UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ____________
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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.
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As of August 11, 2021, 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 | $ | $ | ||||||
| Patient financing receivable, current portion | - | |||||||
| Other receivables | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Right-of-use asset | ||||||||
| Property and equipment, net | ||||||||
| Patient financing receivable, net of current portion | - | |||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Other current liabilities | ||||||||
| Notes payable, current portion | ||||||||
| Convertible notes payable, related parties | - | |||||||
| Convertible notes payable | - | |||||||
| PPP Loan, current portion | ||||||||
| Deferred revenue | ||||||||
| Lease liability, current portion | ||||||||
| Interest payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Lease liability, net of current portion | ||||||||
| PPP Loan, net of current portion | - | |||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred Stock - $ par value: shares authorized; Series A Preferred Stock - $ par value: shares authorized, and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock - $ par value: shares authorized, and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
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 | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross Profit | ( | ) | ||||||||||||||
| Operating Expenses | ||||||||||||||||
| Salaries and related costs | ||||||||||||||||
| Share based compensation | - | |||||||||||||||
| Loss on disposal of property and equipment | - | - | ||||||||||||||
| Other general and administrative | ||||||||||||||||
| Research and development | - | - | ||||||||||||||
| Advertising | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of redemption put liability | - | ( | ) | - | ||||||||||||
| Loss on derivative instrument | - | ( | ) | - | ( | ) | ||||||||||
| Gain on extinguishment of debt | - | - | ||||||||||||||
| Warrant modification expense | - | ( | ) | - | ( | ) | ||||||||||
| Change in fair value of derivative liability - warrants | - | ( | ) | - | ( | ) | ||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Accrued dividends on outstanding Series B Convertible Preferred Stock | - | - | ||||||||||||||
| Deemed dividend on Series D Convertible Preferred Stock | - | - | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average outstanding shares - basic and diluted | ||||||||||||||||
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
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Accrued dividends on Series B Convertible Preferred Stock | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Deemed dividend on Series D Convertible Preferred Stock | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Adjustment of exercise price on certain warrants | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Issuance of warrants to extend short-term debt | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Conversion of Short-term notes, related parties | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Balances – June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| 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 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock | ( | ) | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Balances – June 30, 2021 | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| 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 | - | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Deemed dividend on Series D Convertible Preferred Stock at issuance | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Deemed dividend on Series D Convertible Preferred Stock | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Issuance of warrants in connection with Series D Convertible Preferred Stock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Issuance of common stock in exchange for consulting fees incurred | - | - | - | - | $ | - | - | |||||||||||||||||||||||||||||||||
| Issuance of warrants pursuant to extension of maturity date on short-term notes, related party | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Accrued dividends on Series B Convertible Preferred Stock | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Adjustment of exercise price on certain warrants | - | - | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||
| Issuance of warrants to extend short-term debt | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Conversion of short-term notes, related parties | - | - | - | - | 4,368,278 | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Balances – June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock | ( | ) | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Balances – June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Issuance of warrants pursuant to short-term notes, related party | ||||||||
| Issuance of warrants to extend short-term debt | ||||||||
| Share based compensation expense | ||||||||
| Common stock issued for consulting services | ||||||||
| Change in fair value of derivative liability - warrants and redemption put liability | ||||||||
| Change in fair value of derivative liability - loss on derivative instrument | ||||||||
| Warrant modification expense | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Patient financing receivable, current portion | ( | ) | ||||||
| Other receivables | ||||||||
| Patient financing receivable, net of current portion | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Interest payable | ||||||||
| Accounts Payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Other current liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from convertible notes payable, related parties | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Payments on debt obligations | ( | ) | ||||||
| Proceeds from paycheck protection program loan | ||||||||
| Proceeds from warrants, net of issuance costs | ||||||||
| Proceeds from issuance of Series D Convertible Preferred Stock | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net (Decrease)/ Increase in Cash | ( | ) | ||||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
| Supplementary Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Adjustment of exercise price on warrants | ||||||||
| Issuance of warrants to extend short-term debt | ||||||||
| Conversion of short-term notes, related parties | ||||||||
| Deemed dividend on Series D Convertible Preferred Stock | ||||||||
| Issuance of Warrants in connection with Series D Convertible Preferred Stock | ||||||||
| Dividends accrued on Series B Convertible Preferred Stock | ||||||||
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
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
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 $,000 and $,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 $
The
Company had cash on hand of approximately $
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 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | $ | $ | ||||||||||||
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 | $ | $ | ||||||
| Lease liability, current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
| 10 |
Future maturities of operating lease liabilities as of June 30, 2021 are as follows:
| Operating leases | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total lease payments | ||||
| Less: Interest | ( |
) | ||
| Total lease liability | $ | |||
Note 5 - Property And Equipment
Property and equipment, net, consists of the following:
| Useful Life | June 30, 2021 | December 31, 2020 | ||||||||
| Furniture and fixtures | $ | $ | ||||||||
| Computers and software | ||||||||||
| Leasehold improvements | ||||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||||
| Total | $ | $ | ||||||||
Depreciation
expense was approximately $
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 $
| 11 |
Effective
October 1, 2020, the Company entered into an oral agreement with Mr. Michael Yurkowsky in which Mr. Yurkowsky will receive $
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 $
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 of the fully diluted shares of the Company. On
July 28, 2020, the Company issued an aggregate of 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 shares of Preferred A Stock for conversion of
the outstanding promissory notes from April 2020, shares of Preferred A Stock for conversion of
the April Secured Note, shares of Preferred A Stock for conversion of
the Hawes Notes, and shares of Preferred A Stock issued upon the closing
of the Rights Offering. FWHC was also issued
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 $
Note 7 - Equity Transactions
Common Stock Issuance
In
February 2020, the Company issued LilyCon Investments $
| 12 |
On
April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) shares of common stock
of the Company and (ii) a 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 $
On July 28, 2020, the Company issued an aggregate of 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 shares of Common Stock and shares of Preferred Stock, of which 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) shares of its Series A preferred stock at a price of $ per share to holders
of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 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 $
Additionally,
on September 24, 2020, the Company issued an aggregate of 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 $
During the three and six months ended June 30, 2021, and 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
Liquidation
Series A Preferred Stock does not have preferential treatment over common stock shareholders if the Company liquidates or dissolves.
| 13 |
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 stock options of which were immediately vested on the date of grant. Each option granted has an exercise price of $per share and an expiration date of 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, options were outstanding and were vested. As of June 30, 2021, the Company recognized $in stock-based compensation expense and has approximately $ of unrecognized compensation costs related to non-vested stock options, which is expected to be recognized over a weighted average period of approximately years.
| 2021 Grants | ||||||||||
| Option value | $ | to | $ | |||||||
| Risk Free Rate | % | to | % | |||||||
| Expected Dividend- yield | to | |||||||||
| Expected Volatility | % | to | % | |||||||
| Expected term (years) | to | |||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
| Outstanding at December 31, 2019 | $ | |||||||||||
| Granted | — | |||||||||||
| Expired/Cancelled | ( | ) | — | |||||||||
| Outstanding and exercisable at June 30, 2020 | $ | |||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||
| Granted | ||||||||||||
| Expired/Cancelled | ( | ) | — | |||||||||
| Outstanding at June 30, 2021 | $ | |||||||||||
Exercisable at June 30, 2021 | $ | |||||||||||
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ||||||||
| Non-vested at June 30, 2021 | $ | |||||||
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 $
Net Loss Per Share
Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are antidilutive due to the Company’s net losses.
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Options to purchase common stock (in the money) | ||||||||
| Warrants to purchase common stock (in the money) | ||||||||
| Series A Preferred Stock convertible to common stock | ||||||||
| Series B & D Preferred Stock convertible to common stock | ||||||||
| Total | ||||||||
Excluded from the above table are warrants and stock options for the six months ended June 30, 2021 as they are out
of the money (exercise price greater than $
| 14 |
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 $
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 $
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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 $
In
2019, $
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 $
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 $
Notes Payable
Notes
payable were assumed in the Merger and are due in aggregate monthly instalments of approximately $
On
March 27, 2020, the Company issued a demand note in the principal amount of $
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Paycheck Protection Program
On
April 29, 2020, the Company issued a promissory note in the principal amount of $
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
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 | $ | |||
| Series D Warrant reclass from equity to liability | ||||
| Warrants issued with modification of Horne Note | ||||
| Warrants issued with April 17, 2020 financing | ||||
| Fair value adjustments | ||||
| Balance at June 30, 2020 | $ | |||
| 17 |
| Redemption Put Liability | ||||
| Balance at December 31, 2019 | $ | |||
| Issuance of Series D Convertible Preferred Stock | ||||
| Fair value adjustments | ( | ) | ||
| Balance at June 30, 2020 | $ | |||
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 $
Series D Warrants
In
conjunction with their Series D Preferred Financing, the Company originally issued Series D warrants to purchase
Horne Warrants
On
April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) shares of common stock
of the Company and (ii) a -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-
$
April Bridge Loan and Converted Advance Warrants
The
Company received an aggregate of $
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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
($
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 | $ | |||
| Exercise price | $ | |||
| Risk free rate | % | |||
| Expected term (in years) | ||||
| Stock price volatility | % | |||
| 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.
| 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 | $ | |||
| Exercise price | $ | |||
| Risk free rate | % | |||
| Expected term (in years) | ||||
| Stock price volatility | % | |||
| Expected dividend yield | ||||
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 | $ | |||||||||||
| Issued | ||||||||||||
| Outstanding and exercisable at June 30, 2020 | $ | |||||||||||
| Issued, not yet exercisable(1) | ||||||||||||
| Total outstanding at June 30, 2020 | ||||||||||||
| Outstanding and exercisable at December 31, 2020 | $ | |||||||||||
| Expired | ( | ) | $ | — | ||||||||
| Issued | — | |||||||||||
| Total outstanding and exercisable at June 30, 2021 | $ | |||||||||||
| (1) |
| 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 | $ | $ | $ | |||||||||||||||||||||||||||
| Private placement of Series D Convertible Preferred Stock | 1/17/2020 | $ | $ | $ | |||||||||||||||||||||||||||
| Granted for bridge financing | 4/8/2020 | $ | $ | $ | |||||||||||||||||||||||||||
| Short-term note, related party conversion | 4/17/2020 | $ | $ | $ | |||||||||||||||||||||||||||
| Granted for bridge financing | 9/11/2020 | $ | $ | $ | |||||||||||||||||||||||||||
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 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $ per share
and (ii) a warrant (the “Series D Warrant”) to purchase
On November 21, 2019, the Company entered into a securities purchase agreement with FWHC Holdings, LLC (“FWHC”) an accredited investor for the purchase of shares of Series D Convertible Preferred Stock, par value $per share and the Series D Warrant (the “FWHC Investment”; see note 14-“Mezzanine Equity and Series D Convertible Preferred Stock” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
For
the six months ended June 30, 2021 and 2020, the Company recorded $
As of December 31, 2020, the Company does not have any Series D Convertible Preferred Stock outstanding (see Note 9-“Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).
Note 13 – Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”. Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the difference turns around. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowance is recorded when it is more likely than not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of tax planning strategies.
From inception to June 30, 2021, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses is fully offset by a valuation allowance as of June 30, 2021 and December 31, 2020. Management of the Company evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and determined that it is more likely than not that the Company will not recognize the full benefits of the deferred tax assets.
The
Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. There are
Note 14 - Subsequent Events
Effective July 13, 2021, Tanya Rhodes, the Company’s Chief Technology Officer, was designated as an Executive Officer of the Company.
As of August 11, 2021, an additional Series A Preferred Stock was converted into Common Stock at the request of certain Series A Preferred Stockholders.
The Company has evaluated subsequent events through August 13, 2021 and has determined that there have been no events that would require adjustments to or disclosure in the June 30, 2021 interim Consolidated Financial Statements other than those disclosed in this Form 10-Q.
| 21 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.
Overview
H-CYTE, Inc (“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.
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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.
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.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On a continual basis, the Company evaluates its estimates and judgments, including those described in greater detail below.
The Company bases our estimates on historical experience and on various other factors that it believes 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.
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Results of Operations - Six months ended June 30, 2021 and 2020
Revenue, Cost of Sales and Gross Profit
The Company recorded revenue of approximately $450,000 and $827,000 for the three and six months ended June 30, 2021, respectively. The Company recorded revenue of approximately $20,000 and $1,036,000, for the three and six months ended June 30, 2020, respectively. The increase in revenue for the three months ended June 30, 2021, as compared to the prior year is attributable to the economic impact that COVID-19 has had on the Company due to its vulnerable patient base being unable or unwilling to travel due to the virus. The Company suspended operations of the Infusion Vertical due to COVID-19 effective March 23, 2020 and did not reopen until August 2020 with limited capacity.
The Company recorded cost of sales of approximately $216,000 and $415,000 for the three and six months ended June 30, 2021, respectively. The Company recorded cost of sales of approximately $70,000 and $447,000 for the three and six months ended June 30, 2020, respectively. The increase in cost of sales for the three months ended June 30, 2021, as compared to the prior year, is attributable to the economic impact that COVID-19 has had on the Company. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the Infusion Vertical. Medical supplies are predominantly variable costs based on the number of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments provided, during normal operations, can be handled adequately with the Company’s current level of personnel. The Company possesses the opportunity to increase the number of treatments performed without increasing personnel costs as it can leverage the current personnel’s availability until the Company’s treatment volume reaches critical mass. However, upon an increase in treatment volume beyond that capacity, the Company will need to hire additional personnel.
The Company generated gross profit of approximately $234,000 and $412,000 for the three and six months ended June 30, 2021, respectively. The Company generated gross profit of approximately ($51,000) and $589,000 for the three and six months ended June 30, 2020, respectively. The increase in gross profit, as compared to the prior year, is attributable to the economic impact that COVID-19 has had on the Company.
Operating Expenses
Salaries and Related Costs
The Company incurred salaries and related costs of approximately $586,000 and $1,248,000 for the three and six months ended June 30, 2021, respectively. The Company incurred salaries and related costs of approximately $594,000 and $1,819,000 for the three and six months ended June 30, 2020, respectively.
Other General and Administrative
The Company incurred other general and administrative costs of approximately $610,000 and $1,440,000 for the three and six months ended June 30, 2021, respectively. The Company incurred other general and administrative costs of approximately $1,035,000 and $2,265,000 for the three and six months ended June 30, 2020, respectively. The decrease, as compared to the prior year, is attributable to the economic impact that COVID-19 has had on the Company.
Of the total other general and administrative costs, approximately $161,000 and $481,000 were related to professional fees for the three and six months ended June 30, 2021. Professional fees were approximately $510,000 and $826,000 for the three and six months ended June 30, 2020. Professional fees consist primarily of accounting, legal, and public company compliance costs as well as regulatory costs.
Research and Development
The Company incurred research and development expenses of $0 for the three and six months ended June 30, 2021. The Company incurred research in development expenses of approximately $200,000 and $950,000 for the three and six months ended June 30, 2020, respectively. The $950,000 expense in 2020 was in connection with the Rion agreements.
| 24 |
Advertising
The Company incurred advertising costs of approximately $88,000 and $165,000 for the three months and six months ended June 30, 2021, respectively. The Company incurred advertising costs of approximately $26,000 and $171,000 for the three months and six months ended June 30, 2020, respectively. The increase, as compared to the prior year, is attributable to the economic impact that COVID-19 had on the Company in 2020 as the clinics were temporarily closed during the three months ended June 30, 2020, resulting in a reduction in marketing spend during the temporary closure.
Departure of Directors and Certain Officers, Election of Directors, Appointment of New Board Members and Officers.
On January 12, 2021, Mr. William Horne stepped down as Chairman of the Board of directors (the “Board”) of the Company. Mr. Horne will remain a member of the Board.
On January 12, 2021, Mr. Ray Monteleone was appointed the new Chairman of the Board. Mr. Monteleone is a current member of the Board.
Funding Requirements
The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company implements its business plan to focus on the Biologics 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.
Going Concern
The Company reported net losses of approximately $2,058,000 and $3,466,000 for the three months and six months ended June 30, 2021, respectively. The Company reported net losses of approximately $6,432,000 and $8,849,000 for the three months and six months ended June 30, 2020, respectively.
The Company’s independent registered public accounting firm included an explanatory paragraph with respect to the Company’s ability to continue as a going concern in its report on the Company’s consolidated financial statements for the year ended December 31, 2020. The presence of the going concern explanatory paragraph suggests that the Company may not have sufficient liquidity or minimum cash levels to operate the business. Since its inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until its products can generate enough revenue to offset its operating expenses. The present level of cash is insufficient to satisfy our current operating requirements and Biologics Division business model.
There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. If the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings, or raising equity capital, the Company may be forced to discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In the event the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the Company may be forced to reduce our expenses, or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Liquidity and Sources of Liquidity
With the Company historically having experienced losses, the primary source of liquidity has been raising capital through debt and equity offerings, as described below.
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Debt
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,842,695. This sum included the issuance by the Company to FWHC Bridge, LLC (the “Investor) of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note (see below “Short-term Notes, Related Parties”) previously issued by the Company to the Investor on April 9, 2020. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020. The amendment to the Hawes Note eliminated the requirement that the Company make monthly payments of accrued interest.
As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.
The short-term notes, related parties, as of March 31, 2020 totaling $2,135,000 is comprised of loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne aggregating $1,635,000 and a Note in the amount of $500,000 from the Investor. On April 17, 2020, Mr. Horne agreed to convert the notes plus accrued interest owed to Horne Management, LLC, at the time of the Qualified Offering, into 4,368,278 shares of common stock and a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock at the Qualified Offering price of $0.014.
On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.
In addition, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stock to the holders of outstanding promissory notes in the aggregate principal amount and accrued interest of $4,483,617. The notes were converted pursuant to a mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act.
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, provided $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 amortized over the remaining term 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 convertible notes payable, related parties and convertible notes payable, respectively.
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Equity
On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.
On September 24, 2020, the Company issued an aggregate of 323,844,416 Preferred A shares to holders of outstanding promissory notes in the aggregate principal amount, accrued interest, and conversion of certain warrants totaling $4,483,617. The notes were converted pursuant to mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act. As a result of their participation in the backstop portion of the rights offering and the conversion of their promissory notes, FWHC Holdings, LLC became beneficial owners of approximately 61% of the Company’s outstanding common stock. This percentage includes that shares owned by FWHC Bridge, LLC and FWHC Bridge Friends, LLC who have indicated that they are part of a group with FWHC Holdings, LLC.
Working Capital Deficit
Working capital as of June 30, 2021 and December 31, 2020 is summarized as follows:
| As Of | ||||||||
| June 30, 2021 | December 31, 2020 | |||||||
| Current Assets | $ | 1,697,341 | $ | 1,757,202 | ||||
| Current Liabilities | 5,522,974 | 2,892,686 | ||||||
| Working Capital Deficit | $ | (3,825,633 | ) | $ | (1,135,484 | ) | ||
Cash Flows
Cash activity for the six months ended June 30, 2021 and 2020 is summarized as follows:
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash used in operating activities | $ | (2,740,629 | ) | $ | (4,335,204 | ) | ||
| Cash used in investing activities | (7,832 | ) | — | |||||
| Cash provided by financing activities | 2,624,338 | 4,740,840 | ||||||
| Net (decrease)/ increase in cash | $ | (124,123 | ) | $ | 405,816 | |||
As of June 30, 2021, the Company had approximately $1,517,000 of cash on hand.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding disclosure.
The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2021. In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and the Company necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, the Company’s disclosure controls and procedures were not as effective as desired because of the material weakness in its internal control over financial reporting as discussed below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2021, the Company determined that internal control deficiencies relating to a lack of segregation of duties still exist. Management believes these deficiencies mainly relate to the Company employing a limited number of accounting and finance personnel. The aggregation of these deficiencies is considered to be a material weakness in internal control over financial reporting.
In light of the conclusion that the Company’s internal disclosure controls were ineffective as of June 30, 2021, it has applied additional procedures and processes as necessary to ensure the reliability of financial reporting in regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
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Changes in Internal Control Over Financial Reporting
During the six months ended June 30, 2021, the Company has adopted and began to implement a written remediation plan which includes continuing to use external consultants for technical accounting matters, incremental formal education for the accounting and finance group, implementing a number of new entity and process level controls and installing a new accounting software system. Management believes these actions will help remediate internal control deficiencies related to the Company’s financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in a lawsuit with Sinclair Broadcast Group, Inc. (Sinclair) which was filed on March 25, 2021 in the Circuit Court for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. Sinclair has filed suit alleging breach of contract for advertising services in the amount of approximately $75,000 plus interest and costs. The Company has retained legal counsel for its defense against the suit.
ITEM 1A. RISK FACTORS.
We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS.
The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 13, 2021
| H-CYTE, INC | ||
| By: | /s/ Robert S. Greif | |
| Robert S. Greif | ||
Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Jeremy Daniel | |
| Jeremy Daniel | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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EXHIBIT INDEX
| 31.1 | Section 302 Certification of Principal Executive Officer* | |
| 31.2 | Section 302 Certification of Principal Financial Officer* | |
| 32.1 | Section 906 Certification of Principal Executive Officer and Principal Financial Officer*** | |
| 101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are imbedded within the Inline XBRL document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document ** | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document ** | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document ** | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document ** | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document ** |
| * | Filed herewith. |
| ** | Pursuant to Rule 406T of Regulation S-T adopted by the SEC, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections. |
| *** | This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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