063 | 6,777,447 | ||||||
Net (Decrease) Increase in Cash | (1,301,696 | ) | 2,522,241 | |||||
Cash - Beginning of period | 1,424,096 | 69,628 | ||||||
Cash - End of period | $ | 122,400 | $ | 2,591,869 | ||||
Supplementary Cash Flow Information | ||||||||
Cash paid for interest | $ | 15,874 | $ | 9,320 | ||||
Non-cash investing and financing activities | ||||||||
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 |
H-CYTE, INC
See accompanying notes to the consolidated financial statements
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of the Company
On July 11, 2019, MedoveX Corp.H-CYTE, Inc is a hybrid-biopharmaceutical company dedicated to developing and delivering new treatments for patients with chronic respiratory and pulmonary disorders. During the last two years, the Company has evolved into two separate verticals under its Healthcare Medical Biosciences Division with its entrance into the biologics development space (“MedoveX”Biologics Vertical”) changed its name to H-CYTE, Inc. (“H-CYTE” or the “Company”) by filing a Certificate of Amendment (the “Amendment”). This new vertical is complementary to the Company’s Amendedcurrent Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Vertical”) 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 FINRAis focused on July 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2013 as SpineZ Corp.underserved disease states.
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.
As of the merger, theThe consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), MedoveX Corp, Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the results includedinclude 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”). Additionally, H-CYTE Management, LLC is the operator and manager of the various Lung Health Institute (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale.
In 2019,On September 11, 2020, with the closing of the Rights Offering, FWHC, LLC, FWHC, Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as “FWHC”) gained control of the Company hadby subsequently owning approximately 61% of the fully diluted shares of the Company (for further discussion, see Notes 8 and 9-”Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
The Company has two divisions: the healthcare medical biosciences division (“Healthcare Medical Biosciences division”Division (which includes the “Infusion Vertical” and the “Biologics Vertical”) and the DenerveX medical device division (“DenerveX division”DenerveX”). In the first quarter of 2020, theThe Company has decided to focus its available resources on the Healthcare Medical Biosciences divisionDivision as it represents a significantly greater opportunity than the DenerveX division as explained below. Thedivision. Following this decision, on April 2, 2021, the Company is no longer manufacturing or sellingentered into a series of agreements with Medovex, LLC to pursue a joint venture regarding the continued development and commercialization of the DenerveX device.Device for business outside the U.S. (see Note 14).
Healthcare Medical Biosciences Division (Biosciences division)(“Biosciences Division”)
Autologous Infusion Therapy (“Infusion Vertical”)
The Company’s Biosciences division is a medical biosciences companyDivision includes the Infusion Vertical that develops and implements innovative treatment options in regenerative medicineautologous cellular therapy (PRP-PBMC) to treat an array of debilitating medical conditions.chronic lung disorders. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality careto the LHI clinics, while producing positive medical outcomes.outcomes following the strictest CDC guidelines.
Biotech Development Division (“Biologics Vertical”)
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post FDA approval) a FDA approved therapy (known as L-CYTE-01)biologic for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel biologics technology to harness the healing power of the body. Rion’s innovative 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-year10-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)biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01.this biologic as necessary. 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.the biologic.
With these agreements, Rion will serve as the product supplier and co-developercontracted preclinical development arm of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases.biologic. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and developmentthe clinical efficacy trials of these biologics,this biologic, H-CYTE intends to pursue submission of an investigational new drug (IND) applicationa Biologics License Application (“BLA”) for review by the FDA for treatment of COPD.
ProprietaryDenerveX Medical Device Business (DenerveX medical device division)Division (DenerveX)
The Company’s business of designing and marketing proprietary medical devices for commercial use in the U.S. and Europe began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System, and it became 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 expectsdecided to continue to generate negative cash flows as the Company’s revenue activities are suspended and as the Company implementsfocus 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 capitalavailable 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 quarter revenue 2020 was approximately $1,000,000 compared to fourth quarter 2019 revenue of approximately $1,800,000. The Company expects revenue for the 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 currently evaluating if its protocol has the potential to help people affected by COVID-19, but more research will need to be completed beforeBiosciences Division as this division presents 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 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.
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. Subsequentlysignificantly greater opportunity. Following this decision, 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,2, 2021, the Company entered into a Secured Convertible Noteseries of agreements with Medovex, LLC to pursue a joint venture regarding the continued development 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 stockcommercialization of the Company (the “April Offering”). The proceedsDenerveX Device for business outside of the April Offering will be usedU.S. (see Note 14).
Note 2 – Basis of presentation
The accompanying interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for working capitalinterim periods. Therefore, they do not include all information and general corporate purposes.footnote disclosures necessary for a complete presentation of the Company’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. 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 $424,615filed audited consolidated financial statements as of Marchand for the fiscal years ended December 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 offered2019, which included all information and notes necessary for purchase at the Qualified Financing at the closing of the Qualified Financing.
such complete presentation in conjunction with its 2020 Annual Report on Form 10-K.
As partThe results of operations for the interim period ended March 31, 2021 are not necessarily indicative 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 warrantsresults to be equal toexpected for any future period or the price per share atentire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020, 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 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, 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 investorcontained in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed2020 Annual Report on Form 10-K. For further above in “Note Purchase Agreement”, this A&Rdiscussion refer to Note was further amended and superseded by an April Secured Note in the amount2–”Basis Of Presentation And Summary of $1,000,000 issued by the CompanySignificant Accounting Policies” to the Investor.
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 toand “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in the recoverability and classification of recorded asset amounts orCompany’s Annual Report on Form 10-K for the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.fiscal year ended December 31, 2020.
Note 3 – Basis of presentation- Liquidity, Going Concern and Management’s Plans
BasedThe Company incurred net losses of approximately $1,408,000 and $2,416,000 for the three months ended March 31, 2021 and 2020, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as it implements its plan around the Biosciences Division. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern.
COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the outbreak of COVID-19 on the termseconomy in the U.S. and the rest of the APA,world is expected to continue to be significant. The extent to which the former RMS members had voting controlCOVID-19 outbreak will continue to impact the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected.
The Company has updated its business model to decrease corporate overhead and marketing activities to significantly reduce expenses. The Company believes that as COVID-19 begins to dissipate due to vaccinations being administered nationwide, patients will again feel comfortable traveling to one of the combined companyLHI clinics for its treatment. The Company’s Biologics Vertical has commenced preclinical work in support of filing an Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”). The Company is anticipating an initial submission during the second half of 2021.
Note Purchase Agreements
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 $2,842,695 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 $3,842,695. This sum included the issuance by the Company to FWHC Bridge, LLC (the “Investor) of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note (see below “Short-term Notes, Related Parties”) previously issued by the Company to the Investor on April 9, 2020. 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. 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 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. The amendment to the Hawes Note eliminated the requirement that the Company make monthly payments of accrued interest.
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 implemented a one-time reduction of the exercise price of such warrants to be equal to the price per share of preferred stock totaling $0.014 per share for the Qualified Financing. The Qualified Financing closed on September 11, 2020 triggering the reset of certain existing warrants to $0.014 per share and the conversion of the April Secured Notes plus accrued interest into 287,984,337 Preferred A shares. The Company also converted the Hawes notes plus accrued interest into 35,860,079 shares of Preferred A shares upon 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 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 H-CYTE are recorded as of the Merger closing date at their estimated fair values.
The accompanying interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of 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 and for the fiscal years ended December 31, 2019 and December 31, 2018 which included all information and notes necessary for such complete presentation in conjunction with its 2019 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 2020 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 ended December 31, 2019, which are contained in the Company’s 2019 Annual Report on Form 10-K. ForQualified Financing (for further discussion, of the Company’s significant accounting policies, refer tosee Note 3 – “Basis Of Presentation And Summary of Significant Accounting Policies”9-”Equity Transactions” to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the Company’s 2020 Annual Report on Form 10-K for the fiscal year ended December 31, 2019.10-K).
Certain reclassifications have been made to amounts previously reported and some disclosures for prior periods have been added to conform with the current period presentation.
Note 4 – Business AcquisitionShort-term Notes, Related Parties
On January 8,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 demand note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bore simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC which is a pre-exiting shareholder of the Company. As discussed further above in “Note Purchase Agreements”, 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. As explained above, the A&R Note was converted to Series A Preferred stock on September 11, 2020, the closing date of the Qualified Financing.
The short-term notes with related parties were issued by the Company during 2019, MedoveX completed its business combinationand as of March 31, 2020 consisted of four loans totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by the former Chief Executive Officer, William E. Horne, for working capital purposes. The loans bore interest rates 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 were repaid and 840,000 warrants were 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 RMS undersuch conversion to be effective as of April 17, 2020. This warrant has an exercise price equal to the price per share at which MedoveX purchased certain assetssecurities were offered to investors for purchase at the Qualified Financing totaling $0.014 and assumed certain liabilitiesis exercisable beginning on the day immediately following the earlier to occur of RMS, otherwise referred(x) the closing of the Qualified Financing and (y) November 1, 2020. The Qualified Financing closed on September 11, 2020 (for further discussion, see Note 9-”Equity Transactions” to as the Merger.consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the terms of the APA, MedoveX issuedApril 2021 Note Purchase Agreement, the Company sold promissory notes in the aggregate principal amount of $2,575,000. The Notes are due and payable on March 31, 2022 and bear interest at an annual rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the shareholdersprice paid for such New Securities in the next financing that meets the definition of RMS 33,661 shares plus 6,111 additional Exchange Shares (based on closinga Qualified Financing as defined in the sale of $2,000,000 of new securities) for 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%April 2021 Note Purchase Agreement. The Notes are secured by all of the outstanding voting sharesassets of the Company.
UnderCompany under a security agreement with the termsHolders. The lead investor of the APA,April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the Company issued additional “Exchange Shares”total amount to the shareholdersCompany. FWHC is an affiliated entity of RMS to maintainFWHC, LLC, which is a principal stockholder of the 55% ownership and not be diluted by the saleCompany. An additional affiliate of convertible securities (“New Shares Sold”) until MedoveX raisedFWHC, LLC advanced an additional $5,650,000 via$25,000 (see Note 14). Since the issuancenumber of new securities. Onshares the date of closingholder will receive upon a Qualified Financing is not known until the Company issued 6,111 additional Exchange Shares to RMS Shareholders asfinancing occurs, 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 equitycontingent beneficial conversion feature will be issued to RMS.
Because RMS shareholders owned approximately 55% ofcalculated and recorded when the voting stock of MedoveX after the transaction, RMS was deemed to be the acquiring company for accounting purposes (the “Acquirer”) and the transactionfinancing 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 Allocationcompleted.
The purchase price forCompany had cash on hand of approximately $332,000 as of March 31, 2021 and approximately $2,133,000 as of May 13, 2021. The Company’s cash is insufficient to fund its operations over the acquisitionnext year and the Company is currently working to obtain additional debt or equity financing to help support the Biosciences Division’s business model.
There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of the Acquiree has been allocatedany future financings will be workable or acceptable to the assets acquired and liabilities assumed basedCompany or its shareholders. If the Company is unable to fund its operations from existing cash on their estimated fair values.
hand, operating cash flows, additional borrowings, or raising equity capital, the Company may be forced to discontinue operations. The 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 |
Priorconsolidated financial statements do not include any adjustments relating to the transaction, MedoveX had 24,500,000 sharesrecoverability and classification of common stock outstanding at a market capitalizationrecorded asset amounts or the amounts and classification 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 toliabilities that might 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 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 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 2019necessary should the Company recorded an impairment charge of $2,944,000 relatedbe unable to the carrying value of its intangible assets.
Goodwill is calculatedcontinue 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. During the fourth quarter of 2019 the Company recorded an impairment charge of approximately $12,564,000 related to the carrying value of goodwill.a going concern.
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:
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 54 – 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, which are included in other general and administrative expense, for the three months ended March 31, 20202021 and 2019,2020, respectively, are as follows:
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating lease expense | $ | 150,564 | $ | 136,943 |
Three months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Operating lease expense | $ | 108,593 | $ | 150,564 | ||||
Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 20202021 and 2019,2020, respectively, are as follows:
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating cash flows from operating leases | $ | 150,564 | $ | 136,943 |
Three months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Operating cash flows from operating leases | $ | 108,593 | $ | 150,564 | ||||
Supplemental balance sheet and other information related to operating leases are as follows:
March 31, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Operating leases right-of-use assets | $ | 606,897 | $ | 738,453 | $ | 204,546 | $ | 278,552 | ||||||||
Lease liability, current portion | 402,876 | 453,734 | 87,939 | 139,189 | ||||||||||||
Lease liability, net of current portion | 221,710 | 302,175 | 134,295 | 157,050 | ||||||||||||
Total operating lease liabilities | $ | 624,586 | $ | 755,909 | $ | 222,234 | $ | 296,239 | ||||||||
Weighted average remaining lease term | 2.16 years | 2.25 years | 2.42 years | 2.32 years | ||||||||||||
Weighted average discount rate | 7.75 | % | 7.75 | % | 11.57 | % | 10.31 | % |
Future maturities of operating lease liabilities as of March 31, 20202021 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.
Operating leases | ||||
Remainder of 2021 | $ | 75,712 | ||
2022 | 102,891 | |||
2023 | 69,333 | |||
Total lease payments | 247,936 | |||
Less: Interest | (25,702 | ) | ||
Total lease liability | $ | 222,234 |
The Company leasesdid not renew its corporate office space lease in Tampa, FL and Atlanta, GA.which expired on March 31, 2021. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, and Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX.AZ. These clinic locations have various expiration dates through August 31, 2023. 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, theThe Company entered into a three-month extensionshort-term lease for theits Tampa location beginning April 1, 2021 totaling $71,775. The Dallas, TX lease that expired on April 30, 2020.July 31, 2020 and the Pittsburgh, PA lease expired on October 31, 2020, neither of which were renewed as these clinic locations were permanently closed. The Company has decided that its corporate staff will continue working remotely but the Company will have a small corporate meeting room in the Tampa LHI clinic.
Note 65 - Property And Equipment
Property and equipment, net, consists of the following:
Useful Life | March 31, 2020 | December 31, 2019 | Useful Life | March 31, 2021 | December 31, 2020 | |||||||||||||||
Furniture and fixtures | 5-7 years | $ | 231,222 | $ | 231,222 | 5-7 years | $ | 231,222 | $ | 231,222 | ||||||||||
Computers and software | 3-7 years | 244,039 | 244,039 | 3-7 years | 247,844 | 246,323 | ||||||||||||||
Leasehold improvements | 15 years | 157,107 | 157,107 | 15 years | 155,583 | 155,583 | ||||||||||||||
632,368 | 632,368 | 634,649 | 633,128 | |||||||||||||||||
Less accumulated depreciation | (434,772 | ) | (412,665 | ) | ||||||||||||||||
Less: accumulated depreciation | (505,523 | ) | (493,953 | ) | ||||||||||||||||
Total | $ | 197,596 | $ | 219,703 | $ | 129,126 | $ | 139,175 |
Depreciation expense was approximately $22,000$12,000 and $27,000$22,000 for the three months ended March 31, 20202021 and 2019,2020, respectively. The Company uses the straight-line depreciation method to calculate depreciation expense.
Note 7 - Intangible Assets And Goodwill
The Company’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 December 31, 2019.
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.
12 |
Note 86 – Related Party Transactions
Consulting ExpenseBoard Members and Officers and Related Expenses
Effective 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 received $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair in addition to regular quarterly board meeting fees. 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$2,500 per quarter. On January 12, 2021, Mr. Monteleone was appointed as Chairman of the Board and Compensation Committee Chair. There are understandings between the Company and Mr. Monteleone for him to receive $4,167 per month to serve on the Board of Directors and an additional $5,000 per quarter to serve as Chairman of the Board, Audit Committee Chair, and Compensation Committee Chair. The Company expensed approximately $17,500 and $30,000 in compensation to Mr. Monteleone for the three months ended March 31, 20202021 and 2019, the Company has expensed approximately $30,000, and $35,000 in compensation to Mr. Monteleone,2020 respectively.
TheEffective October 1, 2020, the Company entered into an oral consulting arrangementagreement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS,Mr. Michael Yurkowsky in January 2019 in the amount of $10,000which Mr. Yurkowsky will receive $4,167 per month plus benefits reimbursement for advisory services.to serve on the Board of Directors. The Company terminated this agreement effective June 30, 2019. For three months ended March 31, 2019, the Company expensed approximately $27,000$12,500, and $0 in consulting feescompensation to St. Louis Family Office.
The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019Mr. Yurkowsky 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, 2021 and 2020 and 2019,respectively.
On January 12, 2021, Mr. William Horne stepped down as Chairman of the Board. Mr. Horne will remain a member of the Board. Effective March 1, 2021, the Company entered into an oral agreement with Mr. Horne in which Mr. Horne will receive $4,167 per month to serve on the Board of Directors. The Company expensed approximately $15,000$4,000, and $0 respectively.
Officers andin Board Members and Related Expenses
In connection with the April Offering, the Company’s CEO Williamfee compensation to Mr. 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 months ended March 31, 2021 and 2020, and 2019, the Company paid $0 in Board of Director fees to Michael Yurkowsky and to Raymond Monteleone.respectively.
Debt and Other Obligations
The short-term notes, related parties are detailed in Note 2 - “Liquidity,3-”Liquidity, Going Concern and Management’s Plans” in this Form 10-Q.
Change in Control
On September 11, 2020, with the closing of the Rights Offering, FWHC, LLC, FWHC Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as “FWHC) gained control of the Company by subsequently owning approximately 61% of the fully diluted shares of the Company. On July 28, 2020, the Company issued an aggregate of 15,518,111 shares of its common stock to FWHC upon the conversion of its issued Series D Convertible Preferred Stock. The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Series D Convertible Preferred Stock as set forth in the Certificate of Designations for the Series D Convertible Preferred Stock. On September 11, 2020, with the closing of the Rights Offering, FWHC was issued 123,031,819 shares of Preferred A Stock for conversion of the outstanding promissory notes from April 2020, 75,162,429 shares of Preferred A Stock for conversion of the April Secured Note, 35,860,079 shares of Preferred A Stock for conversion of the Hawes Notes, and 117,362,143 shares of Preferred A Stock issued upon the closing of the Rights Offering. FWHC was also issued 273,356,676 10-year warrants at $0.014 upon the closing of the Rights Offering.
Note 97 - Equity Transactions
For the consolidated statement of stockholders’ deficit as of 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 that 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 and $370,000, respectively.
Common Stock Issuance
On January 8, 2019, the Company entered into a securities purchase agreement (the ��SPA”) with four purchasers (the “Purchasers”) pursuant to which the four Purchasers invested in the Company an aggregate amount of $2,000,000, with $1,800,000 in cash and $200,000 by cancellation of debt as explained below, in exchange for forty 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 $0.75 per share. For further discussion of the SPA, refer to Note 9 - “Equity Transactions” to the consolidated financial statements in the Company’s Annual Report on Form 10-K is incorporated by reference herein.
The Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,000,000, as of 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 to 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 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 $52,033. In August 2019, the Company issued 150,000 shares of common stock to consultants 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 for the year ending December 31, 2019.
In February 2020, the Company issued LilyCon Investments $35,000 in shares of the Company’s common stock at a weighted average share price of $0.32 per share for a total of 109,375 shares per the terms of the consulting agreement executed in February 2019.
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 were offered to investors for purchase at the Qualified Financing, which was $0.014, and is exercisable beginning on the day immediately following the closing of the Rights Offering, which occurred on September 11, 2020.
On July 28, 2020, the Company issued an aggregate of 17,893,076 shares of its common stock upon the conversion of all of its issued and outstanding Series B and Series D Preferred Stock (the “Preferred Stock”) and accumulated dividends. The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Series D Preferred Stock as set forth in the Certificate of Designations for the Series D Preferred Stock.
On July 29, 2020, the Company filed its Second Amended and Restated Certificate of Incorporation (the “Amended COI”). The Amended COI provides for the issuance of up 1,600,000,000 shares of Common Stock and 1,000,000,000 shares of Preferred Stock, of which 800,000,000 shares are designated as Series A Preferred Stock and eliminates the previously authorized classes of preferred stock. The Amended COI also delineates the rights of the Series A Preferred Stock.
Series BA Preferred Stock Preferences
On September 11, 2020, the registered Rights Offering (Registration No. 333-239629) of the Company expired. Pursuant to the Rights Offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The Rights Offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985.
Additionally, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A Preferred Stock to the holders of outstanding promissory notes, issued in April 2020, in the aggregate principal amount and accrued interest of $4,483,617. The notes were converted pursuant to mandatory conversion triggered by the completion of the Rights Offering (for further discussion, see Note 9-”Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
During the quarter ended March 31, 2021, 9,679,834 shares of Series A Preferred Stock were converted to Common Stock at the request of certain Series A Preferred Shareholders.
Voting Rights
Holders of Series BA Preferred Stock (“Series BA Holders”) have the right to receive notice of any meeting of holders of common stock or Series BA Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series BA Preferred Stock. Each Series BA Holder shall vote on each matter on an as converted basis submitted to them with the holders of common stock.
Conversion
Series A Preferred Stock converts to common stock at a 1:1 ratio immediately upon request of the Series A Holder.
Liquidation
Upon the liquidation or dissolution of the business ofSeries A Preferred Stock does not have preferential treatment over common stock shareholders if the Company whether voluntaryliquidates 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 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 $0.36.
In 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. Since 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 year ended 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 2,650 shares of Series B Preferred Stock, and accrued dividends, were subsequently converted into an aggregate of 715,279 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.dissolves.
Stock-Based Compensation 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.
14 |
Stock Option Activity
For the three months ended March 31, 20202021 and 2019, the Company recognized approximately $600 and $89,000, respectively, as compensation expense with respect to vested stock options. 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 three months ended March 31, 2019 is primarily related to an 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. These options were immediately vested upon issuance.
As of March 31,2020,2020, all outstanding stock options were fully vested, and related compensation expense recognized.On April 1, 2021, the Board of Directors of the Company approved and granted an aggregate of 49,750,000 stock options to certain directors and officers of the Company having an exercise price of $0.07 per share and an expiration date of ten years from the date of grant. These options are not included in the Company’s current stock option plan as they were granted outside of the plan (see Note 14).
The following is a summary of stock option activity for the quarters endingthree months ended March 31, 20192021 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 | 6.99 | ||||||||
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 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
Outstanding at December 31, 2019 | 425,000 | $ | 1.38 | 7.71 | ||||||||
Granted | — | — | — | |||||||||
Expired/Cancelled | — | — | — | |||||||||
Outstanding and exercisable at March 31, 2020 | 425,000 | $ | 1.38 | 7.46 | ||||||||
Outstanding at December 31, 2020 | 410,000 | $ | 1.39 | 6.72 | ||||||||
Granted | — | — | — | |||||||||
Expired/Cancelled | — | — | — | |||||||||
Outstanding and exercisable at March 31, 2021 | 410,000 | $ | 1.39 | 6.48 |
Non-Controlling Interest
For the three months ended March 31, 20202021 and 2019,2020, 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 services 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 care and 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 to $0 each month for each VIE to a net of zero.the VIEs. Due to this change in policy, there was no change in the non-controlling interest for the three months ended March 31, 20202021 or 20192020 related to the net income (loss) 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,three month period ended March 31, 2021, the Company had 528,429,575 shares outstanding of Series A Preferred Stock which converts on a 1:1 ratio to common stock and would be considered dilutive upon conversion. In addition, 389,486,207 warrants outstanding at March 31, 2021 are potentially dilutive as their exercise price is below the current stock price. There is no difference between the basic and diluted net loss per share when including the remaining 23,937,765 warrants outstanding with an exercise price above the current stock price and 410,000 in outstanding common stock options as they are considered anti-dilutive and excluded for the period ended March 31, 2021 due to the net loss. For the three month period ended March 31, 2020, 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.excluded.
15 |
Note 108 – Commitments & Contingencies
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, 2020,2021, 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 affiliated physicians related to LI Dallas, LI Nashville, LI Pittsburgh, LI Scottsdale, and LI Tampa.Scottsdale. For the three months ended March 31, 20202021 and 2019,2020, payments totaling approximately $22,000$17,000 and $22,000, respectively, were made to these physicians’ legal entities. Due to COVID-19, the Company ceasingtemporarily ceased operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, LI Nashville, and LI Tampa, at which time, the guaranteed payments for these clinics will be suspended until operations recommence at the aforementioned clinics.were suspended. The guaranteed payments did not resume for LI Dallas and LI Pittsburgh due to them presently being closed. The Company resumed guaranteed payments in January 2021 for LI Nashville and LI Scottsdale.
Manufacturer Liability DisputeRion Agreements
The Company selectedOn June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post FDA registered contract manufacturer,approval) a biologic for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel biologics technology to manufactureharness the DenerveX product. Inhealing power of the body. Rion’s innovative 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 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company became awareentered into a services agreement with Rion which provides the Company the benefit of events which resultedRion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the manufacturer not meeting certain contract performance requirements. Asfurther research and development for the generation of a result,new biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for this biologic as necessary. 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 the biologic. An additional $350,000 in expense is expected to be incurred per the Rion Agreements. At this time, 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 unableable to estimate when this expense will occur. For the amount of the loss based on information available at this time. As such,periods ending March 31, 2021 and 2020, 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.expensed $0 and $750,000, respectively, related to these agreements.
Note 119 – Short-term Debt
Convertible note
The Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in the Merger.Asset Purchase Agreement between Medovex, Corp and Regenerative Medicine Solutions, LLC (“Merger”) in 2019 (see Note 1 – “Description of the Company” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K) .. 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 arewere secured by all of the assets of the Company.
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,In 2019, and the conversion price$100,000 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, waswere converted into an aggregate of 251,667 shares of common stock, eliminating $100,000and $350,000 of the Company’s debt obligation.Convertible Notes were redeemed by the Company. 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. In 2019, the Company redeemed $350,000 of convertible notes payable in principal and $52,033 in interest payable for three of the noteholders.
The Company also reached an extension with the remaining noteholder which extended the maturity date of the loanHawes Notes for one year, until September 30, 2020. This noteThe notes had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of approximately $425,000$424,615 as of March 31, 2020 and December 31, 2019. Additionally, approximately 424,000 warrants were issued on September 15, 2019 in2020. In connection with the extension ofApril Offering, the note.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 (see Note 11-”Debt” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
Notes Payable
Notes payable were assumed in the 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 Company is working with the lender for an additional extension of the promissory notes. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 at March 31, 20202021 and December 31, 2019.2020. The Company has not made payments on this note since February 10, 2020, due to COVID-19, resulting in accrued interest of approximately $4,000.
On March 27, 2020, the Company issued a Notedemand note in the principal amount of $500,000 to the Investor for a total of $500,000FWHC 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, the Company amended and restated the demand note to reflect a new principal amount of $1,000,000, which became the “A&R Note (see Note 11-”Debt” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
The short-term notes with related parties were issued by the Company during 2019, and as of March 31, 2020 consisted of four loans totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by the former Chief Executive Officer, William E. Horne, for working capital purposes. The loans bore interest rates 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 were repaid and 840,000 warrants were 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 (see Note 11-”Debt” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
Paycheck Protection Program
On April 29, 2020, the Company issued a promissory note in the principal amount of $809,082 to the Bank of Tampa in connection with a loan in such amount made under the Paycheck Protection Program (“PPP Loan”). The PPP Loan bears an interest at a rate of 8.0%1% per annum and is payable in eighteen monthly payments of $45,533 beginning on approximately August 14, 2021. The Company elected to use a 24-week Covered Period, per the SBA Paycheck Protection Program guidelines, the Covered Period ended on October 14, 2020.
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 criteria set by the SBA. Not more than 40% of the amount forgiven can be attributed to non-payroll costs, as listed above. As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period (as defined below), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on demand. Ifthe loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on 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.the loan that is not forgiven. The Investorlender is an affiliateresponsible for notifying the borrower of a pre-existing shareholderremittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable. The Company having been the lead investor in the Company’s recent Series D Convertible Preferred Stock Offering.filed its forgiveness application on April 20, 2021.
17 |
Note 1210 – 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 reconciliationare rollforwards of the beginning and ending balances for the liabilityliabilities 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, 2019:2020:
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 theThe Company assumed in the Merger), whereby 108,250 sharesdid not have any assets or liabilities measured at fair value using Level 1 or 2 of the Company’s Series B Convertible Preferred Stock (the “Series B Shares”)fair value hierarchy as of December 31, 2020 (see Note 12-”Derivative Liability-Warrants and warrants were issued to purchase 2,312,500 shares of the Company’s common stock (“Series B Warrants”). The Series B Warrants had a three-year term at an exercise price of $0.75. The Series 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 warrantsRedemption Put” 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, was recorded as a derivative liability as a measurement period adjustment to the 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 change in fair value, of approximately $175,000 and $0, has been recorded as a component of other income (expense)consolidated financial statements in the Company’s consolidated statement of operations for the three months ended March 31, 2020 and 2019, respectively. The fair value of the derivative liability includedAnnual Report on the consolidated balance sheet was approximately $141,000 and $316,000 as of March 31, 2020 and December 31, 2019, respectively.Form 10-K).
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.
Note 1311 - Common Stock Warrants
A summary of the Company’s warrant issuance activity and related information for the quarters ended March 31, 20202021 and March 31, 2019:2020:
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 | ||||||||||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||||||||||||||
Outstanding and exercisable at December 31, 2019 | 44,806,076 | $ | 0.78 | 4.59 | 44,806,076 | $ | 0.78 | 4.59 | ||||||||||||||||
Issued | 513,567 | 0.75 | 6.13 | 513,567 | 0.75 | 6.13 | ||||||||||||||||||
Outstanding and exercisable at March 31, 2020 | 45,319,643 | $ | 0.78 | 4.61 | 45,319,643 | $ | 0.78 | 4.61 | ||||||||||||||||
Outstanding and exercisable at December 31, 2020 | 413,423,972 | $ | 0.015 | 10.30 | ||||||||||||||||||||
Issued | — | ��� | — | |||||||||||||||||||||
Total outstanding at March 31, 2021 | 413,423,972 | 0.10 | 9.24 |
18 |
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 as of their respective issue dates are as follows:
Event Description | 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 | 5,000,000 | $ | 0.40 | $ | 0.75 | $ | 0.24 | 3 years | 2.57 | 115.08 | |||||||||||||||||
Antidilution provision(1) | 1/8/2019 | 2,023,438 | $ | 0.40 | $ | 0.40 | $ | 0.28 | 3 years | 2.57 | 115.08 | |||||||||||||||||
Private placement | 1/18/2019 | 6,000,000 | $ | 0.40 | $ | 0.75 | $ | 0.23 | 3 years | 2.60 | 114.07 | |||||||||||||||||
Private placement | 1/25/2019 | 1,250,000 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.72 | |||||||||||||||||
Private placement | 1/31/2019 | 437,500 | $ | 0.54 | $ | 0.75 | $ | 0.34 | 3 years | 2.43 | 113.47 | |||||||||||||||||
Private placement | 2/7/2019 | 750,000 | $ | 0.57 | $ | 0.75 | $ | 0.36 | 3 years | 2.46 | 113.23 | |||||||||||||||||
Private placement | 2/22/2019 | 375,000 | $ | 0.49 | $ | 0.75 | $ | 0.30 | 3 years | 2.46 | 113.34 | |||||||||||||||||
Private placement | 3/1/2019 | 125,000 | $ | 0.52 | $ | 0.75 | $ | 0.33 | 3 years | 2.54 | 113.42 | |||||||||||||||||
Private placement | 3/8/2019 | 150,000 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.53 | |||||||||||||||||
Private placement | 3/11/2019 | 2,475,000 | $ | 0.61 | $ | 0.75 | $ | 0.40 | 3 years | 2.45 | 113.62 | |||||||||||||||||
Private placement | 3/26/2019 | 500,000 | $ | 0.51 | $ | 0.75 | $ | 0.32 | 3 years | 2.18 | 113.12 | |||||||||||||||||
Private placement | 3/28/2019 | 375,000 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.18 | 112.79 | |||||||||||||||||
Private placement | 3/29/2019 | 62,500 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.21 | 112.79 | |||||||||||||||||
Private placement | 4/4/2019 | 500,000 | $ | 0.48 | $ | 0.75 | $ | 0.29 | 3 years | 2.29 | 112.77 | |||||||||||||||||
Private placement | 7/15/2019 | 200,000 | $ | 0.53 | $ | 1.00 | $ | 0.31 | 3 years | 1.80 | 115.50 | |||||||||||||||||
Convertible debt extension | 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)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.
Event Description | 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 (%) | |||||||||||||||||||||||
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 | 144.30 | ||||||||||||||||||||
Granted for bridge financing | 4/8/2020 | 296,875 | $ | 0.05 | $ | 0.40 | $ | 0.04 | 3 years | 0.34 | 131.82 | ||||||||||||||||||||
Short-term note, related party conversion | 4/17/2020 | 4,368,278 | $ | 0.05 | $ | 0.014 | $ | 0.05 | 10 years | 0.65 | 100.64 | ||||||||||||||||||||
Granted for bridge financing | 9/11/2020 | 364,439,176 | $ | 0.05 | $ | 0.014 | $ | 0.017 | 10 years | 0.65 | 96.97 |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Note 14- Mezzanine Equity and12 - 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 21,2019,21, 2019, the Company entered into a securities purchase agreement with FWHC HOLDINGS,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 toSee Note 14 - “Mezzanine14-”Mezzanine Equity and Series D Convertible Preferred Stock” onto the consolidated financial statements in the Company’s 2020 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 determined 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 $79,000 and $267,000, respectively.
The Company’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 the residual to the Series D Shares and the 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 calculated as the amount allocated to the convertible instrument divided by the number of shares to which 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 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.
On January 17, 2020, the Company entered into a securities purchase agreement with an accredited investor for the purchase of 2,450 shares of Series D Preferred Stock, par value $0.001 per share and a Series D Warrant resulting in $100,000 in gross proceeds to 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 proceeds 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 $37,207 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 $100,000.10-K.
For the three months ended March 31, 2021 and 2020, the Company recorded $0 and $158,147 in deemed dividends on the Series D Convertible Preferred stockStock in accordance with the 8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,281,433 at March 31, 2020. All outstanding shares of Series D Convertible Preferred Stock were converted into 15,773,363 shares of Common Stock on July 28, 2020. The conversion was pursuant to a mandatory conversion triggered by the majority holder of the Series D Convertible Preferred Stock as set forth in the Certificate of Designations.
As of December 31, 2020, the Company does not have any Series D Convertible Preferred Stock outstanding (see Note 9-”Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
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Series D CONVERTIBLE Preferred Stock PreferencesNOTE 13 – Income Taxes
Voting Rights
HoldersThe Company utilizes the liability method of our Series D Preferred Stock (“Series D Holders”) haveaccounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”. Under the rightliability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to receive noticebe in effect during the years in which the difference turns around. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowance is recorded when it is more likely than not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of any meeting of holders of common stock or Series D Preferred Stock 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.tax planning strategies.
Liquidation
UponFrom inception to March 31, 2021, the liquidation, dissolution or winding upCompany has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses is fully offset by a valuation allowance as of March 31, 2021 and December 31, 2020. Management of the Company whether voluntary or involuntary, each Series D Holder shall be entitled to receive, for each share thereof, outevaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and determined that it is more likely than not that the Company will not recognize the benefits of the Company legally available therefore,deferred tax assets.
The Company’s policy is to record interest and penalties on uncertain tax positions as a preferential amount in cash equal to the stated value plus all accruedcomponent of income tax expense. There are no uncertain tax positions at March 31, 2021 and unpaid dividends. All preferential amounts to be paid to the Series D 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 Series B and common stock.December 31, 2020. The Company accrues these dividends as they are earned each period.has not undergone any tax examinations since inception.
Note 1514 - Subsequent Events
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,1, 2021, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”2021 Note Purchase Agreement”) with thirty threefive (5) investors (the “Purchasers”“Holders”) pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale. Pursuant 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 proceedsterms of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted2021 Note Purchase Agreement, the Company sold promissory notes 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$2,575,000. The Notes are due 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,payable on March 27, 2020 (the “Hawes Note”)31, 2022 and bear interest at an annual rate of 8%. 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 convertare convertible into shares of preferred stockCommon Stock at a discount of 20% to the price paid for such New Securities in the next financing that meets the definition of a Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by all of the assets of the Company offered for purchase atunder a security agreement with the Qualified Financing at the closing of the Qualified Financing.
As partHolders. The lead investor of the April Offering,2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the holderstotal amount to the Company. FWHC is an affiliated entity of certain existing warrants issued byFWHC, LLC which is a principal stockholder of the Company. An additional affiliate of FWHC LLC advanced an additional $25,000 (for further information, including the Note Purchase Agreement exhibits, refer to the Company’s Form 8-K filed on April 7, 2021). Since the number of shares the holder will receive upon a Qualified Financing is not known until the financing occurs, a contingent beneficial conversion feature will be calculated and recorded when the financing is completed.
On April 1, 2021, the Board of Directors of the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. Theapproved and granted an aggregate of 49,750,000 stock options to certain directors and officers of the Company intends to implement a one-time reduction of thehaving an exercise price of such warrants to be equal to the price$0.07 per share at which sharesand an expiration date of preferred stock are offered for purchase atten years from the Qualified Financing once that price has been established.
Debtdate of grant. The Director’s options vest over a period of three years, and Other Obligations
On April 23, 2020, Horne Management, LLC agreed to convert the short-term notes, related parties totaling $1,635,000 asChief Executive Officer’s and Chief Financial Officer’s options vest over a period of March 31, 2020 plus accrued interest into (i) 4,368,278 shares of common stockfour years. A certain number of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of sharesoptions were vested immediately. The options were priced based on the closing price of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equalon the date prior to the price per share at which securitiesgrant. These options are offered to investors for purchase atnot included in 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 closingCompany’s current stock option plan as they were granted outside 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.
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.plan.
On April 29, 2020,2, 2021, the Company issuedentered into a series of agreements (collectively the “Agreements”) with Medovex LLC, a limited liability company formed on December 8, 2020, to pursue a joint venture regarding the continued development and commercialization of the DenerveX Device for business outside of the U.S. Pursuant to the terms of the Agreements, the Company assigned and contributed personal property and related rights, consisting of all the tangible assets relating to the DenerveX rotational ablation denervation device (the “DenerveX Device”) in exchange for (i) a secured convertible promissory note in the original principal amount of $809,082$140,000 (the “DenerveX Note”) and (ii) 400,000 Class B Units of Medovex LLC (the “Exchange Units”). The 400,000 Class B Units represent approximately 22% of the currently outstanding membership interests of Medovex LLC. In addition, pursuant to the BankIntellectual Property Agreement, the Company will receive a royalty of Tampa in connection with a loan in such amount made under the Payroll Protection Program (“PPP Loan”). The PPP Loan bears interest at a rate6% of 1% per annum and is payable in eighteen monthly payments of $45,533 commencing six monthsgross revenues derived from the datesale or licensing of the noteDenerveX Device (no royalty will be payable upon the first $666,667 of gross revenues) during the life of the underlying patent and 2% thereafter. The Company did not give up any of the intellectual property ownership related to the DenerveX Device. Medovex LLC also assumed all of the Company’s existing and future obligations related to the DenerveX Device (for further information, including the Agreements exhibits, refer to the Company’s Form 8-K filed on November 29, 2020. While the note is dated April 29, 2020, the loan was not formally approved and funded until May 7, 2020.8, 2021).
The Company can apply for loan forgiveness inAs of May 12, 2021, an amount equal toadditional 7,594,932 Series A Preferred Stock was converted into Common Stock at the sumrequest of the following costs incurred by the Company:certain Series A Preferred Stockholders.
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.
ItemItem 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 October 18, 2018, H-CYTE, Inc is a hybrid-biopharmaceutical company dedicated to developing and delivering new treatments for patients with chronic respiratory and pulmonary disorders. During the last two years, the Company has evolved into two separate verticals under its Healthcare Medical Biosciences Division with its entrance into the biologics development space (“Biologics Vertical”). This new vertical is complementary to the Company’s current Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Vertical”) and is focused on underserved disease states.
The consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly named MedoveX) entered into an Asset Purchase Agreement with Regenerative Medicine Solutions,Blue Zone Health Management, LLC), MedoveX Corp, Cognitive Health Institute, LLC, RMS Shareholder,and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the results include Lung Institute Dallas, PLLC (“Shareholder”LI Dallas”), Lung Institute LLCNashville, PLLC (“LI”LI Nashville”), RMS Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”). Additionally, H-CYTE Management, LLC (“RMS LI Management”)is the operator and Cognitivemanager of the various Lung Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale.
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 ofSeptember 11, 2020, with the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treatedRights Offering, FWHC, LLC, FWHC Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as a reverse acquisition whereby“FWHC”) gained control of the Company is deemedby subsequently owning approximately 61% of the fully diluted shares of the Company (for further discussion, see Notes 8 and 9-”Equity Transactions” to have been acquired by RMSthe consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
The Company has two divisions: the Healthcare Medical Biosciences Division (which includes the “Infusion Vertical” and the historical“Biologics Vertical”) and the DenerveX medical device division (“DenerveX”). The Company has decided to focus its available resources on the Healthcare Medical Biosciences Division as it represents a significantly greater opportunity than the DenerveX division. Following this decision, on April 2, 2021, the Company entered into a series of agreements with Medovex, LLC to pursue a joint venture regarding the continued development and commercialization of the DenerveX Device for business outside the U.S. (see Note 14 to the Company’s financial statements priorincluded herein).
Healthcare Medical Biosciences Division (“Biosciences Division”)
Autologous Infusion Therapy (“Infusion Vertical”)
The Company’s Biosciences Division includes the Infusion Vertical that develops and implements innovative treatment options in autologous cellular therapy (PRP-PBMC) to treat chronic lung disorders. Committed to an individualized patient-centric approach, this division provides oversight and management of the highest quality to the acquisition date of January 8, 2019 now reflectLHI clinics, while producing positive medical outcomes following the historical financial statements of RMS.strictest CDC guidelines.
Biotech Development Division (“Biologics Vertical”)
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post FDA approval) a FDA approved therapy (known as L-CYTE-01)biologic for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel biologics technology to harness the healing power of the body. Rion’s innovative 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-year10-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)biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01.this biologic as necessary. 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.the biologic.
With these agreements, Rion will serve as the product supplier and co-developercontracted preclinical development arm of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases.biologic. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and developmentthe clinical efficacy trials of these biologics,this biologic, H-CYTE intends to pursue submission of an investigational new drug (IND) applicationa Biologics License Application (“BLA”) for review by the FDA for treatment of COPD.
DueDenerveX Medical Device Division (DenerveX)
In the first quarter of 2020, the Company made the decision to COVID-19, all ofstop any further efforts to source alternative manufacturing and distributor options for the LHI clinics are closed. The Company will evaluate reopening these clinics at the appropriate time. The Company is not expecting to be able to generate revenue until, at the earliest, August 2020.DenerveX product. The Company has contacteddecided to focus 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 thatavailable resources on the Biosciences Division as this division presents a significantly greater opportunity. Following this decision, on April 2, 2021, the Company will be ableentered into a series of agreements with Medovex, LLC to treat patients as soon as August 2020; as such,pursue a joint venture regarding the Company cannot estimate when it will be safe to treat patientscontinued development and generate revenue. Future quarters’ revenue is dependent oncommercialization of the timingDenerveX Device for business outside 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 currently evaluating whether or not its protocol 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. 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.U.S. (see Note 14).
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, 2019, included in the Company’s Annual Report on Form 10-K.
Results of Operations - Three Monthsmonths Ended March 31, 20202021 and 20192020
Revenue, Cost of Sales and Gross Profit
The Company recorded revenue of approximately $376,000 and $1,017,000, for the three months ended March 31, 20202021 and 2019 of approximately $1,017,000 and $1,324,000,2020, respectively. The decrease in revenue for the three months ended March 31, 20202021, as compared to the prior year is mainly attributable to a decrease in the numbereconomic impact that COVID-19 has had on the Company due to its vulnerable patient base being unable or unwilling to travel due to the virus. The Company suspended operations of treatments provided by the Biosciences division partially because of cancelling all treatmentsInfusion Vertical due to COVID-19 effective March 23, 2020.2020 and did not reopen until August 2020 with limited capacity.
ForThe Company recorded cost of sales for the three months ended March 31, 2021 and 2020 of approximately $199,000 and 2019, the Company incurred approximately $377,000, and $559,000 in cost of sales, respectively. The decrease in cost of sales for the three months ended March 31, 20202021, as compared to the prior year, is mainly attributable to a decrease in the number of treatments provided byeconomic impact that COVID-19 has had on the Biosciences division.Company. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the Biosciences division.Infusion Vertical. 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 provided, wereduring normal operations, can be handled adequately with the Company’s current 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.
For the three months ended March 31, 20202021 and 20192020, the Company generated a gross profit totaling approximately $640,000 (63%)$178,000 and $765,000 (58%),$640,000, respectively. The decrease in gross profit, was dueas compared to the reduction in revenue, net ofprior year, is attributable to the cost of sales efficiencies. The increase in gross margin percentage foreconomic impact that COVID-19 has had on the three months ended March 31, 2020, is due to a greater proportionate reduction in cost of sales from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members than the reduction in revenue.Company.
Operating Expenses
Salaries and Related Costs
For the three months ended March 31, 20202021 and 2019,2020, the Company incurred approximately $1,224,000$662,000 and $1,533,000$1,224,000 in salaries and related costs, respectively. The decrease in salaries and related costs for the three months ended March 31, 2021, as compared to the prior year, is mainly attributable to a 40% reduction in executive compensation. The Company anticipates that salariesclinical and related costs will be further reduced in 2020 as the company shifts its business model in its pursuit of becoming a leading biomedical services company andcorporate staff due to its recent cost reduction measures effectiveLHI operations ceasing in March 2020.in response to COVID-19.
Other General and Administrative
For the three months ended March 31, 20202021 and 2019,2020, the Company incurred approximately, $1,230,000,$830,000, and $1,488,000$1,230,000 in other general and administrative costs, respectively. The decrease, as compared to the prior year, is primarily attributable to reduction in operating activities in the DenerveX division.economic impact that COVID-19 has had on the Company.
Of the total other general and administrative costs, for the three months ended March 31, 20202021 and 2019,2020, professional fees were approximately $316,000$320,000 and $369,000,$316,000, 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 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.costs.
Research and Development
For the three months ended March 31, 20202021 and 2019,2020, the Company incurred approximately $750,000$0 and $0$750,000 in research and development expenses, respectively. The $750,000 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.
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Advertising
For the three months ended March 31, 20202021 and 2019,2020, the Company had approximately $145,000$77,000 and $1,136,000$145,000 respectively, in advertising costs. The decrease is attributable mainly to the Company determining that its marketing channels were not yielding the expected results for promoting the Company’s Biosciences division.Infusion Vertical. The Company expects these expenses will continue at these reduced rates until the LHI clinics are reopened and patients are being treated again.
Depreciation and Amortization
For the three months ended March 31, 2020 and 2019, the Company recognized approximately $22,000 and $211,000 respectively, in depreciation and amortization expense. The decrease is mainly attributablecontinues to amortization expense declining from $184,000 in the three months ended March 31, 2019 to $0 in the three months ended March 31, 2020evaluate its marketing strategy due to the complete write-off of intangibles at fiscal year-end 2019.its patient base’s limited capacity to travel due to COVID-19.
Other Income (Expense)
Interest expense for the three months ended March 31, 2020 and 2019 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 the amount of $64,000.
The change in fair value of redemption put liability for the three ended March 31, 2021 and 2020 was $0 and $194,000 respectively. The change in fair value of the derivative liability - warrants for the three months ended March 31, 2021 and 2020 werewas approximately $194,000$0 and $175,000, respectively. The redemption put liability is related to the Series D Convertible Preferred Stock financing in the fourth quarter 2019.The Series B Convertible Preferred Stock’s derivative liability-warrants was recorded as a measurement period adjustment to the purchase price allocation related to the Merger in the third quarter of 2019.
Departure of Directors and Certain Officers, Election of Directors, Appointment of New Board Members and Officers.
On February 29, 2020, the Company accepted the resignations of Briley Cienkosz, Chief Marketing Officer and Gary Mancini, Chief Relationship Officer for personal reasons and not as a result of any disputes or disagreements.
On May 7, 2020,January 12, 2021, Mr. William Horne the Company’s CEO and Chairman tendered his resignation as CEO effective when the Company finds a suitable replacement with more FDA experience. Until such successor is retained, Mr. Horne will remain as the CEO. Mr. Horne’s resignation does not go to his positionstepped down as Chairman of the Board or asof directors (the “Board”) of H-Cyte, Inc. (the “Company”). Mr. Horne will remain a Director. The resignationmember of the Board.
On January 12, 2021, Mr. Ray Monteleone was not asappointed the new Chairman of the Board. Mr. Monteleone is a resultcurrent member of any disagreement with the Company or its policies and practices.Board.
Funding Requirements
The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s generating activities are temporarily suspended and as the Company implements its business plan to focus on taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. The Company will need to raise cash from debt and equity offerings to continue its operations. There can be no assurance that the Company will be successful in doing so.
Going Concern
The Company incurredreported a net lossesloss of approximately $2,416,000$1,408,000 and $3,695,000$2,416,000 for the three months ended March 31, 20202021 and 2019,2020, respectively.
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, 2019.2020. 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 present level of cash is insufficient to satisfy our current operating requirements.requirements and Biologics Division business model.
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. If 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 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.
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 our 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.
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Liquidity and Sources of Liquidity
With the Company historically having experienced losses, the primary source of liquidity has been raising capital through debt and equity offerings, as described below.
Debt
On April 17, 2020, and in subsequent April closings, the Company entered into the April SPAa Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with the Purchasersthirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,835,195$2,842,695 in gross proceeds through the sale to the Purchasers of the April Secured Convertible Promissory Notes (the “April Secured Notes”) and April Warrantswarrants (the “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 “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 $2,835,195. As part$3,842,695. This sum included the issuance by the Company to FWHC Bridge, LLC (the “Investor) of an April Secured Note in the April Offering,amount of $1,000,000 to amend and supersede the A&R Note (see below “Short-term Notes, Related Parties”) previously issued by the Company to the Investor on March 27, 2020 and April 9, 2020 were amended and superseded by2020. The Investor is an April Secured Noteaffiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the amount of $1,000,000 issued to the Investor.Company’s recent Series D Convertible Preferred Stock Offering. 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, 2019.2020. The amendment to the Hawes Note among other things, eliminateseliminated 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, 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 at the Qualified Offering price of $0.014.
On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.
In addition, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stock to the holders of outstanding promissory notes in the aggregate principal amount and accrued interest of $4,483,617. The notes were converted pursuant to a mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act.
On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the terms of the April 2021 Note Purchase Agreement, the Company sold promissory notes in the aggregate principal amount of $2,575,000. The Notes are due and payable on March 31, 2022 and bear interest at an annual rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next financing that meets the definition of a Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by all of the assets of the Company under a security agreement with the Holders. The lead investor of the April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the Company. FWHC is an affiliated entity of FWHC, LLC, which is a principal stockholder of the Company. An additional affiliate of FWHC, LLC advanced an additional $25,000.
Equity
On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.
On September 24, 2020, the Company issued an aggregate of 323,844,416 Preferred A shares to holders of outstanding promissory notes in the aggregate principal amount, accrued interest, and conversion of certain warrants totaling $4,483,617. The notes were converted pursuant to mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act. As a result of their participation in the backstop portion of the rights offering and the conversion of their promissory notes, FWHC Holdings, LLC became beneficial owners of approximately 65% of the Company’s outstanding common stock. This percentage includes that shares owned by FWHC Bridge, LLC and FWHC Bridge Friends, LLC who have indicated that they are part of a group with FWHC Holdings, LLC.
Cash activity for the three months ended March 31, 20202021 and 20192020 is summarized as follows:
Working Capital DeficitSurplus/ (Deficit)
As Of | As Of | |||||||||||||||
March 31, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Current Assets | $ | 361,000 | $ | 2,275,000 | $ | 583,408 | $ | 1,757,202 | ||||||||
Current Liabilities | 6,447,000 | 5,774,000 | 3,205,300 | 2,892,686 | ||||||||||||
Working Capital Deficit | $ | 6,086,000 | $ | 3,499,000 | $ | (2,621,892 | ) | $ | (1,135,484 | ) |
Cash Flows
Cash activity for the three months ended March 31, 20202021 and 20192020 is summarized as follows:
Three Months Ended March 31, | Three months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash used in operating activities | $ | (1,890,759 | ) | $ | (3,878,137 | ) | $ | (1,306,813 | ) | $ | (1,890,759 | ) | ||||
Cash used in investing activities | — | (377,069 | ) | (1,522 | ) | — | ||||||||||
Cash provided by financing activities | 589,063 | 6,777,447 | — | 589,063 | ||||||||||||
Net (decrease) increase in cash | $ | (1,301,696 | ) | $ | 2,522,241 | |||||||||||
Net decrease in cash | $ | (1,308,335 | ) | $ | (1,301,696 | ) |
As of March 31, 2020,2021, the Company had approximately $122,000$332,000 of cash on hand.
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Off-Balance Sheet Arrangements
We doThe Company does 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
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 NoteNotes payable were assumed 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 stockMerger 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.
The extended maturity date of the short-term convertible notes payable of approximately $425,000 is September 30, 2020. No payments of principal or interest are due until maturity.
Notes payable of approximately $67,000 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 Company is working with the lender for an additional extension of the promissory notes. The promissory notes have an aggregate outstanding balance of approximately $67,000 at March 31, 2021 and December 31, 2020. The Company has not made payments on this note since February 10, 2020, due to COVID-19, resulting in accrued interest of $4,000.
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
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding 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, 2020.2021. 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.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020,2021, the Company’s disclosure controls and procedures were not as effective as desired because of the material weakness in our internal control over financial reporting as discussed below, and as a result, the Company engagedengages consultants, implemented a number of new entity and process level controls and installed a new accounting software system to help mitigate this material weakness.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable 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, 2020,2021, we determined that internal control deficiencies existed that constitutedrelating to a lack of segregation of duties still exist. Management believes these deficiencies mainly relate to the Company employing a limited number of accounting and finance personnel. The aggregation of these deficiencies is considered to be a material weaknesses:weakness in internal control over financial reporting.
In light of the conclusion that our internal disclosure controls were ineffective as of March 31, 2020,2021, we have applied additional procedures and processes as necessary to ensure the reliability of our financial reporting in 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 three months ended March 31, 2020, there were no changes in2021, the Company’sCompany has adopted and began to implement a remediation plan which included implementing a new accounting software system that management believes will help remediate internal control overdeficiencies related to the Company’s 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..
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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 orlawsuit with Sinclair Broadcast Group, Inc. (Sinclair) which was filed on March 25, 2021 in the Circuit Court for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. Sinclair has a materialfiled suit alleging breach of contract for advertising services in the amount of approximately $75,000 plus interest adverse toand costs. The Company has retained legal counsel for its defense against the Company’s business.suit.
We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2020, the Company received proceeds of $100,000 and issued 2,449,960 of preferred stock at a price of $0.41 per share, and a ten-year warrant to purchase 244,996 shares of common stock at an exercise price of $0.75 per share.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
Not applicable.
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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 21, 202013, 2021
H-CYTE, INC | ||
By: | /s/ | |
Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ Jeremy Daniel | |
Jeremy Daniel | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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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. |
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