UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2020.

OR

For the transition period from ________________ to ________________

Commission file number 001-36763

H-CYTE, INC

(Exact Name of Registrant as Specified in Its Charter)

(844) 633-6839

(Registrant’s Telephone Number, Including Area Code)

Securities registered under section 12(b) of the Exchange Act: Common stock, par value $0.001 per share

Securities registered under section 12(g) of the Exchange Act: Not applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

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 [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

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

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

As of March 24, 2021, 136,109,864 shares of the registrant’s common stock were outstanding.

Documents incorporated by reference: None.

TABLE OF CONTENTS

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by using terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.

This Annual Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves several assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Annual Report and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including, but not limited to, the possibility that we may fail to preserve our expertise in medical therapy and product research and development; that existing and potential partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms; that we may be unable to maintain or grow sources of revenue; that we may be unable to attain and maintain profitability; that we may be unable to attract and retain key personnel; that we may not be able to effectively manage, or to increase, our relationships with customers; that we may have unexpected increases in costs and expenses; the effect the current COVID-19 pandemic will have on the Company as further discussed herein. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

PART I

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 18 months, 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.

On July 11, 2019, MedoveX Corp. (“MedoveX”) changed its name to H-CYTE, Inc. (“H-CYTE” or the “Company”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2013 as SpineZ Corp.

On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the APA was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the APA and its amendment (collectively the “APA”), the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.

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. The Company is no longer manufacturing or selling the DenerveX device but continues to explore possible opportunities to monetize such technology.

As of the merger, 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 included 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”). 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.

Impact of COVID-19

The coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of operations in 2020. The impact of the outbreak of COVID-19 on the businesses and the economy in the United States and the rest of the world is and is expected to continue to be significant. The extent to which COVID-19 outbreak will continue to impact business and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. 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 the end of July 2020. The Company made the decision in late March 2020, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas. The Company reopened operations in August 2020 at its clinics in Tampa, Nashville, and Scottsdale. The clinics in Pittsburgh and Dallas did not reopen and were closed permanently.

The Company believed these expense reductions were necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company was not able to generate revenue from March 23, 2020 until August 2020. With the Company’s revenue-generating activities suspended for a portion of 2020 and the negative impact that COVID-19 has had on its medical biosciences division, 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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity.

The Company has updated its business model to decrease corporate overhead and marketing expense to significantly reduce expenses. The Company believes as COVID-19 begins to dissipate due to vaccinations being administered nationwide, as well as herd immunity, patients will again begin to travel to one of the LHI clinics for treatment. The Company continues to focus on developing a new FDA approved biologic for the treatment of chronic lung disease.

Company’s Two Operating Divisions

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. The Company is no longer manufacturing or selling the DenerveX device but continues to explore possible opportunities to monetize such technology.

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 consistently provides oversight and management of the highest quality care to the LHI clinics located in Tampa, Nashville, and Scottsdale, 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.

The following information pertains to the Biosciences Division:

Competition

Developing and commercializing new FDA approved drugs and therapies is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change. The Company faces intense competition worldwide from pharmaceutical, biomedical technology, medical therapy, and combination products companies, including major pharmaceutical companies. The Company may be unable to respond to technological advances through the development and introduction of new products. Most of the Company’s existing and potential competitors have substantially greater financial, sales and marketing, manufacturing and distribution, and technological resources. These competitors may also be in the process of seeking FDA (or other regulatory approvals) and patent protection for new products. The Company’s biologics product lines also face competition from numerous existing products and procedures, which currently are considered part of the standard of care. The Company believes that the principal competitive factors in its markets are:

The Company will also compete in the marketplace to recruit qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses complementary to its products or advantageous to its business.

The Company is aware that several of its competitors are developing technologies in its current and future products areas. There are numerous regenerative medicine providers who make unsubstantiated claims that they are able to treat chronic lung disease. Most of these competitors are small clinics with little brand recognition. The landscape is changing as pharma and biologics companies, as well as academia such as the Mayo Clinic, begin to develop therapies for multiple diseases using regenerative medicine through the more stringent regulatory pathway of a BLA.

Customers

The Company’s customer base consists of individuals who are suffering from chronic lung disease that are searching for alternative or adjunct forms of treatment outside of traditional pharmaceutical care which has not been successful for them in the past.

Intellectual Property

The Company’s Infusion Vertical is currently a direct care service provider and does not own any intellectual property around its current procedure. The development of a biologic is ongoing and is projected to start the FDA approval process in 2021. H-CYTE has a ten-year exclusive licensing agreement with Rion and will therefore be protected by Rion’s intellectual property filings.

Government Regulations

Governmental authorities in the U.S. (at the federal, state and local levels) and abroad, extensively regulate, among other things, the research and development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing, and export and import of products such as those we are developing.

FDA Regulation

The Infusion Vertical’s current cellular therapy for chronic lung disease does not require FDA approval due to it being an autologous therapy. The biologic therapy should begin clinical development in 2021. The biologic therapy will need to be approved by the FDA before it is marketed in the U.S. During the FDA’s BLA approval process, the Company’s biologic therapy will be subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies.

FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, record-keeping, market clearance or approval, advertising and promotion, import and export, sales and marketing, and distribution of medical devices and products.

In the U.S., the FDA subjects pharmaceutical and biologic products to rigorous review. If the Company does not comply with applicable requirements, it may be fined, the government may refuse to approve its marketing applications or to allow it to manufacture or market its products, and the Company may be criminally prosecuted. Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions, or criminal prosecution.

Proprietary Medical Device Business (DenerveX division)

The Company’s business of designing and marketing proprietary medical devices for commercial use in the U.S. and Europe began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System and it became commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company marketed the DenerveX Device as a disposable, single-use kit which includes all components of the DenerveX device product. In addition to the DenerveX device itself, the Company developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device. There is currently no finished product of the DenerveX device in inventory as commercial production has been suspended since the first quarter of 2019. There was minimal revenue from the DenerveX product in 2020.

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. Although the Company is no longer manufacturing or selling the DenerveX device, it does continue to explore possible opportunities to monetize such technology.

Good Manufacturing Practices (“GMP”)

United States Anti-Kickback and False Claims Laws

In the U. S., there are Federal and State anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in Federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA as pharmaceuticals, biologics, medical devices, and hospitals, physicians and other potential purchasers of such products. Other provisions of Federal and State laws provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. In addition, certain states have implemented regulations requiring medical device and pharmaceutical companies to report all gifts and payments of over $50 to medical practitioners. This does not apply to instances involving clinical trials.

Although the Company intends to structure its future business relationships with clinical investigators and purchasers of its products to comply with these and other applicable laws, it is possible that some of the Company’s business practices in the future could be subject to scrutiny and challenged by Federal or State enforcement officials under these laws.

Research and Development Expense

Research and development costs and expenses consist primarily of fees paid to external service providers, laboratory testing, supplies, costs for facilities and equipment, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred.

Employees

As of March 24, 2021, the Company had 26 total full-time employees. None of its employees are represented by a union.

Available Information

The Company’s website, www.hcyte.com, provides access, without charge, to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The information provided on the Company’s website is not part of this report and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

Materials filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.

Not applicable to smaller reporting companies.

Not applicable to smaller reporting companies.

The Company leases corporate office space in Tampa, FL and Atlanta, GA (the offices in Atlanta were subleased for the year ended December 31, 2020). The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. Each location has its own expiration date ranging from July 31, 2020 to August 31, 2023. The Company did not renew the leases in Dallas, TX, Pittsburgh, PA, and Atlanta, GA as those leases all expired in 2020. The Company does not intend on renewing its corporate office space lease in Tampa, FL which expires on March 31, 2021 but will renew the Tampa, FL lease for the LHI clinic. 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.

The Company believes its existing facilities are suitable to meet current operational needs.

None.

Not Applicable.

PART II

Market Information

On March 23, 2021 the price per share of the Company’s common stock had a high of $0.09 per share, a low of $0.07 per share, and closed at $0.09. The Company had approximately 232 holders of record of common stock as of March 23, 2021.

Dividends

The Company has not declared or paid any cash dividends on its common stock and presently intends on retaining future earnings, if any, to fund the development and growth of the business. Therefore, the Company does not anticipate paying any cash dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

The Company has authorized 2,650,000 options to be available under the Equity Compensation Plan. As of December 31, 2020, the Company had an outstanding aggregate of 410,000 options to purchase common stock under the Equity Compensation Plan at a weighted average price of $1.39 per share to certain employees, consultants and our outside directors.

Not required for smaller reporting company.

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 18 months, 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 represents a high growth opportunity to develop a robust pipeline of FDA approved therapeutics, focused on underserved disease states. This focus on next generation treatments has the potential to bring advancements to patients who have had few options beyond managing their symptoms with inhalers and nebulizers.

To support the Company’s approach to clinical development for biologics, the Company sought and was granted external verification that the results from LHI’s real-world database of patients, who were treated with LHI’s autologous infusion therapy, was valid. Using advanced statistical modeling, the Company generated real world evidence validating that its proprietary PRP- PBMC therapy provides statistically significant improvement in FEV1 at both three months and twelve months, as well as an excellent safety profile and quality of life advantages. This evidence was accepted for publication in January 2021 and appears in the, “Journal of Regenerative Medicine & Biology Research.”

A second publication has been submitted that will further support the Company’s autologous infusion therapy. This real-world study focuses on the sentinel measurement of lung disorders. Entitled, “FEV1 Absolute Volume Analysis and predicted FEV changes” this study will focus primarily on efficacy of the Infusion Vertical’s PRP-PBMC therapy in its patient population. In addition, the company is seeking FDA clearance of the device used in its Infusion Vertical to have a specific indication for lung disorders.

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.

On July 11, 2019, MedoveX Corp. (“MedoveX”) changed its name to H-CYTE, Inc. (“H-CYTE” or the “Company”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2013 as SpineZ Corp.

On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the APA was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the APA and its amendment (collectively the “APA”), the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.

Impact of COVID-19

The coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of operations in 2020. The impact of the outbreak of COVID-19 on the businesses and the economy in the United States and the rest of the world is and is expected to continue to be significant. The extent to which COVID-19 outbreak will continue to impact business and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. 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 the end of July 2020. The Company made the decision in late March 2020, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas. The Company reopened operations in August 2020 at its clinics in Tampa, Nashville, and Scottsdale. The clinics in Pittsburgh and Dallas did not reopen and were closed permanently.

The Company believed these expense reductions were necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company was not able to generate revenue from March 23, 2020 until August 2020. With the Company’s revenue-generating activities suspended for a portion of 2020 and the negative impact that COVID-19 has had on its medical biosciences division, 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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity.

The Company has updated its business model to decrease corporate overhead and marketing expense to significantly reduce expenses. The Company believes as COVID-19 begins to dissipate due to vaccinations being administered nationwide, patients will again begin to travel to one of the LHI clinics for treatment. The Company continues to focus on developing a new FDA approved biologic for the treatment of chronic lung disease.

RESULTS OF OPERATIONS

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

The following table sets forth certain operational data including their respective percentages of revenues for the years ended December 31, 2020 and 2019:

H-Cyte, Inc

Statement of Operations

Revenue and Gross Profit

Revenue is derived predominantly from the Company’s Biosciences division, which resulted in revenue, net of allowance for refunds, for the year ended December 31, 2020 and December 31, 2019, of approximately $2,151,000 and $8,347,000, respectively. The decrease in revenue for the year ended December 31, 2020, as compared to the prior year is attributable to suspending operations, the permanent closure of two of the five LHI clinics, and the ongoing effects due to COVID-19 to the Biosciences division.

For the years ended December 31, 2020 and December 31, 2019, the Company generated a gross profit totaling approximately $1,384,000 (64% of revenue) and $6,294,000 (75% of revenue), respectively. The decrease in revenue is due to the effects of COVID-19. Gross profit decreased in 2020 compared to 2019 due to the Company using part-time medical staff to treat its patients in Tampa and Scottsdale causing cost of sales for patient care to increase.

Salaries and Related Costs

For the years ended December 31, 2020 and December 31, 2019, the Company incurred approximately $3,199,000 and $8,646,000, respectively, in salaries and related costs. Included in salaries and related costs for the year ended December 31, 2019 was approximately $1,690,000 in compensation expense related to the common stock issued to Mr. William E. Horne, former Chief Executive Officer (“CEO”), on April 25, 2019. These shares were fully vested upon the issuance of a restricted stock award. Excluding the non-recurring stock compensation expense of approximately $1,690,000, the Company realized a decrease in salaries and related costs for the periods ending December 31, 2020 compared to December 31, 2019, due to its recent cost reduction measures effective in 2020 in response to the COVID-19 pandemic. The Company made the decision in late March 2020, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas. The Company reopened operations in August 2020 at its clinics in Tampa, Nashville, and Scottsdale. The clinics in Pittsburgh and Dallas did not reopen and were closed permanently.

Other General and Administrative

For the years ended December 31, 2020 and December 31, 2019, the Company incurred approximately $3,747,000 and $6,847,000, respectively, in other general and administrative costs. The decrease is attributable to cost saving measures in response to the COVID-19 pandemic. The Company made the decision in late March 2020, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas. The Company reopened operations in August 2020 at its clinics in Tampa, Nashville, and Scottsdale. The clinics in Pittsburgh and Dallas did not reopen and were closed permanently.

Advertising

For the years ended December 31, 2020 and December 31, 2019, the Company had approximately $297,000 and $4,910,000, respectively, in advertising costs. The decrease is attributable to a shift in the Company’s marketing plan and cost saving measures in response to the COVID-19 pandemic. The Company re-evaluated its marketing plan in 2020 and decided to significantly reduce marketing spend during the COVID-19 pandemic.

Loss on Impairment

The Company recorded a loss on impairment for its DenerveX technology of approximately $2,944,000 and its goodwill totaling approximately $12,564,000 for the year ended December 31, 2019. As the Company has determined that the DenerveX System no longer represents part of its strategic plans for the future, the loss on impairment of the technology was recorded. The Company also determined the fair value of the reporting unit was less than the carrying amount of goodwill. As a result, during the fourth quarter of 2019 the Company recorded a goodwill impairment charge. For the year ended December 31, 2020, the Company did not have impairment losses.

Depreciation & Amortization

For the year ended December 31, 2020, the Company recognized approximately $81,000 in depreciation and amortization expense, compared to approximately $834,000 in 2019. The decrease is primarily attributable to amortization of the technology intangible asset acquired in the Merger for the year ended December 31, 2019. The expense for 2020 was significantly lower due to no amortization recorded in 2020.

Other Income (Expense)

For the years ended December 31, 2020 and 2019, interest expense was approximately $1,463,000 and $299,000 respectively. The increase is attributable to new financing being arranged for the year ended December 31, 2020 along with the closing of the Rights Offering on September 11, 2020.

The change in fair value of redemption put liability and change in fair value of the derivative liability - warrants for the year ended December 31, 2019 were approximately $347,000 and $827,000, respectively, and was a result of the assumption of the Series B Convertible Preferred Stock in the Merger and the Series D Convertible Preferred Stock financing in 2019, respectively. The change in fair value of redemption put liability and change in fair value of the derivative liability - warrants for the year ended December 31, 2020 were approximately $273,000 and $2,987,000, respectively, and was a result of the change in fair value at the end of each reporting period and was subsequently reclassified to equity at the close of the Rights Offering (see Note 12).

Liquidity, Sources of Liquidity, and Going Concern

The Company had approximately $1,641,000 and $1,424,000 of cash on hand at December 31, 2020 and 2019, respectively.

The Company incurred net losses of approximately $6,459,000 and $29,808,000 for the years ending December 31, 2020 and 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue activities are suspended and as the Company implements its business plan. The consolidated financial statements are prepared using generally accepted accounting principles in the United States (“U.S. GAAP”) as applicable to a going concern.

The Biosciences division 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 biologics protocol and taking that protocol through the FDA process.

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 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 August at the Tampa, Nashville, Scottsdale, and Pittsburgh clinics. The Pittsburgh clinic ceased operations permanently at the end of October 2020. The Dallas clinic did not re-open and was closed permanently. The Company believed these expense reductions were necessary during the unexpected COVID-19 pandemic.

The Company has updated its business model to decrease corporate overhead and marketing expense to significantly reduce expenses. The Company believes that as COVID-19 begins to dissipate due to vaccinations being administered nationwide, that patients will again feel comfortable traveling to one of the LHI clinics for treatment. The Company continues to focus on developing a new FDA approved cellular therapy for the treatment of chronic lung disease.

Going Concern

The recent coronavirus outbreak (“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 and 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 operation will be affected.

The Company has updated its business model to decrease corporate overhead and marketing expense to significantly reduce expenses. The Company believes that as COVID-19 begins to dissipate due to vaccinations being administered nationwide, that patients will again feel comfortable traveling to one of the LHI clinics for 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.

With the Company’s revenue-generating activities hindered significantly by COVID-19, the Company will need to raise cash from debt and equity offerings to continue clinical operations and to take the biologics protocol to the FDA. There can be no assurance that the Company will be successful in doing so.

Although cost reduction measures were taken in 2020, due to COVID-19, the present level of cash is insufficient to satisfy the Company’s current operating requirements. The Company is seeking additional sources of funds from the sale of equity or debt securities or through a credit facility.

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 acceptable to the Company or its shareholders. In the event the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings, or raising equity capital, there is substantial doubt about the Company’s ability to continue as a going concern. 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.

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 U.S. GAAP. 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 an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Fair Value Measurements

We measure certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations and derivatives.

We use the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded or written down.

The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist us in determining fair value, as appropriate.

Although we believe that the recorded fair value of our financial instruments is appropriate at December 31, 2020, these fair values may not be indicative of net realizable value or reflective of future fair values.

Income Taxes

The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by enacted tax rates. A valuation allowance will be recorded to reduce deferred tax assets when necessary.

The Company files income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. The tax years that could be subject to federal audit are 2017, 2018, and 2019.

Revenue Recognition

We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five basic criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.

The Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606, Revenue From Contracts with Customers, which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company records revenue under ASC 606 when control is transferred to the customer, which is consistent with past practice. The adoption of this standard did not have a material impact on the consolidated financial statements.

The Company uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price accounts for medical, surgical, facility, and office services rendered by LHI for consented procedures and is recorded as revenue. The Company recognizes revenue when the terms of a contract with a patient are satisfied.

The Company offers two types of cellular therapy treatments to their patients.

Management performed an analysis of its customer refund history for refunds issued related to prior year’s revenue. Management used the results of this historical refund analysis to record a reserve for anticipated future refunds related to recognized revenue. At December 31, 2020 and 2019, the estimated allowance for refunds was approximately $77,000 and $63,000, respectively and is recorded as a contra revenue account.

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.

Consulting Agreements

The Company entered into an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $5,000 per month. Additionally, 62,500 shares of common stock at $0.29 per share was issued in connection with a separate agreement on August 29, 2019. The Company incurred expense of approximately $10,000 and $83,000 for the years ended December 31, 2020 and 2019, respectively, related to these agreements.

The Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 for services related to evaluation and negotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The duration of the consulting agreement is for a period of twelve months in the amount of $12,500 per month with a $15,000 signing bonus. Either party may terminate this agreement with or without cause upon 30 days written notice. The agreement also provides LilyCon Investments with $35,000 in stock (to be calculated using an annual variable weighted average price from February 2019 through January 2020) to be granted on the one-year anniversary of this agreement, if the agreement has not been terminated prior to that date. For years ended December 31, 2020 and 2019, the Company expensed a total of approximately $65,000 and $153,000, respectively, in compensation to LilyCon Investments. In February 2020, the Company issued LilyCon Investments $35,000 in shares of H-CYTE stock at an average share price of $0.31 per share for a total of 106,061 shares per the terms of the agreement. In March 2020, this agreement was modified to lower the monthly payment amount to $5,000. This agreement was terminated effective April 1, 2020.

The Company entered into a consulting agreement with Goldin Solutions, effective August 4, 2019, for media engagement and related efforts, including both proactive public relations and crisis management services. The agreement has a minimum term of six months, with a $34,650 monthly fee plus expenses payable each month, with the exception of a first month discount of $12,600. For year ended December 31, 2020 and December 31, 2019, the Company expensed $99,000 and $162,000, respectively. The Company terminated this agreement in March 2020.

The Company entered into a consulting agreement with Tanya Rhodes of Rhodes & Associates, Inc, effective June 15, 2020, to serve as the Chief Technology Officer (Research) of the Company. The agreement has a minimum term of six months with an average fee of $20,000 per month plus expenses which increases 5% per month on January 1 of each calendar year unless an alternative retainer amount is negotiated and agreed upon by both parties. The Company extended the contract on January 1, 2021, resulting in monthly expenses of $22,500 plus expenses for services rendered. Ms. Rhodes is a meaningful member of the management group and serves as the Company’s Chief Technology Officer (Research). Ms. Rhodes is an innovative, growth-oriented leader in healthcare with a broad base of international experience in all aspects of operational business including R&D, clinical and regulatory, strategic marketing and business development. She brings a demonstrated track record for bringing new technologies from concept through commercialization, and brings an in-depth knowledge of biological tissues, enzymes, stem cells, antimicrobials and natural products. Prior to joining H-Cyte Ms. Rhodes held numerous C-level positions in many sectors including wound care, dermatology, aesthetics and plastic surgery, and was the VP Innovation for Smith & Nephew and a global executive team member driving $450M business.  Ms. Rhodes completed her PhD in molecular orbital computational chemistry in the UK and then a Masters Degree in the Management of Technology in the US.

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

On February 29, 2020, the Company accepted the resignations of Briley Cienkosz, Chief Marketing Officer and Gary Mancini, Chief Relationship Officer for personal reasons and not as a result of any disputes or disagreements.

On May 7, 2020, William Horne, the Company’s Chief Executive Officer (“CEO”) and Chairman tendered his resignation as CEO effective when the Company finds a suitable replacement with more FDA experience. Until such successor is retained, Mr. Horne will remain as the CEO. Mr. Horne’s resignation does not pertain to his position as Chairman of the Board or as a Director. The resignation was not as a result of any disagreement with the Company or its policies and practices.

On September 28, 2020, the Company appointed Robert Greif as its CEO and President. Prior to joining the Company, Mr. Greif was the Chief Commercial Officer and business development Leader at Atox Bio, Inc. from February 2019 to November 2019. At Atox, Mr. Greif built the North American commercial organization in preparation for the launch of a first-in-class immunomodulatory. Prior to joining Atox, Mr. Greif led the commercial operations of rEvo Biologics, Inc., an orphan disease biotechnology company from May 2011 to February 2019. He also held a variety of business unit and commercial leadership roles at United Health Group Incorporated, Boehringer Ingelheim Group, and Sanofi SA. The Company believes that Mr. Greif’s strong track record leading high-growth pharmaceutical and biotech businesses makes him qualified to serve in his role with the Company.

On September 29, 2020, Ann Miller resigned as the Company’s Chief Operating Officer.

On September 29, 2020, with the Company’s appointment of Robert Greif as CEO and President, Mr. William Horne resigned as the CEO and President. There are no family relationships between any director or executive officer of the Company and any other director or executive officer of the Company, or any person nominated or chosen by the Company to become a director or executive officer.

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. Raymond Monteleone, a member of the Board, was appointed the new Chairman of the Board.

Indemnification

We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving, at our request, in such capacity, to the maximum extent permitted under the laws of the State of Nevada.

The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we maintain directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid for indemnification of directors and officers. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, we have not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

Additionally, in the normal course of business, we have made certain guarantees, indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to our customers and distribution network partners in connection with the sales of our products and therapies, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease.

It is not possible to determine the maximum potential loss under these guarantees, indemnities and commitments due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standard Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02 (as amended), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

The Company has not entered into significant lease agreements in which it is the lessor. For the lease agreements in which the Company is the lessee, under Topic 842, lessees are required to recognize a lease liability and right-of-use asset for all leases (except for short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components.

In June 2018, FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 in the first quarter of 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which amends the approaches and methodologies in accounting for income taxes during interim periods and makes changes to certain income tax classifications. The new standard allows exceptions to the use of the incremental approach for intra-period tax allocation, when there is a loss from continuing operations and income or a gain from other items, and to the general methodology for calculating income taxes in an interim period, when a year-to date loss exceeds the anticipated loss for the year. The standard also requires franchise or similar taxes partially based on income to be reported as income tax and the effects of enacted changes in tax laws or rates to be included in the annual effective tax rate computation from the date of enactment. Lastly, in any future acquisition, the Company would be required to evaluate when the step-up in the tax basis of goodwill is part of the business combination and when it should be considered a separate transaction. The standard will be effective for the Company beginning January 1, 2021, with early adoption of the amendments permitted. The Company is currently evaluating the impact from the adoption of ASU 2019-12 on its consolidated financial statements.

Not Applicable.

TABLE OF CONTENTS FOR THE FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of H-CYTE, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of H-CYTE, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has negative working capital, has an accumulated deficit, has a history of significant operating losses, and has a history of negative operating cash flow. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding this matter are also discussed in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Debt and equity accounting considerations

As described in Notes 9, 12 and 14 to the consolidated financial statements, the Company had various debt and equity transactions that required accounting considerations, significant estimates and judgements around certain features and the possibility of conversion or redemption, the valuation of certain components of the financings, including the valuation around certain freestanding and embedded derivatives.

The Company determined that warrants issued in connection with certain financings required derivative liability classification. These warrants were initially measured at fair value and subsequently have been remeasured to fair value at each reporting period, prior to their reclassification to equity in September 2020 at the close of the Company’s Series A Preferred Stock Rights Offering.

The Company determined that due to the nature of the financing features, mezzanine equity classification was appropriate for the Series D Convertible preferred stock itself and the redemption put required derivative liability classification. The redemption put liability was initially measured at fair value and subsequently has been remeasured at fair value at each reporting period, prior to their reclassification to equity in July 2020 when the Series D Convertible Preferred Stock was called and converted to common stock.

There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the freestanding instruments or embedded derivatives using the Black-Scholes-Merton option pricing model or a binomial lattice model to measure the fair value of the debt and/or equity instrument both with and without the embedded feature.

We identified the accounting considerations and related valuations, including the related fair value determinations of the various debt and equity financings and classification of such as a critical audit matter. The principal considerations for our determination were: (1) the accounting consideration in determining the nature of the various features and weighting of evidence (2) the evaluation of the potential derivatives and potential bifurcation in the instruments, and (3) considerations related to the determination of the fair value of the various debt and equity instruments and the conversion and redemption features that include complex valuation models and assumptions utilized by management. Auditing these elements is especially challenging and requires auditor judgement due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

Changes in the accounting determinations and the related valuation assumptions can have a significant impact on the valuation of the embedded and freestanding derivative liabilities. For example, all other things being equal, generally, an increase in the Company’s stock price, change of control probability, risk-adjusted yields term to maturity/conversion or stock price volatility increases the value of the derivative liability.

Our audit procedures related to management’s conclusion on the evaluation and related valuation of freestanding and embedded derivatives, included the following, among others: (1) Utilized personnel with specialized knowledge and skill in technical accounting to assist in: (i) evaluating the relevant terms and conditions of the various financings, and (ii) assessing the appropriateness of conclusions reached by the Company with respect to the accounting for the convertible debt/equity, and the assessment and accounting for potential derivatives. (2) We used a valuation specialist to assist us in evaluating the Company’s models, valuation methodology, and significant assumptions used in the fair value estimates.

/s/ Frazier & Deeter, LLC

Tampa, Florida

March 25, 2021

We have served as the Company’s auditor since 2018.

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

H-CYTE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

H-CYTE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the years ended December 31, 2020 and 2019

See accompanying notes to consolidated financial statements.

H-CYTE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS