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, 2021

 

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 425    
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 [X] 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 12, 2021, 144,434,230 shares of the registrant’s common stock were outstanding.

 

 

 

 

 

 

H-CYTE, INC AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION  
   
  Special Note Regarding Forward-looking Statements 3
Item 1. Financial Statements 4
  Consolidated Balance Sheets 4
  Consolidated Statements of Operations 5
  Consolidated Statements of Stockholders’ Equity (Deficit) 6
  Consolidated Statements of Cash Flows 7
  Notes to Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risks 27
Item 4. Controls and Procedures 27
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 28
     
SIGNATURES 29

 

 2 
   

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. 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 
   

 

Item 1. Financial Statements

 

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   (Unaudited)     
   March 31, 2021   December 31, 2020 
Assets          
           
Current Assets          
Cash  $332,310   $1,640,645 
Accounts receivable   40,500    - 
Other receivables   1,137    22,123 
Prepaid expenses   209,461    94,434 
Total Current Assets   583,408    1,757,202 
           
Right-of-use asset   204,546    278,552 
Property and equipment, net   129,126    139,175 
Other assets   29,239    29,239 
Total assets  $946,319   $2,204,168 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable  $1,149,597   $1,006,968 
Accrued liabilities   236,777    276,415 
Other current liabilities   324,601    154,812 
Notes payable, current portion   67,444    67,444 
PPP Loan, current portion   746,845    606,811 
Interest payable   10,838    6,898 
Deferred revenue   581,259    634,149 
Lease liability, current portion   87,939    139,189 
Total Current Liabilities   3,205,300    2,892,686 
           
Long-term Liabilities          
Lease liability, net of current portion   134,295    157,050 
PPP Loan, net of current portion   62,237    202,271 
Total Long-term Liabilities   196,532    359,321 
           
Total Liabilities   3,401,832    3,252,007 
           
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   42,515,999    42,515,999 
Accumulated deficit   (45,266,648)   (43,858,974)
Non-controlling interest   (370,132)   (370,132)
Total Stockholders’ Deficit   (2,455,513)   (1,047,839)
           
Total Liabilities and Stockholders’ Deficit  $946,319   $2,204,168 

 

See accompanying notes to the consolidated financial statements

 

 4 
   

 

H-CYTE, INC AND SUBSIDIARIES

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

 

 5 
   

 

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the three months ended March 31, 2020 and 2021

(Unaudited)

 

   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 
   

  

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   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

 

 7 
   

 

H-CYTE, INC

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.

 

 8 
   

 

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.

 

 9 
   

 

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).

 

 10 
   

 

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 
           

 

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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.

 

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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.

 

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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.

 

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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.

 

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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. 

 

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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.

 

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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 

  

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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).

 

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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.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

Overview

 

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).

 

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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 to the Company’s financial statements included 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 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).

 

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.

 

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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.

 

Results of Operations - Three months Ended March 31, 2021 and 2020

 

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, 2021 and 2020, respectively. The decrease in revenue for the three months ended March 31, 2021, as compared to the prior year is attributable to the economic 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 the Infusion Vertical due to COVID-19 effective March 23, 2020 and did not reopen until August 2020 with limited capacity.

 

The Company recorded cost of sales for the three months ended March 31, 2021 and 2020 of approximately $199,000 and $377,000, respectively. The decrease in cost of sales for the three months ended March 31, 2021, as compared to the prior year, is attributable to the economic impact that COVID-19 has had on the Company. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the Infusion Vertical. Medical supplies are predominantly variable costs based on the number of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments provided, during 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, 2021 and 2020, the Company generated a gross profit totaling approximately $178,000 and $640,000, respectively. The decrease in gross profit, as compared to the prior year, is attributable to the economic impact that COVID-19 has had on the Company.

 

Operating Expenses

 

Salaries and Related Costs

 

For the three months ended March 31, 2021 and 2020, the Company incurred approximately $662,000 and $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 clinical and corporate staff due to LHI operations ceasing in March in response to COVID-19.

 

Other General and Administrative

 

For the three months ended March 31, 2021 and 2020, the Company incurred approximately, $830,000, and $1,230,000 in other general and administrative costs, respectively. The decrease, as compared to the prior year, is attributable to the 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, 2021 and 2020, professional fees were approximately $320,000 and $316,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs.

 

Research and Development

 

For the three ended March 31, 2021 and 2020, the Company incurred approximately $0 and $750,000 in research and development expenses, respectively. The $750,000 expense was in connection with the Rion services agreement.

 

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Advertising

 

For the three months ended March 31, 2021 and 2020, the Company had approximately $77,000 and $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 Infusion Vertical. The Company continues to evaluate its marketing strategy due to its patient base’s limited capacity to travel due to COVID-19.

 

Other Income (Expense)

 

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 was approximately $0 and $175,000, respectively. The redemption put liability is related to the Series D Convertible Preferred Stock financing in the fourth quarter 2019.

 

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

 

On January 12, 2021, Mr. William Horne stepped down as Chairman of the Board of directors (the “Board”) of H-Cyte, Inc. (the “Company”). Mr. Horne will remain a member of the Board.

 

On January 12, 2021, Mr. Ray Monteleone was appointed the new Chairman of the Board. Mr. Monteleone is a current member of the 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 reported a net loss of approximately $1,408,000 and $2,416,000 for the three months ended March 31, 2021 and 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, 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 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 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 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.

 

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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, 2021 and 2020 is summarized as follows:

 

Working Capital Surplus/ (Deficit)

 

   As Of 
   March 31, 2021   December 31, 2020 
Current Assets  $583,408   $1,757,202 
Current Liabilities   3,205,300    2,892,686 
Working Capital Deficit  $(2,621,892)  $(1,135,484)

 

Cash Flows

 

Cash activity for the three months ended March 31, 2021 and 2020 is summarized as follows:

 

   Three months Ended March 31, 
   2021   2020 
Cash used in operating activities  $(1,306,813)  $(1,890,759)
Cash used in investing activities   (1,522)    
Cash provided by financing activities       589,063 
Net decrease in cash  $(1,308,335)  $(1,301,696)

 

As of March 31, 2021, the Company had approximately $332,000 of cash on hand.

 

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Off-Balance Sheet Arrangements

 

The 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

 

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 $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, 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, 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 engages 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, 2021, we determined that internal control deficiencies relating 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 weakness in internal control over financial reporting.

 

In light of the conclusion that our internal disclosure controls were ineffective as of March 31, 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, 2021, the Company 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 deficiencies related to the Company’s financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company is involved in a lawsuit 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 filed suit alleging breach of contract for advertising services in the amount of approximately $75,000 plus interest and costs. The Company has retained legal counsel for its defense against the suit.

 

ITEM 1A. RISK FACTORS.

 

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

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

Not applicable.

 

ITEM 6. EXHIBITS.

 

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

  

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SIGNATURES

 

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

 

Date: May 13, 2021

 

  H-CYTE, INC
     
  By: /s/ Robert S. Greif
    Robert S. Greif
   

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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