Liquidity, Going Concern and Management's Plans
|9 Months Ended|
Sep. 30, 2020
|Organization, Consolidation and Presentation of Financial Statements [Abstract]|
|Liquidity, Going Concern and Management's Plans||
Note 3 - Liquidity, Going Concern and Management’s Plans
The corona virus outbreak (COVID-19) has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020, the Company took steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through mid-July 2020. The Company also made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics located in Tampa, Scottsdale, Pittsburgh, Nashville, and Dallas. The Company resumed operations in July at the Tampa and Nashville clinics, in August at the Scottsdale clinic, and in September at the Pittsburgh clinic. The Pittsburgh clinic re-opening was temporary in September as it ceased operations permanently at the end of October 2020. The Dallas clinic did not re-open and will be closed permanently.
The Company reported net income of approximately $3,950,000 and a net loss of approximately $4,899,000 for the three and nine months ended September 30, 2020, and a net loss of $2,624,000 and $11,616,000 for the three and nine months ended September 30, 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue-generating activities were suspended until July. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company will incur losses until sufficient revenue is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process. Due to COVID-19, the Company was unable to perform treatments from March 23, 2020 until July 2020. The Company contacted its patients that were scheduled to have treatments completed, both first time patients and recurring patients, and have rescheduled many of these patients now that the Company is operational. There is no guarantee that the Company will be able to continue to treat patients due to the coronavirus outbreak; as such, the Company cannot estimate if it will be safe to continue to treat patients and generate revenue. The Company’s third quarter 2020 revenue was approximately $650,000 compared to first quarter 2020 revenue of approximately $1,017,000. The Company’s future quarters’ revenue is dependent upon being able to continue to treat patients in the LHI clinics. The Company will continue to focus on its goal of taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases.
With the Company’s revenue-generating activities resuming during the third quarter at a significantly reduced volume, and the uncertainty around the COVID-19 outbreak, the Company will need to raise cash from debt and/or equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.
Note Purchase Agreement
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,842,695 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 the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note, 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.
Short-term notes, related parties
On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further above in “Note Purchase Agreement”, this A&R Note was further amended and 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 five loans totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by 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.
Rights Offering (Qualified Financing)
The Company established July 28, 2020 as the Record Date for purposes of establishing a date for the Company’s rights offering whereby each holder of the Company’s Common stock on the Record Date will be entitled to three subscription rights, each to purchase one share of Series A Preferred Stock.
As mentioned below, the Company entered into a standby purchase agreement with certain creditors who had previously purchased secured convertible notes and warrants, pursuant to which such creditors agreed (a) not to exercise any subscription rights they may receive as stockholders of the Company in the registered rights offering (described below) and (b) instead to purchase any Series A preferred stock corresponding to the unexercised rights in the rights offering up to an aggregate amount of approximately $2.8 million at the same subscription price. The amounts due under the standby purchase agreements became calculable and payable upon the expiration of the rights offering as set forth below.
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 excluding issuance costs of approximately $320,000. 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, accrued interest, and conversion of certain warrants totaling $5,487,869. 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.
The Company had cash on hand of approximately $3,437,000 as of September 30, 2020 and $2,481,000, as of November 12, 2020. The Company’s cash is insufficient to fund its operations over the next year and the Company will need to raise additional capital through debt or equity offerings to continue operations.
There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. The Company will need to raise additional funds of which there can be no assurance and 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 reduce expenses or discontinue operations. The interim 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.
The entire disclosure when substantial doubt is raised about the ability to continue as a going concern. Includes, but is not limited to, principal conditions or events that raised substantial doubt about the ability to continue as a going concern, management's evaluation of the significance of those conditions or events in relation to the ability to meet its obligations, and management's plans that alleviated or are intended to mitigate the conditions or events that raise substantial doubt about the ability to continue as a going concern.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef