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 ____________
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| OTC Capital Markets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller Reporting Company
| |
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes ☒
As of August 12, 2022 shares of the registrant’s common stock were outstanding.
H-CYTE, INC AND SUBSIDIARIES
TABLE OF CONTENTS
| 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, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Patient financing receivable, current portion | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| 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, related parties | ||||||||
| Interest payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Royalty obligation (see note 4) | ||||||||
| Lease liability, 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, 2022 and December 31, 2021, respectively. | ||||||||
| Common stock - $par value: shares authorized, and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively.1 | ||||||||
| Additional paid-in capital1 | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
| 1 |
See accompanying notes to the consolidated financial statements
| 4 |
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Inducement expense | ( | ) | ||||||||||||||
| Loss on extinguishment of convertible notes payable | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - Basic and Diluted1 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average outstanding shares - basic and diluted | ||||||||||||||||
| 1 |
See accompanying notes to the consolidated financial statements
| 5 |
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the three months and six months ended June 30, 2021 and 2022
| Three months ended | Preferred Series A Stock | Common Stock1 | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||
| June 30, 2021 and 2022 | Shares | Amount | Shares | Amount | Capital1 | Deficit | Deficit | |||||||||||||||||||||
| Balances - March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series A Preferred Stock to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Preferred Series A Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital1 | Deficit | Deficit | ||||||||||||||||||||||
| Balances - March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series A Preferred Stock to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Adjustment for | - | ( | ) | |||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Six months ended | Preferred Series A Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||
| June 30, 2021 and 2022 | Shares | Amount | Shares | Amount | Capital1 | Deficit | Deficit | |||||||||||||||||||||
| Balances - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series A Preferred Stock to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Preferred Series A Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital1 | Deficit | Deficit | ||||||||||||||||||||||
| Balances - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Conversion of Series A Preferred Stock to Common Stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Adjustment for a | - | ( | ) | |||||||||||||||||||||||||
| Inducement expense | - | - | ||||||||||||||||||||||||||
| Conversion of warrants to Common Stock | - | |||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| 1 |
See accompanying notes to the consolidated financial statements
| 6 |
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Share based compensation expense | ||||||||
| Inducement expense | ||||||||
| Amortization of debt premium | ( | ) | ||||||
| Bad debt expense | ||||||||
| Loss on extinguishment of convertible notes payable | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Patient financing receivable, current portion | ( | ) | ||||||
| Patient financing receivable, net of current portion | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Other liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Interest payable | ||||||||
| Interest payable, related party | ||||||||
| 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 notes payable | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Payment of debt financing costs | ( | ) | ||||||
| Proceeds from warrants exercised related to inducement | ||||||||
| Payment on PPP Loan | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Change in Cash | ( | ) | ( | ) | ||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
| Supplementary Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non Cash Investing & Financing Activity | ||||||||
| Conversion of Series A Preferred Stock to Common Stock | ||||||||
| Issuance of warrants pursuant to inducement agreements | ||||||||
| Issuance of warrants for services rendered | ||||||||
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 intended to continue as a hybrid-biopharmaceutical company dedicated primarily to developing new treatments for patients with chronic respiratory and pulmonary disorders. During the last three years, the Company has evolved into two separate divisions with its entrance into the biologics and device development space (“Biotech Division”). This division is complementary to the Company’s Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Division”) and is focused on underserved disease states. H-CYTE is shifting its focus on acquiring and developing early-stage companies or their technologies in the areas of therapeutics, medical devices, and diagnostics. The goal is to develop these companies and incubate their technologies to meaningful clinical inflection points.
On June 3, 2022, the Company closed its clinic in Scottsdale, Arizona. The Company has now closed all of its clinical operations in the autologous infusion therapy business which delivered treatments for patients with chronic respiratory and pulmonary disorders. The Company will continue to pursue regulatory approval of the device that was utilized in the treatment provided at the clinics. The Company also has a continued interest in the commercialization of the DenerveX device. The Company has begun to transform itself into a biologics and therapeutic device incubator company to bring new technologies to market.
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, LLC (“LI Dallas”), Lung Institute Nashville, LLC (“LI Nashville”), Lung Institute Pittsburgh, LLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”). Additionally, H-CYTE Management, LLC was 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. During the first quarter of 2022, the Company decided to close the LI Tampa and LI Nashville clinics. During the second quarter of 2022, the Company closed the LI Scottsdale clinic, the final LHI clinic.
On June 10, 2022, the Company amended (the “Amendment”) its Articles of Incorporation to effectuate a one-for-one thousand reverse stock split (the “Reverse Split”) of its common stock. The Reverse Split was approved by FINRA on June 10, 2022 and effectuated on June 13, 2022. Pursuant to the Amendment, the Company also reduced the authorized shares of common stock to . As a result of the Reverse Split, as of June 30, 2022, the Company has shares of common stock outstanding and shares of Series A Preferred Stock outstanding. As a result of the Reverse Stock Split, the Series A Preferred Stock conversion ratio is now one thousand shares of Series A Preferred Stock converts into one share of common stock. Accordingly, the outstanding shares of Series A Preferred Stock are now convertible into an aggregate of shares of common stock.
Impact of COVID-19
The coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of operations. The impact of the COVID-19 outbreak on businesses and the economy in the United States is expected to continue to be significant. The extent to which the COVID-19 outbreak will continue to impact businesses and the economy is highly uncertain. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency caused by a new strain of the coronavirus and advised of the risks to the international community as the virus spread globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The spread of COVID-19 coronavirus has caused public health officials to recommend precautions to mitigate the spread of the virus, especially as to travel and congregating in large numbers. In addition, certain states and municipalities have enacted quarantining regulations which severely limit the ability of people to move and travel.
In addition, the Company is uncertain of the full effect the pandemic will have on it for the longer term since the scope and duration of the pandemic is unknown, and evolving factors such as the level and timing of the distribution of efficacious vaccines across the world and the extent of any resurgences of the virus or emergence of new variants of the virus, such as the Delta variant and the Omicron variant, will impact the stability of economic recovery and growth. The Company may experience long-term disruptions to its operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the pandemic; and closures of businesses or manufacturing facilities critical to its business.
| 8 |
Autologous Infusion Therapy (“Infusion Division”)
The Company’s 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 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. During the first quarter of 2022, the Company decided to close the clinics in Tampa and Nashville. During the second quarter of 2022, the Company closed its clinic in Scottsdale. The Company has now closed all of its clinical operations in the autologous infusion therapy division which delivered treatments for patients with chronic respiratory and pulmonary disorders.
Biotech Development (“Biotech Division”)
During the year ended December 31, 2021, the Company completed a review of the R&D status regarding the exclusive product supply and services agreements with Rion, LLC (“Rion”) to develop and distribute (post U.S. Food & Drug Administration, the “FDA”, approval) a biologic combining its PRP-PBMC (“PRP”) technology with Rion’s exosomes (“EV”) technology for the treatment of chronic obstructive pulmonary disease (“COPD”). The Company has determined a single entity biologic from an alternative commercial source will be a more viable solution. The Company has decided to move away from Rion’s PRP technology and is progressing towards alternate biologics and therapeutic devices to meet the needs of the business.
As of June 30, 2022, the Company has closed all of the LHI clinics and has moved away from the Infusion Division as part of its future plans. The Company has also decided that the Biotech Division will begin to transform into a medical biosciences incubator company focusing on bringing new biologics and therapeutic device technologies to market for various health conditions.
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, 2021 and 2020, which included all information and notes necessary for such complete presentation in conjunction with its 2021 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
The results of operations for the interim period ended June 30, 2022 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, 2021, which are contained in the Company’s 2021 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, 2021.
Note 3 - Liquidity, Going Concern and Management’s Plans
The
Company incurred net losses of approximately $
COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the outbreak of COVID-19 on the economy in the U.S. and the rest of the world is expected to continue to be significant. The extent to which the COVID-19 outbreak will continue to impact the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected.
The
Company 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 not continue 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
January 2022, the Company offered certain warrant holders the opportunity to receive an additional warrant to purchase the Company’s
Common Stock at $
The Company filed a Registration Statement on Form S-1 registering the resale of the shares of common stock issuable upon exercise of the warrants issued in the April 2020 financing. The registration statement was declared effective on February 14, 2022.
On
June 9, 2022, the Company entered into a securities purchase agreement for a total of $
On
June 9, 2022, the Company also issued a promissory note for $
| 9 |
Note 4 – Related Party Transactions
Officers and Board Members and Related Expenses
On
January 12, 2021, Mr. Raymond Monteleone was appointed as Chairman of the Board, Audit Committee Chair, and Compensation Committee
Chair. There are understandings between the Company and Mr. Monteleone for him to receive $
Mr.
Michael Yurkowsky entered into an oral agreement with the Company on October 1, 2020, 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 $
| 10 |
Mr.
Richard Rosenblum entered into an oral agreement with the Company effective January 17, 2022, in which Mr. Rosenblum will receive
$
Mr.
Matthew Anderer entered into an oral agreement with the Company effective January 17, 2022, in which Mr. Anderer will receive $
Debt and Other Obligations
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 $
On
October 14, 2021, the Company entered into the Second Closing Bring Down Agreement (the “October 2021 Note Purchase Agreement”)
whereby the five (5) investors who had entered into the April 2021 Note Purchase Agreement purchased new notes in the Company in the
aggregate principal amount of $
On February 22, 2022, the Company entered into a Debt
Conversion Agreement (the “Amendment Agreement”) which i) provided for an additional round of convertible debt financing (“Tranche
2 Notes”) of up to $
| 1) | $ | |
| 2) | Following the closing of a Qualified financing, |
The Milestone Payments are not to exceed $2 million, and the Amendment Agreement also specifies that a Qualified Financing will not occur prior to the closing of the acquisition of Jantibody, LLC.
The Company evaluated the Amendment Agreement under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that probability of having to pay a Milestone payment was minimal and the change in the fair value of the conversion feature was not material. Since the Amendment did not cause a material change in cash flows, extinguishment accounting was not applicable.
On April 29, 2022, the Company
entered into an Amended and Restated Note Conversion Agreement (the “Note Conversion Agreement”) with certain holders of its
Tranche 1 Notes (i) providing for a conversion price equal to the lesser of (x) $ per share (pre-split) and (y) the price per share
paid by the investors in a Qualified Financing for such New Securities purchased for cash and not through conversion of Notes (as such
terms are defined in the Note Conversion Agreement), in each case subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization, (ii) automatic conversion upon the occurrence of a Qualified Financing, and
(iii) amendment of the maturity date from March 31, 2022 to June 17, 2022 (the “New Notes”).
Due to changes in key provisions of the Tranche 1
Notes, the Company analyzed the before and after cash flows between the (i) fair value of the New Notes and (ii) reacquisition price of
the Tranche 1 Notes prior to the (A) change in the maturity date from March 31, 2022 to June 17, 2022, (B) change in the conversion price
to the lesser of (x) $
The Company used a discounted cash flow method with
Monte Carlo Simulation to value the Royalty Payments. Future Royalty Payments were estimated based on management’s best estimate
of future cash flows under various scenarios which were discounted to present value using a risk-adjusted rate of
Based on the before and after cash flows of each note,
the change was considered significantly different. Consequently, the New Notes were accounted for as a debt extinguishment of the Tranche
1 Notes and a new debt issuance of the New Notes. The Company recorded a $
| Carrying value of Tranche 1 Notes | $ | |||
| Less: Fair value of New Notes | ( | ) | ||
| Less: Fair value of Royalty Payments | ( | ) | ||
| Loss on Extinguishment | $ | ( | ) |
The Note Conversion Agreement also provided for the
consummation of a Tranche 2 Financing (the “Tranche 2 Notes”) subject to (i) the aggregate principal amount of indebtedness
represented by the Tranche 2 Notes being capped at $
On June 9, 2022, the Company
entered into a securities purchase agreement for a total of $
The Company also issued a
promissory note for $
The embedded features in the Tranche 2 Notes were analyzed under ASC 815 to determine if they required bifurcation as derivative instruments. To be a derivative, one of the criteria is that the embedded component must be net-settleable. While the Company’s Common Stock was traded on an exchange at the time of the transaction, the underlying shares are not readily convertible into cash since there is insufficient daily trading volume for the holders to convert the Tranche 2 Notes into Common Stock without significantly affecting the share price. Accordingly, the embedded derivatives, including the embedded conversion feature, did not meet the definition of a derivative, and therefore, did not require bifurcation from the host instrument. Certain default put provisions, including a default put and default interest, were not considered to be clearly and closely related to the host instrument but the Company concluded that the value of these provisions was de minimus at inception. The Company will reconsider the value of these provisions each reporting period to determine if the value becomes material to the financial statements.
The Company chose to early adopt effective January 1, 2021, ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contract in Entity’s Own Equity. Thus, the April 2021 and October 2021 Note Purchase Agreements did not require consideration of a beneficial conversion feature and were accounted for solely as debt on the balance sheets.
Note 5 - Equity Transactions
In
January 2022, the Company offered certain warrant holders the opportunity to receive an additional warrant to purchase the Company’s
Common Stock at $
On
June 10, 2022, the Company amended (the “Amendment”) its Articles of Incorporation to effectuate a one-for-one thousand reverse
stock split (the “Reverse Split”) of its common stock. The Reverse Split was approved by FINRA on June 10, 2022 and effectuated
on June 13, 2022. Pursuant to the Amendment, the Company also reduced the authorized shares of common stock to . As a result
of the Reverse Split, the Company has approximately shares of common stock outstanding and
The following table summarizes the Company’s common and preferred stock outstanding by class. The number of common stock shares has been adjusted to reflect a one-for-one thousand reverse stock split that became effective on June 13, 2022.
| June 30, 2022 | December 31, 2021 | |||||||
| Common Stock | ||||||||
| Series A Preferred Stock | ||||||||
Series A Preferred Stock
During the three and six months ended June 30, 2022, and shares of Series A Preferred Stock were converted to and shares of Common Stock at the request of certain Series A Preferred Shareholders, respectively.
Voting Rights
Conversion
Series
A Preferred Stock
Liquidation
Series A Preferred Stock does not have preferential treatment over common stock shareholders if the Company liquidates or dissolves.
Share-Based Compensation Plan
The Company utilizes the Black-Scholes valuation method to recognize stock-based compensation expense over the vesting period. The expected life represents the period that the stock-based compensation awards are expected to be outstanding.
| 11 |
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 ten years from the date of grant. These options are not included in the Company’s current stock option plan as they were granted outside of the plan.
The Board of Directors decided not to renew the former CEO’s (Robert Greif) employment contract; therefore, the unvested shares were forfeited resulting in a reduction of share-based compensation of approximately $ for the period ended September 30, 2021 that was recognized during the period ended June 30, 2021.
On June 10, 2022, the Company amended its Articles of Incorporation to effectuate a one-for-one thousand reverse stock split of its common stock. The Reverse Split was approved by FINRA on June 10, 2022 and effectuated on June 13, 2022.
At June 30, 2021, options were outstanding and were vested. At June 30, 2022, options were outstanding and were vested. For the three months and six months ended June 30, 2022, the Company recognized approximately $and $in stock-based compensation expense, respectively, which is included in share based compensation. For both the three months and six months ended June 30, 2021, the Company recognized approximately $ in stock-based compensation expense which is included in share based compensation. At June 30, 2022, the Company has approximately $of unrecognized compensation costs related to non-vested stock options, which is expected to the 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, 2020 | $ | |||||||||||
| Granted | ||||||||||||
| Expired/Cancelled | ( | ) | — | |||||||||
| Outstanding at June 30, 2021 | $ | |||||||||||
| Exercisable at June 30, 2021 | $ | |||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||
| Granted | - | - | - | |||||||||
| Outstanding at June 30, 2022 | $ | |||||||||||
| Exercisable at June 30, 2022 | $ | |||||||||||
| 12 |
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested at June 30, 2021 | $ | |||||||
| Non-vested at December 31, 2021 | $ | |||||||
| Vested | ( | ) | ||||||
| Non-vested at June 30, 2022 | $ | |||||||
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 and if-converted methods, as applicable. Any potentially dilutive securities are antidilutive due to the Company’s net losses.
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Options to purchase common stock (in the money) | ||||||||
| Warrants to purchase common stock (in the money) | ||||||||
| Series A Preferred Stock convertible to common stock | ||||||||
| Total | ||||||||
Excluded
from the above table are warrants
and stock
options for the six months ended June 30, 2022 and warrants
and stock
options for the six months ended June 30, 2021 as they are out of the money (exercise price greater than the stock price). Inclusion
of such would be anti-dilutive.
Note 6 – Commitments & Contingencies
CEO Compensation Agreement
On
December 23, 2021, the Company entered into an employment agreement (the “Employment Agreement”) with Michael Yurkowsky,
the Company’s Chief Executive Officer, to continue to serve as the Chief Executive Officer of the Company. Under the Employment
Agreement, which commenced on December 1, 2021 (the “Effective Date”) and has a term of one year from the Effective Date
(the “Employment Period”), Mr. Yurkowsky will receive a base salary of $
In
addition to his base salary, Mr. Yurkowsky may receive a one-time cash bonus in gross amount equal to $
. These market conditions were reflected in the grant date fair value of the award as required under ASC 718 Compensation-Stock Compensation.
The
Equity Award was measured at fair value on its grant date using a Monte Carlo simulation model. The Monte Carlo simulation model includes
assumptions for the expected term, volatility, and dividend yield, each of which are determined in reference to the Company’s historical
results. The Company will recognize aggregate stock-based compensation expense of approximately $ related to the Equity Award
on a straight-line basis over the derived service period determined by the Monte Carlo simulation model, which was
| 13 |
Consulting Agreements
The
Company entered into a consulting agreement with Tanya Rhodes of Rhodes & Associates, Inc, effective June 15, 2020, to serve as the
Chief Science Officer of the Company. The agreement has a minimum term of six months with an average fee of $
The
Company entered into a consulting agreement with Alpha IR Group on March 1, 2022, to provide investor relations to the Company. The agreement
is for twelve months with an average service fee of $
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.
The
Company is involved in a lawsuit with Sinclair Broadcast Group, Inc. (“Sinclair”) which was filed on September 8, 2020, 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 $
The
Company is involved in a lawsuit with ITN Networks, LLC (“ITN”) which was filed on July 22, 2021, in the Circuit Court for
the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. ITN has filed suit alleging breach of contract for advertising
services in the amount of approximately $
Note 7 – Debt
Notes Payable
Notes
payable were assumed in the Merger (for further discussion, see Note 1 - “Overview” to the consolidated financial statements
in the Company’s 2020 Annual Report on Form 10-K) and are due in aggregate monthly installments of approximately $
| 14 |
Paycheck Protection Program
On
April 29, 2020, the Company issued a promissory note in the principal amount of $
The Company did 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
Company received notification from the Small Business Administration (“SBA”), dated August 17, 2021, notifying it that $
Note 8 - Common Stock Warrants
A summary of the Company’s warrant issuance activity and related information for the six months ended June 30, 2022 and 2021 is as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding and exercisable at December 31, 2020 | $ | |||||||||||
| Expired | ( | ) | ( | ) | - | |||||||
| Outstanding and exercisable at June 30, 2021 | $ | |||||||||||
| ||||||||||||
| Outstanding and exercisable at December 31, 2021 | $ | |||||||||||
| Expired | ( | ) | ( | ) | - | |||||||
| Exercised | ( | ) | - | |||||||||
| Granted | ||||||||||||
| Outstanding and exercisable at June 30, 2022 | $ | |||||||||||
| 15 |
The fair value of all warrants issued are determined by using the Black-Scholes valuation technique. 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 (%) | ||||||||||||||||||||
| Granted for inducement agreement | 1/19/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 1/20/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 1/20/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 1/24/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 1/25/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 2/02/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 2/04/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 2/04/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for services provided | 2/09/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 2/22/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 2/22/2022 | $ | $ | $ | ||||||||||||||||||||||||
| Granted for inducement agreement | 3/21/2022 | $ | $ | $ | ||||||||||||||||||||||||
The
fair value of warrants issued during the six months ended June 30, 2022 totaled approximately $
Note 9 - Subsequent Events
On August 9, 2022, the Company entered into a securities
purchase agreement for a total of $
As of August 10, 2022, an additional shares Series A Preferred Stock was converted into shares of Common Stock at the request of certain Series A Preferred Stockholders.
| 16 |
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 intended to continue as a hybrid-biopharmaceutical company dedicated primarily to developing new treatments for patients with chronic respiratory and pulmonary disorders. During the last three years, the Company has evolved into two separate divisions with its entrance into the biologics and device development space (“Biotech Division”). This division is complementary to the Company’s Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Division”) and is focused on underserved disease states. H-CYTE is shifting its focus on acquiring and developing early-stage companies or their technologies in the areas of therapeutics, medical devices, and diagnostics. The goal is to develop these companies and incubate their technologies to meaningful clinical inflection points.
On June 3, 2022, the Company closed its clinic in Scottsdale, Arizona. The Company has now closed all of its clinical operations in the autologous infusion therapy business which delivered treatments for patients with chronic respiratory and pulmonary disorders. The Company will continue to pursue regulatory approval of the device that was utilized in the treatment provided at the clinics. The Company also has a continued interest in the commercialization of the DenerveX device. The Company has begun to transform itself into a biologics and therapeutic device incubator to bring new technologies to market.
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, LLC (“LI Dallas”), Lung Institute Nashville, LLC (“LI Nashville”), Lung Institute Pittsburgh, LLC (“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. During the first quarter of 2022, the Company decided to close the LI Tampa and LI Nashville clinics. During the second quarter of 2022, the Company closed the LI Scottsdale clinic, the final LHI clinic.
On June 10, 2022, the Company amended (the “Amendment”) its Articles of Incorporation to effectuate a one-for-one thousand reverse stock split (the “Reverse Split”) of its common stock. The Reverse Split was approved by FINRA on June 10, 2022 and effectuated on June 13, 2022. Pursuant to the Amendment, the Company also reduced the authorized shares of common stock to 500,000,000. As a result of the Reverse Split, as of June 30, 2022, the Company has approximately 257,282 shares of common stock outstanding and 494,579,119 shares of Series A Preferred Stock outstanding. As a result of the Reverse Stock Split, the Series A Preferred Stock is convertible at a ratio of one thousand shares of Series A Preferred Stock into one share of common stock. Accordingly, the 494,579,119 outstanding shares of Series A Preferred Stock are now convertible into an aggregate of 494,579 shares of common stock.
Impact of COVID-19
COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the COVID-19 outbreak on businesses and the economy in the United States is expected to continue to be significant. The extent to which the COVID-19 outbreak will continue to impact businesses and the economy is highly uncertain. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency caused by a new strain of the coronavirus and advised of the risks to the international community as the virus spread globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The spread of COVID-19 coronavirus has caused public health officials to recommend precautions to mitigate the spread of the virus, especially as to travel and congregating in large numbers. In addition, certain states and municipalities have enacted quarantining regulations which severely limit the ability of people to move and travel.
In addition, the Company is uncertain of the full effect the pandemic will have on it for the longer term since the scope and duration of the pandemic is unknown, and evolving factors such as the level and timing of the distribution of efficacious vaccines across the world and the extent of any resurgences of the virus or emergence of new variants of the virus, such as the Delta variant and the Omicron variant, will impact the stability of economic recovery and growth. The Company may experience long-term disruptions to its operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the pandemic; and closures of businesses or manufacturing facilities critical to its business.
| 17 |
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 assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.
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.
Results of Operations - Three and six months ended June 30, 2022 and 2021
Revenue and Gross Profit
The Company recorded revenue of approximately $74,000 and $453,000 for the three and six months ended June 30, 2022, respectively. The Company recorded revenue of approximately $450,000 and $827,000 for the three and six months ended June 30, 2021, respectively. The Company has closed all of the LHI Clinics as of June 30, 2022 which was the Company’s only current source of revenue. The Company has begun to transform into a biologics and therapeutic device incubator company to bring new technologies to market.
For the three and six months ended June 30, 2022, the Company generated a gross profit totaling approximately $44,000 and $337,000, respectively. The Company generated gross profit of approximately $234,000 and $412,000 for the three and six months ended June 30, 2021, respectively.
Operating Expenses
Salaries and Related Costs
For the three and six months ended June 30, 2022, the Company incurred approximately $280,000 and $627,000 in salaries and related costs, respectively. 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 decrease in salaries and related costs, as compared to the prior year, is due to the adjustments to the Company’s corporate structure by reducing expenses in marketing, sales, and operations due to decreased patient volume and closing of the LHI clinics.
Other General and Administrative
For the three and six months ended June 30, 2022, the Company incurred approximately, $395,000 and $905,000, in other general and administrative costs, respectively. The Company incurred other general and administrative costs of approximately $700,000 and $1,619,000 for the three and six months ended June 30, 2021, respectively. The Company made adjustments to its corporate structure by reducing expenses in marketing, sales, and operations due to decreased patient volume and closing of the LHI clinics.
| 18 |
Other Income/Expense
For the three and six months ended June 30, 2022, the Company incurred approximately $0 and $3,025,000, respectively, in inducement expense related to the warrant inducement (see Note 8). For the three and six months ended June 30, 2022, the Company incurred approximately $2,196,000 and $0, respectively, related to the loss on extinguishment of convertible notes payable (see Note 4).
Appointment of New Board Members and Officers.
On January 17, 2022, Mr. Richard Rosenblum was appointed as a member of the Board.
On January 17, 2022, Mr. Matthew Anderer was appointed as a 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 incurred net losses of approximately $2,635,000 and $6,527,000 for the three and six months ended June 30, 2022, respectively. The Company incurred net losses of approximately $2,058,000 and $3,466,000 for the three 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 consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern.
COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the outbreak of COVID-19 on the economy in the U.S. and the rest of the world is expected to continue to be significant. The extent to which the COVID-19 outbreak will continue to impact the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected.
The Company had cash on hand of approximately $46,000 as of June 30, 2022 and approximately $3,000, as of August 12, 2022. The Company’s cash is insufficient to fund its operations over the next year and the Company is currently working to obtain additional debt or equity financing to help support working capital needs.
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 not continue 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.
| 19 |
Liquidity and Sources of Liquidity
With the Company historically having experienced losses, the primary source of liquidity has been raising capital through debt and equity offerings, as described below.
Debt
Convertible Notes Payable
On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the terms of the April 2021 Note Purchase Agreement, the Company sold promissory notes in the aggregate principal amount of $2,575,000 maturing on June 30, 2022 with an annual interest rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by the assets of the Company under a security agreement with the Holders. The lead investor of the April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.
On October 14, 2021, the Company entered into the Second Closing Bring Down Agreement (the “October 2021 Note Purchase Agreement”) whereby the five (5) investors who had entered into the April 2021 Note Purchase Agreement purchased new notes in the Company in the aggregate principal amount of $750,000. The Notes are due and payable on June 30, 2022 and bear interest at an annual rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next financing that meets the definition of a Qualified Financing as defined in the Note Purchase Agreement. The Notes are secured by all of the assets of the Company under a security agreement with the Holders. The lead investor of the October 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $437,000 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 $7,000 as part of the October 2021 Note Purchase Agreement.
On February 22, 2022, the Company entered into a Debt Conversion Agreement (the “Amendment Agreement”) which i) provided for an additional round of convertible debt financing (“Tranche 2 Notes”) of up to $500,000 and ii) amended the conversion price on the convertible notes issued April 1, 2021 and October 8, 2021 (Tranche 1 Notes”) from 80% of the price paid in a Qualified Financing (proceeds of at least $15 million), to the lesser of (x) $0.002 and (y) the price paid in a Qualified Financing (proceeds of at least $10 million). The Amendment Agreement also provides the following Milestone Payments:
| 3) | $1,000,000 after filing a premarket notification pursuant to Section 510(k) of the Food, Drug and Cosmetic Act, of its intent to market its PRP cellular therapy | |
| 4) | Following the closing of a Qualified financing, 25% of all proceeds raised in excess of $10 million (not to exceed $1 million) |
The Milestone Payments are not to exceed $2 million, and the Amendment Agreement also specifies that a Qualified Financing will not occur prior to the closing of the acquisition of Jantibody, LLC.
The Company evaluated the Amendment Agreement under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that probability of having to pay a Milestone payment was minimal and the change in the fair value of the conversion feature was not material. Since the Amendment did not cause a material change in cash flows, extinguishment accounting was not applicable.
On April 29, 2022, the Company entered into an Amended and Restated Note Conversion Agreement (the “Note Conversion Agreement”) with certain holders of its Tranche 1 Notes (i) providing for a conversion price equal to the lesser of (x) $0.002 per share (pre-split) and (y) the price per share paid by the investors in a Qualified Financing for such New Securities purchased for cash and not through conversion of Notes (as such terms are defined in the Note Conversion Agreement), in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization, (ii) automatic conversion upon the occurrence of a Qualified Financing, and (iii) amendment of the maturity date from March 31, 2022 to June 17, 2022 (the “New Notes”). Upon the effectiveness of the Company’s 1,000-1 reverse split, the conversion price adjusted to the lesser of (a) the price in the Qualified Financing or (b) $2.00 per share. The New Notes also provided the investors with Royalty Payments equal to 15% of all net sales generated by the Company with respect to the sale of products or services associated with the 510(k) Notification related to the Company’s autologous cellular therapy (PRP-PBMC) to treat chronic lung disorder. The Royalty Payments are in lieu of the Milestone payments but are perpetual and there is no limit to the aggregate amount of Royalty Payments that may be paid.
Due to changes in key provisions of the Tranche 1 Notes, the Company analyzed the before and after cash flows between the (i) fair value of the New Notes and (ii) reacquisition price of the Tranche 1 Notes prior to the (A) change in the maturity date from March 31, 2022 to June 17, 2022, (B) change in the conversion price to the lesser of (x) $2.00 and (y) the price paid in a Qualified Financing, and (C) the fair value of the potential Royalty Payments, to determine whether these changes resulted in a modification or extinguishment of the Tranche 1 Notes.
The Company used a discounted cash flow method with Monte Carlo Simulation to value the Royalty Payments. Future Royalty Payments were estimated based on management’s best estimate of future cash flows under various scenarios which were discounted to present value using a risk-adjusted rate of 65%.
| 20 |
Based on the before and after cash flows of each note, the change was considered significantly different. Consequently, the New Notes were accounted for as a debt extinguishment of the Tranche 1 Notes and a new debt issuance of the New Notes. The Company recorded a $2.1 million loss upon extinguishment of debt in the three months ended June 30, 2022, which was comprised of the following:
| Carrying value of Tranche 1 Notes | $ | 3,580,738 | ||
| Less: Fair value of New Notes | (4,079,838 | ) | ||
| Less: Fair value of Royalty Payments | (1,697,000 | ) | ||
| Loss on Extinguishment | $ | (2,196,100 | ) |
The Note Conversion Agreement also provided for the consummation of a Tranche 2 Financing (the “Tranche 2 Notes”) subject to (i) the aggregate principal amount of indebtedness represented by the Tranche 2 Notes being capped at $500,000 and (ii) Tranche 2 Notes’ being an unsecured obligation of the Company and expressly subordinate in all respects to all indebtedness of the Company under the Notes and including language in which the holders of such Tranche 2 Notes acknowledge, confirm and agree to the foregoing subordination terms. Pursuant to the terms of the Note Conversion Agreement, the Investors have agreed not to sell any capital stock of the Company for a period of 12 months following the Qualified Financing.
On June 9, 2022, the Company entered into a securities purchase agreement for a total of $272,500 with two accredited investors. The notes issued are convertible into common stock at a 35% discount to the lowest trading price in the 20-day period prior to conversion. The notes bear interest at 10% and are due one year from issuance. For the first six months, the Company has the right to prepay the notes at a premium of between 25% and 35% depending on when it is repaid.
The Company also issued a promissory note for $100,000 to another accredited investor. This note bears interest at 15% (no matter when repaid) and converts at a discount of 25% of the price of a public offering or a 25% discount to the VWAP of the five (5) days prior to conversion.
The embedded features in the Tranche 2 Notes were analyzed under ASC 815 to determine if they required bifurcation as derivative instruments. To be a derivative, one of the criteria is that the embedded component must be net-settleable. While the Company’s Common Stock was traded on an exchange at the time of the transaction, the underlying shares are not readily convertible into cash since there is insufficient daily trading volume for the holders to convert the Tranche 2 Notes into Common Stock without significantly affecting the share price. Accordingly, the embedded derivatives, including the embedded conversion feature, did not meet the definition of a derivative, and therefore, did not require bifurcation from the host instrument. Certain default put provisions, including a default put and default interest, were not considered to be clearly and closely related to the host instrument but the Company concluded that the value of these provisions was de minim us at inception. The Company will reconsider the value of these provisions each reporting period to determine if the value becomes material to the financial statements.
Equity
In January 2022, the Company offered certain warrant holders the opportunity to receive an additional warrant to purchase the Company’s Common Stock at $14.00 per share, for a period of five (5) years from issuance for the exercise of each existing warrant originally issued in April 2020 prior to March 31, 2021. As of June 30, 2022, the Company had eleven warrant holders exercise an aggregate of 83,579 warrants at $14.00 per share resulting in cash proceeds of $1,170,110 to the Company.
The Company filed a Registration Statement on Form S-1 registering the resale of the shares of common stock issuable upon exercise of the warrants issued in the April 2020 financing. The registration statement was declared effective on February 14, 2022.
Cash activity for the three months ended June 30, 2022 and December 31, 2021 is summarized as follows:
Working Capital Deficit
| As Of | ||||||||
| June 30, 2022 | December 31, 2021 | |||||||
| Current Assets | $ | 223,174 | $ | 197,456 | ||||
| Current Liabilities | 5,175,718 | 4,920,880 | ||||||
| Working Capital Deficit | $ | (4,952,544 | ) | $ | (4,723,424 | ) | ||
Cash Flows
Cash activity for the three months ended June 30, 2022 and 2021 is summarized as follows:
| Six months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash used in operating activities | $ | (1,527,380 | ) | $ | (2,740,629 | ) | ||
| Cash used in investing activities | - | (7,832 | ) | |||||
| Cash provided by financing activities | 1,478,085 | 2,624,338 | ||||||
| Net increase (decrease) in cash | $ | (49,295 | ) | $ | (124,123 | ) | ||
As of June 30, 2022, the Company had approximately $46,000 of cash on hand.
| 21 |
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, 2022. 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, 2022, the Company’s disclosure controls and procedures were not as effective as desired because of the material weakness in our internal control over financial reporting as discussed below, and as a result, the Company engaged consultants, implemented a number of new entity and process level controls and installed a new accounting software system to help mitigate this material weakness.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2022, we determined that internal control deficiencies relating to a lack of segregation of duties still exist. Management believes these deficiencies mainly relate to the Company employing a limited number of accounting and finance personnel. The aggregation of these deficiencies is considered to be a material weakness in internal control over financial reporting.
In light of the conclusion that our disclosure controls and procedures were ineffective as of June 30, 2022, we have applied additional procedures, engaged consultants, and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this quarterly report.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in a lawsuit with Sinclair Broadcast Group, Inc. (“Sinclair”) which was filed on September 8, 2020, 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. The amount is recorded in accounts payable as of June 30, 2022.
The Company is involved in a lawsuit with ITN Networks, LLC (“ITN) which was filed on July 22, 2021, in the Circuit Court for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. ITN 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. The amount is recorded in accounts payable as of June 30, 2022.
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 12, 2022
| H-CYTE, INC | ||
| By: | /s/ Michael Yurkowsky | |
| Michael Yurkowsky | ||
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 | Inline XBRL Instance Document ** | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document ** | |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document ** | |
| 101.LAB | Inline XBRL Taxonomy Labels Linkbase Document ** | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document ** | |
| 101.DEF | Inline XBRL Definition Linkbase Document ** | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL 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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