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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 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.

 

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.)

Yes No

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller Reporting Company
  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 ☒ No

 

As of August 11, 2021, 148,596,889 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’ 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 22
Item 3. Quantitative and Qualitative Disclosures About Market Risks 28
Item 4. Controls and Procedures 28
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Mine Safety Disclosures 29
Item 5. Other Information 29
Item 6. Exhibits 29
     
SIGNATURES 30

 

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 the Company’s 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:

 

  the Company’s ability to market, commercialize, and achieve broader market acceptance for its products;
     
  the Company’s ability to successfully expand and achieve full productivity from its sales, clinical support, and marketing capabilities;
     
  the Company’s ability to successfully complete the development of, and obtain regulatory clearance or approval for, its products; and
     
  the estimates regarding the sufficiency of the Company’s cash resources, the ability to obtain additional capital or the 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 the Company believes that it has 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 the Company and its projections of the future, about which it cannot be certain. As a result of these factors, the Company cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if the 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 the Company, or any other person, that it will achieve its objectives and plans in any specified time frame, or at all. The Company does 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)     
   June 30, 2021   December 31, 2020 
Assets          
           
Current Assets          
Cash  $1,516,522   $1,640,645 
Patient financing receivable, current portion   22,990    - 
Other receivables   1,809    22,123 
Prepaid expenses   156,020    94,434 
Total Current Assets   1,697,341    1,757,202 
           
Right-of-use asset   183,685    278,552 
Property and equipment, net   40,644    139,175 
Patient financing receivable, net of current portion   42,470    - 
Other assets   18,412    29,239 
Total assets  $1,982,552   $2,204,168 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable  $955,691   $1,006,968 
Accrued liabilities   208,025    276,415 
Other current liabilities   212,310    154,812 
Notes payable, current portion   67,444    67,444 
Convertible notes payable, related parties   1,554,220    - 
Convertible notes payable   1,070,118    - 
PPP Loan, current portion   809,082    606,811 
Deferred revenue   542,198    634,149 
Lease liability, current portion   90,276    139,189 
Interest payable   13,610    6,898 
Total Current Liabilities   5,522,974    2,892,686 
           
Long-term Liabilities          
Lease liability, net of current portion   111,096    157,050 
PPP Loan, net of current portion   -    202,271 
Total Long-term Liabilities   111,096    359,321 
           
Total Liabilities   5,634,070    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, 520,305,884 and 538,109,409 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   520,305    538,109 
Common stock - $.001 par value: 1,600,000,000 shares authorized, 144,962,989 and 127,159,464 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   144,963    127,159 
Additional paid-in capital   43,377,999    42,515,999 
Accumulated deficit   (47,324,653)   (43,858,974)
Non-controlling interest   (370,132)   (370,132)
Total Stockholders’ Deficit   (3,651,518)   (1,047,839)
           
Total Liabilities and Stockholders’ Deficit  $1,982,552   $2,204,168 

 

See accompanying notes to the consolidated financial statements

 

4

 

 

H-Cyte, Inc and Subsidiaries

Consolidated Statements of Operations

 

             
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
                 
Revenues  $450,456   $19,500   $826,625   $1,036,276 
Cost of Sales   (216,018)   (70,011)   (414,668)   (446,827)
Gross Profit   234,438    (50,511)   411,957    589,449 
                     
Operating Expenses                    
Salaries and related costs   586,119    594,447    1,247,894    1,818,157 
Share based compensation   862,000    -    862,000    643 
Loss on disposal of property and equipment   92,804    -    92,804    - 
Other general and administrative   609,641    1,034,898    1,439,755    2,265,033 
Research and development   -    200,000    -    950,000 
Advertising   88,000    25,935    165,228    170,553 
Depreciation and amortization   1,989    17,244    13,559    39,352 
Total Operating Expenses   2,240,553    1,872,524    3,821,240    5,243,738 
                     
Operating Loss   (2,006,115)   (1,923,035)   (3,409,283)   (4,654,289)
                     
Other Income (Expense)                    
Other Income   2,255    6,783    3,534    9,321 
Interest expense   (54,145)   (363,023)   (59,930)   (419,172)
Change in fair value of redemption put liability   -    (18,952)   -    174,707 
Loss on derivative instrument   -    (2,306,121)   -    (2,306,121)
Gain on extinguishment of debt   -    1,300,088    -    1,300,088 
Warrant modification expense   -    (70,851)   -    (70,851)
Change in fair value of derivative liability - warrants   -    (3,057,225)   -    (2,882,247)
Total Other Income (Expense)   (51,890)   (4,509,301)   (56,396)   (4,194,275)
                     
Net Loss  $(2,058,005)  $(6,432,336)  $(3,465,679)  $(8,848,564)
                     
Accrued dividends on outstanding Series B Convertible Preferred Stock   -    18,300    -    36,600 
Deemed dividend on Series D Convertible Preferred Stock   -    120,329    -    278,476 
Net loss attributable to common stockholders  $(2,058,005)  $(6,570,965)  $(3,465,679)  $(9,163,640)
                     
Loss per share - Basic and Diluted  $(0.01)  $(0.06)  $(0.03)  $(0.09)
                     
Weighted average outstanding shares - basic and diluted   138,092,414    103,430,305    135,827,192    101,634,961 

 

See accompanying notes to the consolidated financial statements

 

5

 

 

H-Cyte, Inc and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

For the three and six months ended June 30, 2020 and 2021

  

1  Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Deficit 
Three months ended                                   Preferred Series A Stock   Preferred Series B Stock   Common Stock   Additional Paid-in   Accumulated   Non-controlling   Total Stockholders’ 
June 30, 2020 and 2021  Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Deficit 
Balances - March 31, 2020   -   $-    6,100   $6    99,878,079   $99,878   $28,117,978   $(39,815,966)  $(370,132)  $(11,968,236)
Accrued dividends on Series B Convertible Preferred Stock   -    -    -    -    -    -    (18,300)   -    -    (18,300)
Deemed dividend on Series D Convertible Preferred Stock   -    -    -    -    -    -    (120,329)   -    -    (120,329)
Adjustment of exercise price on certain warrants   -    -    -    -    -    -    (438,913)   -    -    (438,913)
Issuance of warrants to extend short-term debt   -    -    -    -    -    -    6,594    -    -    6,594 
Conversion of Short-term notes, related parties   -    -    -    -    4,368,278    4,368    214,046    -    -    218,414 
Net loss   -    -    -    -    -    -    -    (6,432,336)   -    (6,432,336)
Balances – June 30, 2020   -   $-    6,100   $6    104,246,357   $104,246   $27,761,076   $(46,248,302)  $(370,132)  $(18,753,106)

 

   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 - March 31, 2021   528,429,575   $528,429    -    -    136,839,298   $136,839   $42,515,999   $(45,266,648)  $(370,132)  $(2,455,513)
Conversion of Series A Preferred Stock to common stock   (8,123,691)   (8,124)   -    -    8,123,691    8,124    -    -    -   - 
Share based compensation   -    -    -    -    -    -    862,000    -    -   862,000 
Net Loss   -    -    -    -    -    -    -    (2,058,005)   -   (2,058,005)
Balances – June 30, 2021   520,305,884   $520,305    -    -    144,962,989   $144,963   $43,377,999   $(47,324,653)  $(370,132)  $(3,651,518)

 

Six months ended                                    Preferred Series A Stock   Preferred Series B Stock   Common Stock   Additional Paid-in   Accumulated   Non-controlling   Total Stockholders’ 
June 30, 2020 and 2021  Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Deficit 
Balances - December 31, 2019               -   $-    6,100   $6    99,768,704   $99,769   $28,172,146   $(37,362,531)  $(370,132)  $(9,460,742)
Deemed dividend on Series D Convertible Preferred Stock at issuance   -    -    -    -    -    -    -    (37,207)   -    (37,207)
Deemed dividend on Series D Convertible Preferred Stock   -    -    -    -    -    -    (241,269)   -    -    (241,269)
Issuance of warrants in connection with Series D Convertible Preferred Stock   -    -    -    -    -    -    31,902    -    -    31,902 
Issuance of common stock in exchange for consulting fees incurred   -    -    -    -    109,375   $109    34,891    -    -    35,000 
Issuance of warrants pursuant to extension of maturity date on short-term notes, related party   -    -    -    -    -    -    17,636    -    -    17,636 
Share based compensation   -    -    -    -    -    -    643    -    -    643 
Accrued dividends on Series B Convertible Preferred Stock   -    -    -    -    -    -    (36,600)   -    -    (36,600)
Adjustment of exercise price on certain warrants   -    -    -    -    -    -    (438,913)   -    -    (438,913)
Issuance of warrants to extend short-term debt   -    -    -    -    -    -    6,594    -    -    6,594 
Conversion of short-term notes, related parties   -    -    -    -    4,368,278    4,368    214,046    -    -    218,414 
Net loss   -    -    -    -    -    -    -    (8,848,564)   -    (8,848,564)
Balances – June 30, 2020   -   $-    6,100   $6    104,246,357   $104,246   $27,761,076   $(46,248,302)  $(370,132)  $(18,753,106)

 

   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 - December 31, 2020   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   (17,803,525)   (17,804)   -    -    17,803,525    17,804    -    -    -    - 
Share based compensation   -    -    -    -    -    -    862,000    -    -    862,000 
Net loss   -    -    -    -    -    -    -    (3,465,679)   -    (3,465,679)
Balances – June 30, 2021   520,305,884   $520,305    -   $-    144,962,989   $144,963   $43,377,999   $(47,324,653)  $(370,132)  $(3,651,518)

 

See accompanying notes to the consolidated financial statements

 

6

 

 

H-Cyte, Inc and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

       
   Six Months Ended June 30, 
   2021   2020 
Cash Flows from Operating Activities          
Net loss  $(3,465,679)  $(8,848,564)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   13,559    39,352 
Amortization of debt discount       242,627 
Issuance of warrants pursuant to short-term notes, related party       17,636 
Issuance of warrants to extend short-term debt       6,594 
Share based compensation expense    862,000    643 
Common stock issued for consulting services       35,000 
Change in fair value of derivative liability - warrants and redemption put liability       2,707,541 
Change in fair value of derivative liability - loss on derivative instrument       2,306,121 
Warrant modification expense       70,851 
Loss on disposal of property and equipment   92,804     
Gain on extinguishment of debt       (1,300,088)
Changes in operating assets and liabilities:          
Accounts receivable      19,667 
Patient financing receivable, current portion   (22,990)    
Other receivables   20,314    14,782 
Patient financing receivable, net of current portion   (42,470)    
Prepaid expenses and other assets   (50,759)   668,656 
Interest payable   6,712    158,113 
Accounts Payable   (51,277)   (164,792)
Accrued liabilities   (68,390)   (72,619)
Other current liabilities   57,498    62,581 
Deferred revenue   (91,951)   (299,125)
           
Net Cash Used in Operating Activities   (2,740,629)   (4,335,024)
           
Cash Flows from Investing Activities          
Purchase of property and equipment   (7,832)    
Net Cash Used in Investing Activities   (7,832)    
           
Cash Flows from Financing Activities          
Proceeds from convertible notes payable, related parties   1,554,220     
Proceeds from convertible notes payable   1,070,118     
Payments on debt obligations       (10,937)
Proceeds from paycheck protection program loan       809,082 
Proceeds from warrants, net of issuance costs       3,842,695 
Proceeds from issuance of Series D Convertible Preferred Stock       100,000 
Net Cash Provided by Financing Activities   2,624,338    4,740,840 
           
Net (Decrease)/ Increase in Cash   (124,123)   405,816 
           
Cash - Beginning of period   1,640,645    1,424,096 
           
Cash - End of period  $1,516,522   $1,829,912 
           
Supplementary Cash Flow Information          
Cash paid for interest  $3,880   $18,431 
           
Non-cash investing and financing activities          
Adjustment of exercise price on warrants       438,913 
Issuance of warrants to extend short-term debt       6,594 
Conversion of short-term notes, related parties       218,414 
Deemed dividend on Series D Convertible Preferred Stock       278,476 
Issuance of Warrants in connection with Series D Convertible Preferred Stock       31,902 
Dividends accrued on Series B Convertible Preferred Stock       36,600 

 

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 (“the Company”) 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 divisions with its entrance into the biologics development space (“Biologics Division”). This new division is complementary to the Company’s current Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Division”) and is focused on underserved disease states.

 

The consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC, Medovex Corp, Cognitive Health Institute, LLC, and Lung Institute 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. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary closure of all LI clinics due to COVID-19. These two clinics will remain permanently closed.

 

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).

 

Autologous Infusion Therapy (“Infusion Division”)

 

The Infusion Division 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 Centers for Disease Control and Prevention (the “CDC”) guidelines.

 

Biotech Development (“Biologics Division”)

 

On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post U.S. Food & Drug Administration, the “FDA”, approval) a biologic combining its PRP-PBMC technology with Rion’s exosomes (“EV”) technology for the treatment of chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel EV 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 combined proprietary biologics. The Company is currently evaluating the potential of a combined biologic and the utilization of this agreement.

 

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 has also agreed 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 its efforts.

 

8

 

 

After conducting the clinical efficacy trials of this biologic, the Company intends to pursue submission of a Biologics License Application (“BLA”) for review by the FDA for treatment of COPD or similar lung disorders.

 

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. The Company has determined that the transactions resulting from the series of agreements with Medovex, LLC are immaterial. The Company will assess the progress of the joint venture on a quarterly basis for materiality.

 

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 June 30, 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 $2,058,000 and $3,466,000 and for the three months and six months ended June 30, 2021. 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 interim 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.

 

9

 

 

Convertible Notes Payable

 

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 maturing on March 31, 2022 with an annual interest rate of 8%. The Notes, plus accrued interest, are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by 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 Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement. The Company chose early adoption of ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 related to the April 2021 Note Purchase Agreement.

 

The Company had cash on hand of approximately $1,516,000 as of June 30, 2021 and approximately $1,099,000 as of August 11, 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 and six months ended June 30, 2021 and 2020, respectively, are as follows:

 

  

Three Months Ended June 30,

   Six Months Ended June 30, 
   2021   2020   2021   2020 
Operating lease expense  $75,058   $151,464   $183,650   $302,028 

 

Cash paid for amounts included in the measurement of lease liabilities for the three months and six months ended June 30, 2021 and 2020, respectively, are as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Operating cash flows from operating leases  $75,058   $151,464   $183,650   $302,028 

 

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

 

   June 30, 2021   December 31, 2020 
         
Operating leases right-of-use assets  $183,685   $278,552 
Lease liability, current portion   90,276    139,189 
Lease liability, net of current portion   111,096    157,050 
Total operating lease liabilities  $201,372   $296,239 
Weighted average remaining lease term   2.17 years    2.32 years 
Weighted average discount rate   10.73%   10.31%

 

10

 

 

Future maturities of operating lease liabilities as of June 30, 2021 are as follows:

 

    Operating leases  
       
Remainder of 2021   $ 50,752  
2022     102,891  
2023     69,333  
Total lease payments     222,976  
Less: Interest     (21,604 )
Total lease liability   $ 201,372  

 

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 twelve-month lease for its Tampa location beginning April 1, 2021 totalling $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 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   June 30, 2021     December 31, 2020  
Furniture and fixtures   5-7 years   $ 96,185     $ 231,222  
Computers and software   3-7 years     213,660       246,323  
Leasehold improvements   15 years     40,130       155,583  
          349,975       633,128  
Less: accumulated depreciation         (309,331 )     (493,953 )
                     
Total       $ 40,644     $ 139,175  

 

Depreciation expense was approximately $2,000 and $14,000 for the three and six months ended June 30, 2021, respectively. Depreciation expense was approximately $17,000 and $39,000 for the three months and six months ended June 30, 2020, respectively. The Company uses the straight-line depreciation method to calculate depreciation expense. The Company recorded a loss on disposal of approximately $93,000 for the three and six months ended June 30, 2021.

 

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 $35,000 in compensation to Mr. Monteleone for the three months and six months ended June 30, 2021, respectively. The Company expensed approximately $17,500 and $47,500 in compensation to Mr. Monteleone for the three months and six months ended June 30, 2020, respectively.

 

11

 

 

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 $25,000 in compensation to Mr. Yurkowsky for the three and six months ended June 30, 2021, respectively. For the three and six months ended June 30, 2020, the Company expensed $0.

 

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 $12,500 and $17,000 in Board fee compensation to Mr. Horne for the three and six months ended June 30, 2021. For the three and six months ended June 30, 2020, the Company expensed $0.

 

Debt and Other Obligations

 

The short-term notes, related parties and convertible notes payable, 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.

 

Convertible Notes Payable

 

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 maturing on March 31, 2022 with an annual interest 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 round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by 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 Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.

 

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.

 

12

 

 

On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities were offered to investors for purchase at the Qualified Financing, which was $0.014, and is exercisable beginning on the day immediately following the closing of the Rights Offering, which occurred on September 11, 2020.

 

On July 28, 2020, the Company issued an aggregate of 17,893,076 shares of its common stock upon the conversion of all of its issued and outstanding Series B and Series D Preferred Stock (the “Preferred Stock”) and accumulated dividends. The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Series D Preferred Stock as set forth in the Certificate of Designations for the Series D Preferred Stock.

 

On July 29, 2020, the Company filed its Second Amended and Restated Certificate of Incorporation (the “Amended COI”). The Amended COI provides for the issuance of up to 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 a 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 three and six months ended June 30, 2021, 8,123,691 and 17,803,525 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 and to vote upon any matter submitted to a vote of the holders of common 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.

 

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Share-Based Compensation

 

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

 

 

Stock Option Activity

 

On April 1, 2021, the Board of Directors of the Company approved and granted to certain directors and officers of the Company an aggregate of 54,750,000 stock options of which 4,750,000 were immediately vested on the date of grant. Each option granted has 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.

 

For the six months ended June 30, 2020, all outstanding stock options were fully vested, and related compensation expense recognized. For the six months ended June 30, 2021, 55,135,000 options were outstanding and 5,718,133 were vested. As of June 30, 2021, the Company recognized $862,000 in stock-based compensation expense and has approximately $2,150,000 of unrecognized compensation costs related to non-vested stock options, which is expected to be recognized over a weighted average period of approximately 3.24 years.

 

Inputs used in the valuation models are as follows:

2021 Grants
Option value  $0.054   to  $0.056 
Risk Free Rate   0.90%  to   1.37%
Expected Dividend- yield   -   to   - 
Expected Volatility   173.99%  to   176.04%
Expected term (years)   5   to   7 

 

The following is a summary of stock option activity for the six months ended June 30, 2020 and 2021:

 

   Shares  

Weighted

Average

Exercise

Price

   Weighted Average Remaining Term (Years) 
Outstanding at December 31, 2019   425,000   $1.38    7.71 
Granted            
Expired/Cancelled   (15,000)   1.35     
Outstanding and exercisable at June 30, 2020   410,000   $1.39    7.23 
                
Outstanding at December 31, 2020   410,000   $1.39    6.72 
Granted   54,750,000    0.07    9.75 
Expired/Cancelled   (25,000)   2.16     
Outstanding at June 30, 2021   55,135,000   $0.08    9.73 
                

Exercisable at June 30, 2021

   

5,718,333

   $

0.16

    

9.52

 

 

The following is a summary of the Company’s non-vested shares for the six months ended June 30, 2021:

   Shares   Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2020   -   $- 
Granted   54,750,000    0.06 
Vested   (5,333,333)   0.05 
Forfeited   -    - 
Non-vested at June 30, 2021   49,416,667   $0.06 

 

Non-Controlling Interest

 

For the six months ended June 30, 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, 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 six months ended June 30, 2021 or 2020 related to the net income (loss) as it was $0 each month through the management fee charged by the Company. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary closure of all LI clinics due to COVID-19. These two clinics will remain permanently closed.

 

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.

 

The Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive:

 

   For the Six Months Ended June 30, 
   2021   2020 
Options to purchase common stock (in the money)   4,977,273    410,000 
Warrants to purchase common stock (in the money)   386,908,082    404,821,082 
Series A Preferred Stock convertible to common stock   520,305,884    - 
Series B & D Preferred Stock convertible to common stock   -    38,308,600 
Total   912,191,239    443,539,682 

 

Excluded from the above table are 23,149,370 warrants and 385,000 stock options for the six months ended June 30, 2021 as they are out of the money (exercise price greater than $0.08). Inclusion of such would be anti-dilutive.

 

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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 June 30, 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 Nashville and LI Scottsdale. For the three and six months ended June 30, 2021, payments totaling approximately $26,000 and $43,000, respectively, were made to these physicians’ legal entities. For the three and six months ended June 30, 2020, payments totaling approximately $0 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 those clinics being permanently 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 three and six months ended June 30, 2021 the Company expensed $0. For the three and six months ended June 30, 2020 the Company expensed $200,000 and $950,000, respectively.

 

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Note 9 – Short-term Debt

 

Convertible Notes Payable

 

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

 

In 2019, $100,000 of the Convertible Notes were converted into shares of common stock, and $350,000 of the Convertible Notes were redeemed by the Company. The Company reached an extension with the remaining noteholder which extended the maturity date of the Hawes Notes for one year, until September 30, 2020. The notes had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of $424,615 as of March 31, 2020. In connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (see Note 11-”Debt” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).

 

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 maturing on March 31, 2022 with an annual interest 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 round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by 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 Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.

 

Interest expense is being accreted to the principal balance using the effective interest method. For the three months ended June 30, 2021, the Company recorded interest expense of $29,220 and $20,118 for related party convertible notes payable and convertible notes payable, respectively.

 

Notes Payable

 

Notes payable were assumed in the Merger and are due in aggregate monthly instalments 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 June 30, 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 $5,000.

 

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).

 

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Paycheck Protection Program

 

On April 29, 2020, the Company issued a promissory note in the principal amount of $809,082 to the Bank of Tampa in connection with a loan in such amount made under the Paycheck Protection Program (“PPP Loan”). The PPP Loan bears an interest rate of 1% per annum and matures on April 29, 2022. The Company elected to use a 24-week Covered Period, per the SBA Paycheck Protection Program guidelines, which 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 and is still waiting for the application to be processed and approved.

 

Note 10 – Derivative Liabilities

 

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 during the six months ended June 30, 2020:

 

Derivative Liability - Warrants    
     
Balance at December 31, 2019  $315,855 
Series D Warrant reclass from equity to liability   509,764 
Warrants issued with modification of Horne Note   198,994 
Warrants issued with April 17, 2020 financing   6,148,816 
Fair value adjustments   2,882,247 
Balance at June 30, 2020  $10,055,676 

 

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Redemption Put Liability    
     
Balance at December 31, 2019  $267,399 
Issuance of Series D Convertible Preferred Stock   5,306 
Fair value adjustments   (174,707)
Balance at June 30, 2020  $97,998 

 

Derivative Liability- Warrants

 

Series B Warrants

 

As part of the April Offering, the holders of the Series B Warrants agreed to terminate anti-dilution price protection in their warrants and adjusted the exercise price to equal the price per share at which shares of preferred stock are offered for purchase in a Qualified Financing. The modification resulted in an increase of approximately $75,000 to the fair value of the derivative liability related to the Series B Warrants.

 

Series D Warrants

 

In conjunction with their Series D Preferred Financing, the Company originally issued Series D warrants to purchase 14,669,757 shares of Common Stock with an exercise price of $0.75 per share. At inception, the Series D warrants met all the criteria to be classified as equity. As part of the April Offering, the exercise price of the Series D Warrants was reduced to the price per share at which shares of preferred stock are offered for purchase in a Qualified Financing. The modification of the exercise price resulted in the warrants requiring liability classification. The Series D Warrants were measured at fair value before and after the modification, resulting in an increase of approximately $510,000 which is recorded as a change in the fair value of the derivative liability.

 

Horne Warrants

 

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. The warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing. The revised exercise price caused the warrants to require liability classification at fair value and the warrants were valued using a Lattice model with the following assumptions: Trading market price- $0.05, estimated exercise price- $0.014, volatility- 101%, risk free rate- 0.65% and an estimated term of 10 years. At inception, the estimated fair value of the Horne Warrants was approximately $199,000.

 

April Bridge Loan and Converted Advance Warrants

 

The April Offering entitled the investors to warrants with the right to purchase up to 100% of the aggregate number of shares of Common Stock into which the Purchaser’s Note may ultimately be converted. The Company also received a $1,000,000 advance which was converted into a Converted Advance Note and Converted Advance Warrants in April 2020. The Converted Advance Warrants entitle the holder to purchase up to 200% of the aggregate number of shares of Common Stock into which the Converted Advanced Note may ultimately be converted.

 

The Company received an aggregate of $2,842,695 in gross proceeds through the April 2020 Offering and an advance of $1,000,000 which was converted into an Advance Note on April 17, 2020. The Company expected the price per share at which securities would have been offered for purchase in the Qualified Financing to be $0.014 resulting in the assumption there would be approximately 203,050,000 and 142,857,000 shares issuable upon exercise of the Purchaser Warrants and the Converted Advance Warrants, respectively. The warrants were valued using a Lattice model with the following assumptions: Trading market price- $0.05, estimated exercise price- $0.014, volatility- 103%, risk free rate- 0.65% and an estimated term of 10 years. At inception, the estimated fair value of the Purchaser Warrants and the Converted Advance Warrants was approximately $3,279,000 and $2,869,300, respectively.

 

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The derivative liability has been remeasured to fair value at the end of each reporting period and the change in fair value, of approximately ($3,057,225) and ($2,882,247), has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months and six months ended June 30, 2020, respectively.

 

The Company estimated the fair value of the warrant derivative liability as of June 30, 2020 using the following assumptions:

 

    June 30, 2020  
       
Fair value of underlying stock   $ 0.05  
Exercise price   $ 0.014  
Risk free rate     0.14% - 0.66 %
Expected term (in years)     0.17- 10.27  
Stock price volatility     109% - 312 %
Expected dividend yield      

 

On April 17, 2020, the holders of the warrants agreed to terminate all anti-dilution price protections in their warrants.

 

The fair value of the warrants will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the estimated date and price of a Qualified Financing.

  

In conjunction with the Series D Preferred financing (see note 12), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock with a fair value of approximately $73,000. On the date of the exchange, the Series B Warrants were first adjusted to fair value with the change in fair value being recorded in earnings.

 

19

 

 

Redemption Put Liability

 

As described in Note 12, the redemption put provision embedded in the Series D financing required bifurcation and measurement at fair value as a derivative. If the redemption put provision is triggered, it allows either payment in cash or the issuance of “Trigger Event Warrants”. Accordingly, the fair value of the Redemption put liability considered management’s estimate of the probability of cash payment versus payment in Trigger Event Warrants and was valued using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the redemption factor. The Company estimated the fair value of the Trigger Event Warrant portion of the redemption put liability using the following assumptions on June 30, 2020:

   June 30, 2020 
     
Fair value of underlying stock  $0.05 
Exercise price  $0.20409 
Risk free rate   0.66%
Expected term (in years)   9.5 
Stock price volatility   107%
Expected dividend yield    

 

The fair market value of the redemption put liability at inception was approximately $614,000 which has been recorded as a liability and is remeasured to fair value at the end of each reporting period. The change in fair value of approximately ($19,000) and $175,000 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three and six months ended June 30, 2020, respectively.

 

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 period ended June 30, 2021 and 2020 is as follows:

 

    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   5,178,720    0.015    9.79 
Outstanding and exercisable at June 30, 2020   49,984,796   $0.104    9.16 
Issued, not yet exercisable(1)   354,836,286    0.014    9.79 
Total outstanding at June 30, 2020   404,821,082    0.104    9.16 
                
Outstanding and exercisable at December 31, 2020   413,423,972   $0.015    10.30 
Expired   (3,366,520)  $0.32     
Issued            
Total outstanding and exercisable at June 30, 2021   410,057,452   $0.63    8.63 

 

(1)The Company had estimated on June 30, 2020 that the number of warrants to be granted for the bridge financing would be 354,836,286. The bridge financing closed on September 11, 2020 in which an additional 9,602,890 warrants were issued above the original estimate for a total of 364,439,176. The fair market value associated with the additional warrants issued was recorded to the change in fair value of derivative liability – warrants prior to being reclassed to equity. Upon closing of the Rights Offering on September 11, 2020, the Company issued warrants to one of the Series B Preferred shareholders of 1,292,411 due to an antidilution feature embedded in the Series B Warrant.

 

20

 

 

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 $