NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Description of the Company
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 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
include 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.
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 (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 (which includes the “Infusion Vertical” and the “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).
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 LHI clinics, while producing positive medical 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 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 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 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 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.
With
these agreements, Rion will serve as the product supplier and contracted preclinical development arm of the biologic. H-CYTE will control
the commercial development and the clinical trial investigation. After conducting the clinical efficacy trials of this biologic, H-CYTE
intends to pursue submission of a Biologics License Application (“BLA”) for review by the FDA for treatment of COPD.
DenerveX
Medical Device Division (DenerveX)
In
the first quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and distributor
options for the DenerveX product. The Company has decided to focus its available resources on the Biosciences Division as this division
presents a significantly greater opportunity. 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 of the U.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 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, 2020 and 2019, which included all information and notes necessary for such complete presentation in conjunction with its 2020 Annual
Report on Form 10-K.
The
results of operations for the interim period ended March 31, 2021 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, 2020, which are contained in the Company’s 2020 Annual Report
on Form 10-K. For further discussion refer to Note 2–”Basis Of Presentation And Summary of Significant Accounting Policies”
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 Annual Report on Form 10-K for the fiscal year
ended December 31, 2020.
Note
3 - Liquidity, Going Concern and Management’s Plans
The
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
economy in the U.S. and the rest of the world is expected to continue to be significant. The extent to which the COVID-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 LHI 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 Qualified Financing (for further
discussion, see Note 9-”Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual
Report on Form 10-K).
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, 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, 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. This warrant has an exercise price equal to the price per share
at which securities were offered to investors for purchase at the Qualified Financing totaling $0.014 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. The Qualified
Financing closed on September 11, 2020 (for further discussion, see Note 9-”Equity Transactions” to the 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 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 (see Note 14).
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.
The
Company 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 next 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 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.
Note
4 – Right-of-use Asset And Lease Liability
The
components of lease expense, which are included in other general and administrative expense, for the three months ended March 31, 2021
and 2020, respectively, are as follows:
|
|
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, 2021 and 2020, respectively, are
as follows:
|
|
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, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Operating
leases right-of-use assets
|
|
$
|
204,546
|
|
|
$
|
278,552
|
|
Lease liability, current portion
|
|
|
87,939
|
|
|
|
139,189
|
|
Lease liability, net
of current portion
|
|
|
134,295
|
|
|
|
157,050
|
|
Total operating lease
liabilities
|
|
$
|
222,234
|
|
|
$
|
296,239
|
|
Weighted average remaining lease term
|
|
|
2.42
years
|
|
|
|
2.32
years
|
|
Weighted average discount rate
|
|
|
11.57
|
%
|
|
|
10.31
|
%
|
Future
maturities of operating lease liabilities as of March 31, 2021 are as follows:
|
|
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 did not renew its corporate office space lease in Tampa, FL which expired on March 31, 2021. The Company leases medical clinic
space in Tampa, FL, Nashville, TN, and Scottsdale, 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.
The Company entered into a short-term lease for its Tampa location beginning April 1, 2021 totaling $71,775. The Dallas, TX lease expired
on 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
5 - Property And Equipment
Property
and equipment, net, consists of the following:
|
|
Useful
Life
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Furniture and fixtures
|
|
5-7 years
|
|
$
|
231,222
|
|
|
$
|
231,222
|
|
Computers and software
|
|
3-7 years
|
|
|
247,844
|
|
|
|
246,323
|
|
Leasehold improvements
|
|
15 years
|
|
|
155,583
|
|
|
|
155,583
|
|
|
|
|
|
|
634,649
|
|
|
|
633,128
|
|
Less: accumulated depreciation
|
|
|
|
|
(505,523
|
)
|
|
|
(493,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
129,126
|
|
|
$
|
139,175
|
|
Depreciation
expense was approximately $12,000 and $22,000 for the three months ended March 31, 2021 and 2020, respectively. The Company uses the
straight-line depreciation method to calculate depreciation expense.
Note
6 – Related Party Transactions
Board
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 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, 2021 and 2020 respectively.
Effective
October 1, 2020, the Company entered into an oral agreement with Mr. Michael Yurkowsky in which Mr. Yurkowsky will receive $4,167 per
month to serve on the Board of Directors. The Company expensed approximately $12,500, and $0 in compensation to Mr. Yurkowsky for the
three months ended March 31, 2021 and 2020 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 $4,000, and $0 in Board fee compensation to Mr. Horne for the three months ended March
31, 2021 and 2020, respectively.
Debt
and Other Obligations
The
short-term notes, related parties are detailed in Note 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
7 - Equity Transactions
Common
Stock Issuance
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
A Preferred Stock
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 A Preferred Stock (“Series A Holders”) have the right to receive notice of any meeting of holders of common stock
or Series A Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series A Preferred Stock.
Each Series A 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
Series
A Preferred Stock does not have preferential treatment over common stock shareholders if the Company liquidates or 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.
Stock
Option Activity
For
the three months ended March 31, 2021 and 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 three months ended March 31, 2021 and 2020:
|
|
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, 2021 and 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 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 the VIEs. Due to this change in policy, there was no change in the non-controlling interest for the three months
ended March 31, 2021 or 2020 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 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 were excluded.
Note
8 – 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, 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, and LI Scottsdale. For the three months ended March 31, 2021 and 2020, payments totaling approximately
$17,000 and $22,000, respectively, were made to these physicians’ legal entities. Due to COVID-19, the Company temporarily 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 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.
Rion
Agreements
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 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 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 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 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 not able to estimate when this expense will occur. For the periods ending March
31, 2021 and 2020, the Company expensed $0 and $750,000, respectively, related to these agreements.
Note
9 – Short-term Debt
Convertible
note
The
Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in the 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
Convertible Notes were secured by all of the assets of the Company.
In
2019, $100,000 of the Convertible Notes were converted into shares of common stock, and $350,000 of the Convertible Notes were redeemed
by the Company. The Company reached
an extension with the remaining noteholder which extended the maturity date of the Hawes Notes for one year, until September 30, 2020.
The 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 $424,615 as of March 31, 2020. 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 (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 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 approximately $4,000.
On
March 27, 2020, the Company issued a demand 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 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 interest at a rate of 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
the 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 amount of
the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance 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 filed its forgiveness application on April 20, 2021.
Note
10 – Derivative Liability - Warrants
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 are rollforwards of the liabilities measured at fair value during the three months ended March 31, 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
|
|
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 December 31,
2020 (see Note 12-”Derivative Liability-Warrants and Redemption Put” to the consolidated financial statements in the Company’s
2020 Annual Report on Form 10-K).
Note
11 - Common Stock Warrants
A
summary of the Company’s warrant issuance activity and related information for the quarters ended March 31, 2021 and 2020:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
|
|
Outstanding and exercisable at
December 31, 2019
|
|
|
44,806,076
|
|
|
$
|
0.78
|
|
|
|
4.59
|
|
Issued
|
|
|
513,567
|
|
|
|
0.75
|
|
|
|
6.13
|
|
Outstanding and exercisable
at March 31, 2020
|
|
|
45,319,643
|
|
|
$
|
0.78
|
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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 (%)
|
|
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
12 - Series D Convertible Preferred Stock
On
November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered
(i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share
and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants
are exercisable for a period of 10 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional
equity restructurings and reorganizations.
On
November 21, 2019, the Company entered into a securities purchase agreement with FWHC Holdings, LLC (“FWHC”) an accredited
investor for the purchase of 146,998 shares of Series D Preferred Stock, par value $0.001 per share and the Series D Warrant (the “FWHC
Investment”). See Note 14-”Mezzanine Equity and Series D Convertible Preferred Stock” to the consolidated financial
statements in the Company’s 2020 Annual Report on Form 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 Stock 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).
NOTE
13 – Income Taxes
The
Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”.
Under the liability 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 be 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 tax planning strategies.
From
inception to March 31, 2021, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred
tax asset generated by these losses is fully offset by a valuation allowance as of March 31, 2021 and December 31, 2020. Management of
the Company evaluated 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 deferred tax assets.
The
Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. There are
no uncertain tax positions at March 31, 2021 and December 31, 2020. The Company has not undergone any tax examinations since inception.
Note
14 - Subsequent Events
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 (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 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. The
Director’s options vest over a period of three years, and the Chief Executive Officer’s and Chief Financial Officer’s
options vest over a period of four years. A certain number of the options were vested immediately. The options were priced based on
the closing price of the Company’s common stock on the date prior to the grant. These options are not included in the Company’s
current stock option plan as they were granted outside of the plan.
On
April 2, 2021, the Company entered 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 $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 Intellectual Property Agreement, the Company will receive a royalty of 6% of gross revenues derived from the sale or licensing of
the DenerveX 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 April 8, 2021).
As
of May 12, 2021, an additional 7,594,932 Series A Preferred Stock was converted into Common Stock at the request of certain Series A
Preferred Stockholders.