UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ____________
Commission file number: 001-36763
H-CYTE, INC
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
Nevada | 46-3312262 | |
(State or | (IRS Employer | |
Identification |
201 East Kennedy Blvd, Suite 700 | ||
Tampa, Florida | 33602 | |
(Address of | (Zip Code) |
(844) 633-6839
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | HCYT | OTC Capital Markets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ X ] | Smaller Reporting Company [X] |
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. [X][ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of August 12, 2019, 98,886,4132020, 122,139,432 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 our 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:
● | our ability to market, commercialize and achieve broader market acceptance for our products; | |
● | our ability to successfully expand, and achieve full productivity from, our sales, clinical support, and marketing capabilities; | |
● | our ability to successfully complete the development of, and obtain regulatory clearance or approval for, our products; and | |
● | the estimates regarding the sufficiency of our cash resources, our ability to obtain additional capital or our 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 we believe that we have 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 us and our projections of the future, about which we cannot be certain. You should also refer to the section of our Annual report on Form 10-K entitled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our 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 us, or any other person, that we will achieve our objectives and plans in any specified time frame, or at all. We do 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.
The “Risk Factors” included in the Company’s Annual Report on Form 10-K reflect the “Risk Factors” of H-CYTE (formerly MedoveX) business and do not include information relative to Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”).
3 |
CONSOLIDATED BALANCE SHEETS
June 30, 2019 (Unaudited) | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 300,068 | $ | 69,628 | ||||
Accounts receivable | 13,896 | 15,242 | ||||||
Other receivables | 65,865 | 5,144 | ||||||
Inventory | 129,264 | — | ||||||
Prepaid expenses | 294,585 | 59,678 | ||||||
Total Current Assets | 803,678 | 149,692 | ||||||
Right-of-use asset | 973,386 | — | ||||||
Property and equipment, net | 259,209 | 266,916 | ||||||
Intangibles, net | 3,312,000 | — | ||||||
Goodwill | 11,348,724 | — | ||||||
Other assets | 29,239 | 38,288 | ||||||
Total Assets | $ | 16,726, 236 | $ | 454,896 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current Liabilities | ||||||||
Interest payable | $ | 149,861 | $ | 158,371 | ||||
Accounts payable | 717,079 | 851,604 | ||||||
Accounts payable to related parties | — | 180,000 | ||||||
Accrued liabilities | 422,458 | 183,183 | ||||||
Other current liabilities | 733,111 | 462,856 | ||||||
Notes payable | 193,445 | 30,852 | ||||||
Short-term note payable, net of debt discount | 625,982 | — | ||||||
Dividend payable | 97,315 | — | ||||||
Deferred revenue | 838,377 | 326,064 | ||||||
Lease liability, current portion | 482,632 | — | ||||||
Total Current Liabilities | 4,260,260 | 2,192,930 | ||||||
Long-Term Liabilities | ||||||||
Lease liability, net of current portion | 511,930 | — | ||||||
Convertible debt to related parties | — | 4,306,300 | ||||||
Deferred rent | — | 22,206 | ||||||
Total Long-Term Liabilities | 511,930 | 4,328,506 | ||||||
Total Liabilities | 4,772,190 | 6,521,436 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Stockholders’ Equity (Deficit) | ||||||||
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018 | — | — | ||||||
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 7,000 and 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 7 | — | ||||||
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018 | — | — | ||||||
Common stock - $.001 par value: 199,000,000 and 49,500,000 shares authorized as of June 30, 2019 and December 31, 2018, respectively. 98,886,360 and 33,661,388 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 98,887 | 33,661 | ||||||
Additional paid-in capital | 25,705,975 | 3,566,339 | ||||||
Accumulated deficit | (13,480,691 | ) | (9,296,408 | ) | ||||
Non-controlling interest | (370,132 | ) | (370,132 | ) | ||||
Total Stockholders’ Equity (Deficit) | 11,954,046 | (6,066,540 | ) | |||||
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 16,726,236 | $ | 454,896 |
See accompanying notes to the unaudited consolidated financial statements
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)BALANCE SHEETS
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 2,431,721 | $ | 2,441,007 | $ | 3,755,961 | $ | 5,343,804 | ||||||||
Cost of Sales | (492,145 | ) | (644,236 | ) | (988,964 | ) | (1,475,373 | ) | ||||||||
Gross Profit | 1,939,576 | 1,796,771 | 2,766,997 | 3,868,431 | ||||||||||||
Operating Expenses | ||||||||||||||||
Salaries and related costs | 3,480,354 | 888,643 | 5,164,686 | 2,178,034 | ||||||||||||
Other general and administrative | 1,885,133 | 784,905 | 3,283,810 | 1,673,670 | ||||||||||||
Advertising | 1,584,850 | 419,337 | 2,720,396 | 1,156,842 | ||||||||||||
Depreciation & amortization | 208,619 | 24,391 | 419,837 | 48,888 | ||||||||||||
Total Operating Expenses | 7,158,956 | 2,117,276 | 11,588,729 | 5,057,434 | ||||||||||||
Operating Loss | (5,219,380 | ) | (320,505 | ) | (8,821,732 | ) | (1,189,003 | ) | ||||||||
Other Income (Expense) | ||||||||||||||||
Other income | - | - | 2,152 | - | ||||||||||||
Foreign currency transaction gain | 9,194 | - | 6,837 | - | ||||||||||||
Interest expense | (87,085 | ) | (42,217 | ) | (179,344 | ) | (70,919 | ) | ||||||||
Total Other Expenses | (77,891 | ) | (42,217 | ) | (170,355 | ) | (70,919 | ) | ||||||||
Net Loss | $ | (5,297,271 | ) | $ | (362,722 | ) | $ | (8,992,087 | ) | $ | (1,259,922 | ) | ||||
Dividend on outstanding Series B Preferred Stock | 21,000 | — | 45,639 | — | ||||||||||||
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants | — | — | 404,384 | — | ||||||||||||
Deemed dividend on beneficial conversion features | — | — | 32,592 | — | ||||||||||||
Net loss attributable to common stockholders | $ | (5,318,271 | ) | $ | (362,722 | ) | $ | (9,474,702 | ) | $ | (1,259,922 | ) | ||||
Loss per share – Basic and Diluted | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.11 | ) | $ | (0.04 | ) | ||||
Weighted average outstanding shares used to compute basic and diluted net loss per share | 96,407,668 | 33,661,388 | 87,236,222 | 33,661,388 |
(Unaudited) June 30, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 1,829,912 | $ | 1,424,096 | ||||
Accounts receivable | 3,000 | 22,667 | ||||||
Other receivables | 3,891 | 18,673 | ||||||
Prepaid expenses | 141,719 | 810,143 | ||||||
Total Current Assets | 1,978,522 | 2,275,579 | ||||||
Right -of-use asset | 489,268 | 738,453 | ||||||
Property and equipment, net | 180,429 | 219,703 | ||||||
Other assets | 35,054 | 36,877 | ||||||
Total Assets | $ | 2,683,273 | $ | 3,270,612 | ||||
Liabilities, Mezzanine Equity, and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Interest payable | $ | 128,815 | $ | 53,198 | ||||
Accounts payable | 1,213,573 | 1,485,542 | ||||||
Accrued liabilities | 252,365 | 324,984 | ||||||
Other current liabilities | 345,018 | 175,181 | ||||||
Short-term notes, related parties | - | 1,635,000 | ||||||
Short-term convertible note payable | 424,615 | 424,615 | ||||||
Notes, payable current portion | 67,444 | 66,836 | ||||||
PPP loan | 355,839 | |||||||
Convertible Bridge Loan and FWHC Advance Loan payable | 240,803 | - | ||||||
Dividend payable | 145,241 | 108,641 | ||||||
Deferred revenue | 747,031 | 1,046,156 | ||||||
Lease liability, current portion | 306,108 | 453,734 | ||||||
Total Current Liabilities | 4,226,852 | 5,773,887 | ||||||
Long-term Liabilities | ||||||||
Lease liability, net of current portion | 200,848 | 302,175 | ||||||
Notes payable, net of current portion | - | 11,545 | ||||||
PPP Loan, net of current portion | 453,243 | - | ||||||
Derivative liability - warrants | 10,055,676 | 315,855 | ||||||
Redemption put liability | 97,998 | 267,399 | ||||||
Total Long-term Liabilities | 10,807,765 | 896,974 | ||||||
Total Liabilities | 15,034,617 | 6,670,861 | ||||||
Commitments and Contingencies | ||||||||
Mezzanine Equity | ||||||||
Series D Convertible Preferred stock | 6,401,762 | 6,060,493 | ||||||
Total Mezzanine Equity | 6,401,762 | 6,060,493 | ||||||
Stockholders’ Deficit | ||||||||
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 6,100 shares issued and outstanding at June 30, 2020 and December 31, 2019 | 6 | 6 | ||||||
Common stock - $.001 par value: 199,000,000 shares authorized, 104,246,357 and 99,768,704 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 104,246 | 99,769 | ||||||
Additional paid-in capital | 27,761,076 | 28,172,146 | ||||||
Accumulated deficit | (46,248,302 | ) | (37,362,531 | ) | ||||
Non-controlling interest | (370,132 | ) | (370,132 | ) | ||||
Total Stockholders’ Deficit | (18,753,106 | ) | (9,460,742 | ) | ||||
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 2,683,273 | $ | 3,270,612 |
See accompanying notes to the consolidated financial statements
4 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 19,500 | $ | 2,431,721 | $ | 1,036,276 | $ | 3,755,961 | ||||||||
Cost of Sales | (70,011 | ) | (492,145 | ) | (446,827 | ) | (988,964 | ) | ||||||||
Gross Profit (Loss) | (50,511 | ) | 1,939,576 | 589,449 | 2,766,997 | |||||||||||
Operating Expenses | ||||||||||||||||
Salaries and related costs | 594,447 | 3,480,354 | 1,818,800 | 5,164,686 | ||||||||||||
Other general and administrative | 1,034,898 | 1,885,133 | 2,265,033 | 3,283,810 | ||||||||||||
Research and development | 200,000 | - | 950,000 | - | ||||||||||||
Advertising | 25,935 | 1,584,850 | 170,553 | 2,720,396 | ||||||||||||
Depreciation and amortization | 17,244 | 208,619 | 39,352 | 419,837 | ||||||||||||
Total Operating Expenses | 1,872,524 | 7,158,956 | 5,243,738 | 11,588,729 | ||||||||||||
Operating Loss | (1,923,035 | ) | (5,219,380 | ) | (4,654,289 | ) | (8,821,732 | ) | ||||||||
Other Income (Expense) | ||||||||||||||||
Other Income | 6,783 | 9,194 | 9,321 | 8,989 | ||||||||||||
Interest expense | (363,023 | ) | (87,085 | ) | (419,172 | ) | (179,344 | ) | ||||||||
Change in fair value of redemption put liability | (18,952 | ) | - | 174,707 | - | |||||||||||
Loss on derivative instrument | (2,306,121 | ) | - | (2,306,121 | ) | - | ||||||||||
Gain on extinguishment of debt | 1,300,088 | - | 1,300,088 | - | ||||||||||||
Warrant modification expense | (70,851 | ) | - | (70,851 | ) | - | ||||||||||
Change in fair value of derivative liability - warrants | (3,057,225 | ) | - | (2,882,247 | ) | - | ||||||||||
Total Other Income (Expense) | (4,509,301 | ) | (77,891 | ) | (4,194,275 | ) | (170,355 | ) | ||||||||
Net Loss | $ | (6,432,336 | ) | $ | (5,297,271 | ) | $ | (8,848,564 | ) | $ | (8,992,087 | ) | ||||
Accrued dividends on outstanding Series B Convertible Preferred Stock | 18,300 | 21,000 | 36,600 | 45,639 | ||||||||||||
Deemed dividend on adjustment to exercise price on certain warrants | - | - | - | 404,384 | ||||||||||||
Deemed dividend on Series D Convertible Preferred Stock | 120,329 | - | 278,476 | - | ||||||||||||
Deemed dividend on Beneficial Conversion Features | - | - | - | 32,592 | ||||||||||||
Net loss attributable to common stockholders | $ | (6,570,965 | ) | $ | (5,318,271 | ) | $ | (9,163,640 | ) | $ | (9,474,702 | ) | ||||
Loss per share - Basic and Diluted | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.11 | ) | ||||
Weighted average outstanding shares - basic and diluted | 103,430,305 | 96,407,668 | 101,634,961 | 87,236,222 |
See accompanying notes to the consolidated financial statements
5 |
H-CYTE, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)DEFICIT
For the three and six months ended June 30, 20192020
(UNAUDITED)(Unaudited)
Preferred Stock | Common Stock | Additional | Accumulated | Non-Controlling | Total Stockholders’ (Deficit) | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
For the Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Balance - March 31, 2019 | 7,200 | $ | 7 | 94,036,746 | $ | 94,037 | $ | 17,610,529 | $ | (8,183,420 | ) | $ | (370,132 | ) | $ | 9,151,021 | ||||||||||||||||
Purchase accounting entries due to the purchase transaction (Note 3) | — | — | — | — | 6,215,000 | — | — | 6,215,000 | ||||||||||||||||||||||||
Issuance of common stock in connection with private placement offering | — | — | 500,000 | 500 | 123,977 | — | — | 124,477 | ||||||||||||||||||||||||
Issuance of warrants in connection with private placement offering | — | — | — | — | 75,523 | — | — | 75,523 | ||||||||||||||||||||||||
Issuance of common stock to pay accrued dividends on Preferred Series B stock | — | — | 32,313 | 32 | 12,894 | — | — | 12,926 | ||||||||||||||||||||||||
Conversion of Preferred Series B Stock and accrued dividends | (200 | ) | — | 91,667 | 92 | (92 | ) | — | — | — | ||||||||||||||||||||||
Issuance of common stock per restricted stock award to executive (Note 9) | — | — | 4,225,634 | 4,226 | 1,686,028 | — | — | 1,690,254 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 3,116 | — | — | 3,116 | ||||||||||||||||||||||||
Dividends payable | — | — | — | — | (21,000 | ) | — | — | (21,000 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (5,297,271 | ) | — | (5,297,271 | ) | ||||||||||||||||||||||
Balance - June 30, 2019 | 7,000 | $ | 7 | 98,886,360 | $ | 98,887 | $ | 25,705,975 | $ | (13,480,691 | ) |
$ | (370,132 | ) |
$ | 11,954,046 | ||||||||||||||||
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Balance - December 31, 2018 | — | $ | — | 33,661,388 | $ | 33,661 | $ | 3,566,339 | $ | (9,296,408 | ) | $ | (370,132 | ) | $ | (6,066,540 | ) | |||||||||||||||
Purchase accounting entries due to the purchase transaction | 9,250 | 9 | 24,717,217 | 24,717 | 12,657,182 | — | — | 12,681,908 | ||||||||||||||||||||||||
Adjustment for assets and liabilities not included in purchase transaction | — | — | — | — | — | 5,244,780 | — | 5,244,780 | ||||||||||||||||||||||||
Issuance of common stock in connection with private placement offering | — | — | 17,500,000 | 17,500 | 4,324,923 | — | — | 4,342,423 | ||||||||||||||||||||||||
Issuance of warrants in connection with private placement offering | — | — | — | — | 2,641,161 | — | — | 2,641,161 | ||||||||||||||||||||||||
Issuance of common stock for repayment of short-term debt | — | — | 500,000 | 500 | 125,437 | — | — | 125,937 | ||||||||||||||||||||||||
Issuance of warrants for repayment of short-term debt | — | — | — | — | 74,063 | — | — | 74,063 | ||||||||||||||||||||||||
Issuance of additional exchange shares (Note 3) | — | — | 17,263,889 | 17,264 | (17,264 | ) | — | — | — | |||||||||||||||||||||||
Issuance of common stock pursuant to conversion of short-term debt | — | — | 250,000 | 250 | 99,750 | — | — | 100,000 | ||||||||||||||||||||||||
Conversion of Preferred Series B Stock and accrued dividends | (2,250 | ) | (2 | ) | 604,167 | 605 | (603 | ) | — | — | — | |||||||||||||||||||||
Issuance of common stock to pay accrued interest on convertible short-term debt | — | — | 1,667 | 2 | 665 | — | — | 667 | ||||||||||||||||||||||||
Issuance of common stock to pay accrued dividends on Preferred Series B stock | — | — | 32,313 | 32 | 12,894 | — | — | 12,926 | ||||||||||||||||||||||||
Issuance of common stock in exchange for consulting fees incurred | — | — | 130,085 | 130 | 51,904 | — | — | 52,034 | ||||||||||||||||||||||||
Adjustment of exercise price on convertible debt | — | — | — | — | 287,542 | (287,542 | ) | — | — | |||||||||||||||||||||||
Adjustment of exercise price on certain warrants | — | — | — | — | 116,842 | (116,842 | ) | — | — | |||||||||||||||||||||||
Beneficial conversion of Preferred Series B Stock | — | — | — | — | 32,592 | (32,592 | ) | — | — | |||||||||||||||||||||||
Issuance of common stock per restricted stock award to executive (Note 9) | — | — | 4,225,634 | 4,226 | 1,686,028 | — | — | 1,690,254 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 92,159 | — | — | 92,159 | ||||||||||||||||||||||||
Dividends payable | — | — | — | — | (45,639 | ) | — | — | (45,639 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (8,992,087 | ) | — | (8,992,087 | ) | ||||||||||||||||||||||
Balance - June 30, 2019 | 7,000 | $ | 7 | 98,886,360 | $ | 98,887 | $ | 25,705,975 | $ | (13,480,691 | ) | $ | (370,132 | ) | $ | 11,954,046 |
Total | ||||||||||||||||||||||||||||||||
Three months ended | Preferred Series B Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Stockholders’ (Deficit) | ||||||||||||||||||||||||||
June 30, 2019 and 2020 | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | ||||||||||||||||||||||||
Balance - March 31, 2019 | 7,200 | $ | 7 | 94,036,746 | $ | 94,037 | $ | 17,610,529 | $ | (8,183,420 | ) | $ | (370,132 | ) | $ | 9,151,021 | ||||||||||||||||
Purchase accounting entries due to the purchase transaction | — | — | — | — | 6,215,000 | — | — | 6,215,000 | ||||||||||||||||||||||||
Issuance of common stock in connection with private placement offering | — | — | 500 | 500 | 123,977 | — | — | 124,477 | ||||||||||||||||||||||||
Issuance of warrants in connection with private placement offering | — | — | — | — | 75,523 | — | — | 75,523 | ||||||||||||||||||||||||
Issuance of common stock to pay accrued dividends on Preferred Series B stock | — | — | 32,313 | 32 | 12,894 | — | — | 12,926 | ||||||||||||||||||||||||
Conversion of Preferred Series B Stock | (200 | ) | — | 91,667 | 92 | (92 | ) | — | — | — | ||||||||||||||||||||||
Issuance of common stock per restricted stock award to executive | — | — | 4,225,634 | 4,226 | 1,686,028 | — | — | 1,690,254 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 3,116 | — | — | 3,116 | ||||||||||||||||||||||||
Accrued dividends on Series B Preferred Stock | — | — | — | — | (21,000 | ) | — | — | (21,000 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (5,297,271 | ) | — | (5,297,271 | ) | ||||||||||||||||||||||
Balance June 30, 2019 | 7,000 | $ | 7 | 98,386,860 | $ | 98,887 | $ | 25,705,975 | $ | (13,480,691 | ) | $ | (370,132 | ) | $ | 11,954,046 |
Total | ||||||||||||||||||||||||||||||||
Preferred Series B Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Stockholders’ (Deficit) | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
Balance - March 31, 2020 | 6,100 | $ | 6 | 99,878,079 | $ | 99,878 | $ | 28,117,978 | $ | (39,815,966 | ) | $ | (370,132 | ) | $ | (11,968,236 | ) | |||||||||||||||
Accrued dividends on Series B Preferred Stock | — | — | — | — | (18,300 | ) | — | — | (18,300 | ) | ||||||||||||||||||||||
Deemed dividend on Series D Preferred Stock | — | — | — | — | (120,329 | ) | — | — | (120,329 | ) | ||||||||||||||||||||||
Adjustment of exercise price on certain warrants | — | — | — | — | (438,913 | ) | — | — | (438,913 | ) | ||||||||||||||||||||||
Issuance of warrants to extend short-term debt | — | — | — | — | 6,594 | — | — | 6,594 | ||||||||||||||||||||||||
Conversion of Short-term notes, related parties | — | — | 4,368,278 | 4,368 | 214,046 | — | — | 218,414 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | (6,432,336 | ) | — | (6,432,336 | ) | ||||||||||||||||||||||
Balance - June 30, 2020 | 6,100 | $ | 6 | 104,246,357 | $ | 104,246 | $ | 27,761,076 | $ | (46,248,302 | ) | $ | (370,132 | ) | $ | (18,753,106 | ) |
Total | ||||||||||||||||||||||||||||||||
Six months ended | Preferred Series B Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Stockholders’ (Deficit) | ||||||||||||||||||||||||||
June 30, 2019 and 2020 | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | ||||||||||||||||||||||||
Balance - December 31, 2018 (audited) | — | $ | — | 33,661,388 | $ | 33,661 | $ | 3,566,339 | $ | (9,296,408 | ) | $ | (370,132 | ) | $ | (6,066,540 | ) | |||||||||||||||
Purchase accounting adjustments | 9,250 | 9 | 24,717,217 | 24,717 | 12,657,182 | — | — | 12,681,908 | ||||||||||||||||||||||||
Adjustment for assets and liabilities not included in Merger | — | — | — | — | — | 5,244,780 | — | 5,244,780 | ||||||||||||||||||||||||
Issuance of common stock in connection with private placement offering | — | — | 17,500,000 | 17,500 | 4,324,923 | — | — | 4,342,423 | ||||||||||||||||||||||||
Issuance of warrants in connection with private placement offering | — | — | — | — | 2,641,161 | — | — | 2,641,161 | ||||||||||||||||||||||||
Issuance of common stock pursuant to conversion of short-term debt | — | — | 500,000 | 500 | 125,437 | — | — | 125,937 | ||||||||||||||||||||||||
Issuance of warrants pursuant to conversion of short-term debt | — | — | — | — | 74,063 | — | — | 74,063 | ||||||||||||||||||||||||
Issuance of additional exchange shares | — | — | 17,263,889 | 17,264 | (17,264 | ) | — | — | — | |||||||||||||||||||||||
Issuance of common stock pursuant to conversion of convertible short-term debt | — | — | 250,000 | 250 | 99,750 | — | — | 100,000 | ||||||||||||||||||||||||
Conversion of Preferred Series B Stock | (2,250 | ) | (2 | ) | 604,167 | 605 | (603 | ) | — | — | — | |||||||||||||||||||||
Issuance of common stock to pay accrued interest on convertible short-term debt | — | — | 1,667 | 2 | 665 | — | — | 667 | ||||||||||||||||||||||||
Issuance of common stock to pay accrued dividends on Preferred Series B stock | — | — | 32,313 | 32 | 12,894 | — | — | 12,926 | ||||||||||||||||||||||||
Issuance of common stock in exchange for consulting fees incurred | — | — | 130,085 | 130 | 51,904 | — | — | 52,034 | ||||||||||||||||||||||||
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants | — | — | — | — | 287,542 | (287,542 | ) | — | — | |||||||||||||||||||||||
Adjustment of exercise price on certain warrants | — | — | — | — | 116,842 | (116,842 | ) | — | — | |||||||||||||||||||||||
Deemed dividend on beneficial conversion features | — | — | — | — | 32,592 | (32,592 | ) | — | — | |||||||||||||||||||||||
Issuance of common stock per restricted stock award to executive | — | — | 4,225,634 | 4,226 | 1,686,028 | — | — | 1,690,254 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 92,159 | — | — | 92,159 | ||||||||||||||||||||||||
Accrued dividends on Series B Preferred Stock | — | — | — | — | (45,639 | ) | — | — | (45,639 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (8,992,087 | ) | — | (8,992,087 | ) | ||||||||||||||||||||||
Balance - June 30, 2019 | 7,000 | $ | 7 | 98,886,360 | $ | 98,887 | $ | 25,705,975 | $ | (13,480,691 | ) | $ | (370,132 | ) | $ | 11,954,046 |
Total | ||||||||||||||||||||||||||||||||
Preferred Series B Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Stockholders’ (Deficit) | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
Balance - December 31, 2019 (audited) | 6,100 | $ | 6 | 99,768,704 | $ | 99,769 | $ | 28,172,146 | $ | (37,362,531 | ) | $ | (370,132 | ) | $ | (9,460,742 | ) | |||||||||||||||
Deemed dividend on Series D Preferred Stock at issuance | — | — | — | — | — | $ | (37,207 | ) | — | (37,207 | ) | |||||||||||||||||||||
Deemed dividend on Series D Preferred Stock | — | — | — | — | (241,269 | ) | — | — | (241,269 | ) | ||||||||||||||||||||||
Issuance of warrants in connection with Series D Preferred Stock | — | — | — | — | 31,902 | — | — | 31,902 | ||||||||||||||||||||||||
Issuance of common stock in exchange for consulting fees incurred | — | — | 109,375 | 109 | 34,891 | — | — | 35,000 | ||||||||||||||||||||||||
Issuance of warrants pursuant to extension of maturity date on convertible debt | — | — | — | — | 17,636 | — | — | 17,636 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 643 | — | — | 643 | ||||||||||||||||||||||||
Accrued dividends on Series B Preferred Stock | — | — | — | — | (36,600 | ) | — | — | (36,600 | ) | ||||||||||||||||||||||
Adjustment of exercise price on certain warrants | — | — | — | — | (438,913 | ) | — | — | (438,913 | ) | ||||||||||||||||||||||
Issuance of warrants to extend short-term debt | — | — | — | — | 6,594 | — | — | 6,594 | ||||||||||||||||||||||||
Conversion of Short-term notes, related parties | — | — | 4,368,278 | 4,368 | 214,046 | — | — | 218,414 | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | $ | (8,848,564 | ) | — | (8,848,564 | ) | |||||||||||||||||||||
Balance - June 30, 2020 | 6,100 | $ | 6 | 104,246,357 | $ | 104,246 | $ | 27,761,076 | $ | (46,248,302 | ) | $ | (370,132 | ) | $ | (18,753,106 | ) |
See accompanying notes to the unaudited consolidated financial statements
6 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(Unaudited)
Six Months Ended | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (8,992,087 | ) | $ | (1,259,922 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 419,837 | 48,888 | ||||||
Amortization of debt discount | 127,863 | — | ||||||
Stock-based compensation | 1,782,413 | — | ||||||
Common stock issued for consulting services | 52,034 | — | ||||||
Changes in operating assets and liabilities, net of purchase transaction: | ||||||||
Accounts receivable | 147,103 | (19,169 | ) | |||||
Other receivables | (60,721 | ) | — | |||||
Accounts receivable from related parties | — | 47,033 | ||||||
Inventory | 2,191 | — | ||||||
Prepaid expenses and other assets | (41,667 | ) | 73,422 | |||||
Interest payable | 4,838 | 49,574 | ||||||
Accounts payable | (691,635 | ) | 26,283 | |||||
Accounts payable to related parties | (180,000 | ) | — | |||||
Accrued liabilities | (222,778 | ) | (116,412 | ) | ||||
Other current liabilities | 555,056 | 133,232 | ||||||
Dividend payable | (6,137 | ) | — | |||||
Deferred revenue | 512,313 | (567,063 | ) | |||||
Net Cash Used in Operating Activities | (6,591,377 | ) | (1,584,134 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | (13,703 | ) | (203,695 | ) | ||||
Purchase of business, net of cash acquired | (302,710 | ) | — | |||||
Net assets not included in purchase transaction | (69,629 | ) | — | |||||
Net Cash Used in Investing Activities | (386,042 | ) | (203,695 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on notes payable obligations | (84,381 | ) | (2,424 | ) | ||||
Borrowings from notes payable obligations | 8,656 | 8,081 | ||||||
Proceeds from issuance of preferred and common stock, net of offering costs | 4,342,423 | — | ||||||
Proceeds from issuance of warrants, net of offering costs | 2,641,161 | — | ||||||
Proceeds from issuance of note payable | — | 1,967,724 | ||||||
Proceeds from contribution from stockholders | 300,000 | — | ||||||
Net Cash Provided by Financing Activities | 7,207,859 | 1,973,381 | ||||||
Net Increase in Cash | 230,440 | 185,552 | ||||||
Cash - Beginning of period | 69,628 | 251,330 | ||||||
Cash - End of period | $ | 300,068 | $ | 436,882 | ||||
Supplementary Cash Flow Information | ||||||||
Cash paid for interest | $ | 8,623 | $ | 20,900 | ||||
Non-cash investing and financing activities | ||||||||
Financing agreement for insurance policy | $ | 94,917 | $ | — | ||||
Conversion of convertible note and accrued interest to common stock | $ | 100,667 | $ | — | ||||
Conversion of note and accrued interest to common stock and warrants | $ | 200,000 | $ | — | ||||
Conversion of accrued dividends on Series B Preferred Stock to common stock | $ | 12,926 | $ | — | ||||
Issuance of common stock for Series B Preferred Stock and accrued dividends conversion | $ | 605 | $ | — | ||||
Dividends accrued | $ | 45,639 | $ | — |
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | (8,848,564 | ) | (8,992,087 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 39,352 | 419,837 | ||||||
Amortization of debt discount | 242,627 | 128,570 | ||||||
Issuance of warrants pursuant to short-term notes, related party | 17,636 | — | ||||||
Issuance of warrants to extend short-term debt | 6,594 | — | ||||||
Stock based compensation | 643 | 1,782,413 | ||||||
Loss on write-off of inventory | — | 2,191 | ||||||
Common stock issued for consulting services | 35,000 | 52,032 | ||||||
Change in fair value of derivative liability – warrants and redemption put liability | 2,707,541 | — | ||||||
Change in fair value of derivative liability – loss on derivative instrument | 2,306,121 | — | ||||||
Warrant modification expense | 70,851 | — | ||||||
Bad debt expense | — | 60,112 | ||||||
Gain on conversion of short-term notes, related party | (1,300,088 | ) | — | |||||
Changes in operating assets and liabilities, net of purchase transaction: | ||||||||
Accounts receivable | 19,667 | 86,991 | ||||||
Other receivables | 14,782 | (60,721 | ) | |||||
Prepaid expenses and other assets | 668,656 | (178,651 | ) | |||||
Interest payable | 158,113 | (52,902 | ) | |||||
Accounts payable | (164,792 | ) | (466,632 | ) | ||||
Accrued liabilities | (72,619 | ) | (222,778 | ) | ||||
Other current liabilities | 62,581 | 555,055 | ||||||
Dividend payable | — | 12,926 | ||||||
Deferred revenue | (299,125) | 512,313 | ||||||
Net Cash Used in Operating Activities | (4,335,024 | ) | (6,361,331 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | — | (13,338 | ) | |||||
Purchase of business, net of cash acquired | — | (302,710 | ) | |||||
Cash excluded in Merger | — | (69,629 | ) | |||||
Net Cash Used in Investing Activities | — | (385,677 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Payment of dividends | — | (6,136 | ) | |||||
Payment on debt obligations | (10,937 | ) | — | |||||
Proceeds on from paycheck protection program loan | 809,082 | — | ||||||
Proceeds from common stock, net of issuance costs | — | 4,342,423 | ||||||
Proceeds from warrants, net of issuance costs | 3,842,695 | 2,641,161 | ||||||
Proceeds from issuance of Series D Convertible Preferred stock | 100,000 | — | ||||||
Net Cash Provided by Financing Activities | 4,740,840 | 6,977,448 | ||||||
Net Increase in Cash | 405,816 | 230,440 | ||||||
Cash - Beginning of period | 1,424,096 | 69,628 | ||||||
Cash - End of period | 1,829,912 | 300,068 | ||||||
Supplementary Cash Flow Information | ||||||||
Cash paid for interest | 18,431 | 124,609 | ||||||
Non-cash investing and financing activities | ||||||||
Beneficial conversion of Preferred Series B stock | — | 32,592 | ||||||
Conversion of short-term note to common stock | — | 225,937 | ||||||
Adjustment of exercise price on warrants | 438,913 | 287,542 | ||||||
Issuance of warrants pursuant to note payable, related party | — | 56,378 | ||||||
Issuance of warrants to extend short-term debt | 6,594 | 106,158 | ||||||
Issuance of common stock pursuant to conversion of short-term debt | 218,414 | 74,063 | ||||||
Deemed dividend on Series D Convertible Preferred Stock | 278,476 | 158,147 | ||||||
Issuance of Warrants in connection with Series D Convertible Preferred Stock | 31,902 | 1,756,093 | ||||||
Beneficial conversion of Series D convertible Preferred Stock | — | 486,132 | ||||||
Dividends accrued on Series B Convertible Preferred Stock | 36,600 | 45,638 | ||||||
Common stock issued to pay accrued dividends on Series B Preferred Stock | — | 19,426 | ||||||
Right-of-use asset additions | — | 1,165,785 | ||||||
Right-of-use liability additions | — | 1,187,991 |
See accompanying notes to the unaudited consolidated financial statements
7 |
H-CYTE, INC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of the Company
On July 11, 2019, MedovexMedoveX Corp. (“MedoveX”) changed its namedname to “H-CYTE,H-CYTE, Inc.” (H-CYTE (“H-CYTE” or the Company)“Company”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2013 as SpineZ Corp.
On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the Asset Purchase AgreementAPA was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the Asset Purchase AgreementAPA and its amendment (collectively the “APA”), the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.
Prior toAs of the merger, of H-CYTE and RMS on January 8, 2019, the consolidated results for H-CYTE includedinclude the financial activities of Regenerative Medicine Solutions,following wholly-owned subsidiaries: H-CYTE Management, LLC LI, RMS Nashville,(formerly Blue Zone Health Management, LLC), MedoveX Corp, Cognitive Health Institute, LLC, (“Nashville”), RMS Pittsburgh,and Lung Institute Tampa, LLC (“Pittsburgh”), RMS Scottsdale, LLC (“Scottsdale”), RMS Dallas, LLC (“Dallas”), State, LLC (“State”), CHIT, RMS LI Management,(formerly Blue Zone Lung Tampa, LLC) and Shareholder, H-CYTEthe results included Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as VIEs.
As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: Debride Inc., Blue Zone Health Management, LLCVariable Interest Entities (“BZHM”, changed in July to H-CYTE Management, LLC), Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC)VIEs”). Additionally, H-CYTE has consolidatedManagement, LLC is the operator and manager of the various Lung Health Institute (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale,Scottsdale.
In 2019, the Company had two divisions: the healthcare medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). In the first quarter of 2020, the Company decided to focus its available resources on the Biosciences division as VIEs.it represents a significantly greater opportunity than the DenerveX division as explained below. The Company is no longer manufacturing or selling the DenerveX device but continues to explore possible opportunities to monetize such technology.
Healthcare Medical Biosciences Division (Biosciences division)
The Company’s RMSBiosciences division is a healthcare medical biosciences company that develops and implements advanced innovative treatment options in regenerative medicine to treat an array of debilitating medical conditions. In addition, the company is the operator and manager of the various Lung Health Institute clinics. Committed to an individualized patient-centric approach, RMSthis division consistently provides oversight and management of the highest quality care while producing positive medical outcomes. RMS offices are located
8 |
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in Tampa, Florida. The Lung Health Institute locatedthe U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology provides an off-the-shelf platform to enhance healing in Tampa, Florida issoft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a wholly owned subsidiary of RMS. RMS also provides oversightten-year exclusive and managementextendable supply agreement with Rion to the Lung Health Institutes located in Nashville, TN, Scottsdale AZ, Pittsburgh, PA, and Dallas, TX.enable H-CYTE to develop proprietary biologics.
TheOn October 9, 2019, the Company is alsoentered 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 businessfurther research and development for the generation of designinga new cellular therapy (L-CYTE-01) and marketing proprietary(ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 investigational new drug (IND) clearance for L-CYTE-01. 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 L-CYTE-01.
With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an IND application for review by the FDA for treatment of COPD.
Proprietary Medical Device Business (DenerveX medical devices for commercial use indevice division)
In the United Statesfirst quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and Europe. The Company received CE marking in June 2017distributor options or other product monetizing relationships for the DenerveX System and it is now commercially available throughoutproduct. Although the European Union and several other countries that accept CE marking. The Company’s first sale ofCompany believes the DenerveX System occurredtechnology has value, the Company does not believe it will realize the value in July 2017.the foreseeable future. The Company plans to seek approvalrecorded an impairment charge for intangibles associated with the DenerveX System from the Food & Drug Administration (“FDA”) in the United States. The Company is presently reevaluating its approaches to revenue generation including the continuing useintellectual property and wrote off related inventory balances as of its distribution channels and source of manufacturing.December 31, 2019.
Note 2 – Basis of presentation and Summary of Significant Accounting Policies
Based on the terms of the Asset Purchase Agreement and its amendment,APA, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition.Merger. RMS is deemed to be the acquiring company for accounting purposes and the transaction is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The assets acquired and the liabilities assumed of RMS included as part of the purchase transaction are recorded at historical cost. Accordingly, the assets and liabilities of H-CYTE are recorded as of the merger closing date at their estimated fair values. (See Note 3.)
Further, the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity (Deficit), and the Consolidated Statements of Cash Flows do not reflect the historical financial information related to H-CYTE prior to the merger. The Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity (Deficit), and the Consolidated Statements of Cash Flows only reflect the historical financial information related to RMS prior to the merger. For the Consolidated Statements of Stockholders’ Equity (Deficit), the common stock, preferred stock, and additional paid in capital reflect the accounting for the stock received by the RMS members as of the merger as if it was received as of the beginning of the periods presented. The Consolidated Statements of Stockholders’ Equity (Deficit) reflects the activity from March 31, 2019 to June 30, 2019 and December 31, 2018 to June 30, 2019. For the comparable period from December 31, 2017 to June 30, 2018, the only activity in the Consolidated Statement of Stockholders’ Equity (Deficit) were the losses of approximately $362,722 and $1,259,922 for the three and six months ended June 30, 2018, respectively.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP and with the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments which included only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2019 and December 31, 2018 and the results of operations and cash flows for the three and six months ended June 30, 2019 and 2018.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K. The December 31, 2018 financial information included in the Company’s Annual Report on Form 10-K reflect the historical financial information of H-CYTE business and do not include the RMS financial information. With the reverse merger, historical financial information for periods prior to the merger on January 8, 2019, presented in the comparative financial information included in the 2019 Form 10-Q, will only reflect the historical financial information related to RMS prior to the merger. (See Note 3.)
The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any future year.
Principles of Consolidation
U.S. GAAP requires that a related entity be consolidated with a company when certain conditions exist. An entity is considered to be a variable interest entity (VIE) when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by the Parent would be required if it is determined that the Parent will absorb a majority of the VIE’s expected losses or residual returns if they occur, retain the power to direct or control the VIE’s activities, or both.
Prior to the merger of H-CYTE and RMS on January 8, 2019, the consolidated results for H-CYTE include the financial activities of Regenerative Medicine Solutions, LLC, LI, Nashville, Pittsburgh, Scottsdale, Dallas, State, CHIT, RMS LI Management, and Shareholder. Additionally, H-CYTE has consolidated LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, as VIEs.
As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: Debride Inc., Blue Zone Health Management, LLC (“BZHM”, changed in July to H-CYTE Management, LLC), Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC). Additionally, H-CYTE has consolidated LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, as VIEs.
The accompanying consolidated financial statements include the accounts of the parent, its wholly-owned subsidiaries, and its VIEs.
Accounts Receivable
Accounts receivable primarily represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables. Trade accounts receivable are stated net of an estimate made for doubtful accounts, if any. Management evaluates the adequacy of the allowance for doubtful accounts regularly to determine if any account balances will potentially be uncollectible. Customer account balances are considered past due or delinquent based on the contractual agreement with each customer. Accounts are written off when, in management’s judgment, they are considered uncollectible. At June 30, 2019 and December 31, 2018, management believes no allowance is necessary. For the three month period ended June 30, 2019, the Company recorded bad debt expense of approximately $60,000.
Goodwill And Intangibles
Goodwill is recorded at fair value and not amortized but is reviewed for impairment at least annually or more frequently if impairment indicators arise. Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value is “more likely than not” less than the carrying amount or if significant changes related to the business have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. The Company can elect to forego the qualitative assessment and perform the quantitative test.
If the carrying amount exceeds its fair value, “Step 1” is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. This step compares the implied fair value of goodwill with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined by assigning the fair value to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The Company has elected to perform the annual impairment assessment for goodwill in the fourth quarter.
Intangibles acquired in a business combination are recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. The Company’s intangible assets are patents and related proprietary technology for the DenerveX System.
Leases
In February 2016, the Financial Accounting Standard Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2019-01, Codification Improvements; ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. Under Topic 842, lessees are required to recognize a lease liability and right-of-use asset for all leases (with the exception of short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components. At January 1, 2019, additional current lease liabilities of $475,000 and long-term lease liabilities of $713,000 with corresponding ROU assets of $1,167,000 were recognized based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
Other Receivables
Other receivables totaling approximately $66,000 at June 30, 2019 include receivables from the non-acquired Lung Institute, LLC to Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa) for approximately $53,000 and approximately $9,000 reimbursement receivable for reimbursement of expenses from a joint study. The $53,000 receivable was a result of Lung Institute, LLC being a transitory entity for Lung Institute Tampa, LLC while general liability insurance and the merchant services accounts were being transferred. A portion of the $53,000 receivable totaling $20,000 was paid to Lung Institute Tampa, LLC in July 2019.
Revenue Recognition
The Company recognizes revenue in accordance with generally accepted accounting principles as outlined in the FASB Accounting Standards Codification 606, Revenue From Contracts with Customers, which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation. The Company records revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. The adoption of this standard did not have a material impact on the consolidated financial statements.
DenerveX System
The Company sells the DenerveX System through a combination of direct sales and independent distributors in international markets. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. The Company only records revenue when collectability is reasonably assured. Utilizing the five-step method outlined in Topic 606 to determine when revenue should be recognized, the Company’s policy is to recognize revenue when product is shipped to the customer, whether that customer is a distributor or an end user, as is the case in Germany.
Biomedical Services
RMS wholly owns the Tampa, Florida Lung Health Institute (LHI) location and manages the other Lung Health Institute locations. The Lung Health Institute uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price accounts for medical, surgical, facility, and office services rendered by LHI for consented procedures and is recorded as revenue. The company recognizes revenue when the terms of a contract with a patient are satisfied.
LHI offers two types of cellular therapy treatments to their patients. The first type of treatment includes medical services rendered typically over a two-day period in which the patient receives cellular therapy. For this treatment type, revenue is recognized in full at time of service. LHI also offers a four-day treatment in which medical services are rendered typically over a two-day period and then again, approximately three months later, medical services are rendered for an additional two-days of treatment. Payment is collected in full for both service periods at the time the first treatment is rendered. Revenue is recognized when services are performed based on the related professional, facility, and diagnostic services for each session of treatment. The Company has deferred recognition of revenue amounting to approximately $838,000 and $326,000 at June 30, 2019 and December 31, 2018, respectively.
Advertising
The Company expenses all advertising costs as incurred. For the three and six months ended June 30, 2019, the Company had approximately $1,585,000 and $2,720,000, respectively, in advertising costs, as compared to $419,000 and $1,157,000, respectively, for the three and six months ended June 30, 2018.
Use of Estimates
In preparing the financial statements, U.S. GAAP requires disclosure regarding estimates and assumptions used by management that affect the amounts reported in financial statements and accompanying notes. The Company’s significant estimates include deferred revenue, the deferred income tax asset and the related valuation allowance, and the fair value of its share-based payment arrangements.
For those estimates that are sensitive to the outcome of future events, actual results could differ from those estimates.
Foreign Currency Transactions
The Company transacts some of its operating activities in foreign currencies, most notably the Euro. The Company also has certain assets and liabilities denominated in foreign currencies that are translated to U.S. Dollars for reporting purposes as of and for the three and six months ended June 30, 2019. These amounts are immaterial and are included in other income (expense) for the three and six months ended June 30, 2019. Because of the immaterial effect noted above, the Company did not present a separate statement of other comprehensive income.
Stock-Based Compensation
The Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718,Compensation - Stock Compensation. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee and non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures.
IncomeTaxes
From inception to June 30, 2019, 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 reserved as of June 30, 2019 and December 31, 2018, respectively, since it is currently likely that the benefit will not be realized in future periods.
As a result of the acquisition, the Company is required to file federal income tax returns and state income tax returns in the states of Arizona, Florida, Georgia, Minnesota, Pennsylvania, Tennessee, and Texas. There are no uncertain tax positions at June 30, 2019 or December 31, 2018. The Company has not undergone any tax examinations since inception.
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 periods presented, there is no difference between the basic and diluted net loss per share: 30,108,743 warrants and 517,509 common stock options outstanding were considered anti-dilutive and excluded for the period ended June 30, 2019. For the six-month period ended June 30, 2018, there were no dilutive securities as the accounting acquirer did not historically have stock compensation programs.
Note 3 – Business Acquisition
On January 8, 2019, H-CYTE completed its business combination with RMS under which H-CYTE purchased certain assets and assumed certain liabilities of RMS. Pursuant to the terms of the Asset Purchase Agreement, H-CYTE issued to the shareholders of RMS 33,661 shares plus 6,111 additional exchange shares (based on closing the sale of $2 million of new securities) for a total of 39,772 shares of Series C Preferred Stock where each share of Series C Preferred stock will, at the date of closing, automatically convert into 1,000 shares of Common Stock and represent approximately fifty-five percent (55%) of the outstanding voting shares of the Company.
Under the terms of the Asset Purchase Agreement, the Company issued additional “Exchange Shares” to the shareholders of RMS to maintain the 55% ownership and not be diluted by the sale of convertible securities (“New Shares Sold”) until H-CYTE raised an additional $5.65 million via the issuance of new securities. On the date of closing the Company issued 6,111 additional Exchange Shares to RMS Shareholders as a result of the issuance of additional securities, which are included in the 39,772 shares above. Subsequent to the closing of the purchase transaction, an incremental 11,153 additional Exchange Shares were issued, for a total of 17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS and these Series C Preferred shares converted to 17,263,889 shares of Common Stock.
Because RMS shareholders own approximately 55% of the voting stock of H-CYTE after the transaction, RMS is deemed to be the acquiring company for accounting purposes (the “Acquirer”) and the transaction is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with U.S. GAAP. The assets acquired and the liabilities assumed of RMS included as part of the purchase transaction are recorded at historical cost. Accordingly, the assets and liabilities of H-CYTE (the “Acquiree”) are recorded as of the mergerMerger closing date at their estimated fair values.
Under the termsThe 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 business combinationCompany’s financial position, results of operations and cash flows, in conformity with RMS, H-CYTE purchased certain assetsgenerally accepted accounting principles. The Company filed audited consolidated financial statements as of and assumed certain liabilities of RMS. The assets of RMS reported onfor the H-CYTE consolidated balance sheet as offiscal years ended December 31, 2019 and December 31, 2018 that were excludedwhich included all information and notes necessary for such complete presentation in the January 8,conjunction with its 2019 transaction were cash of approximately $70,000. The liabilities of RMS reflectedAnnual Report on the H-CYTE consolidated balance sheet as of December 31, 2018 but not assumed in the transaction included the following: convertible debt to a related party of approximately $4.3 million, interest payable of approximately $158,000, accounts payable of approximately $224,000 and other current liabilities of approximately $285,000. Additionally, there were certain on-going litigation matters that were not assumed as part of the January 8, 2019 RMS reverse acquisition.Form 10-K.
Purchase Price Allocation
The purchase priceresults of operations for the acquisition of the Acquiree has been allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase price allocation herein is preliminary. The final purchase price allocation will be determined after completion of a thorough analysis to determine the fair value of all assets acquired and liabilities assumed but in no event later than one year following completion of the acquisition. Accordingly, the final acquisition accounting adjustments could differ materially from the allocation reflected as of June 30, 2019 presented herein. Any increase or decrease in the fair value of the assets acquired and liabilities assumed, as compared to the information shown herein, could also materially change the portion of purchase price allocated to goodwill and could materially impact the operating results of the Company following the acquisition due to differences in purchase price allocation, depreciation and amortization related to some of these assets and liabilities.
During the three monthsinterim period ended June 30, 20192020 are not necessarily indicative of the Company revised its purchase price allocationresults 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 acquisition. As a result,year ended December 31, 2019, which are contained in the Company recorded a measurement period adjustmentCompany’s 2019 Annual Report on Form 10-K. For further discussion of $6,215,000 as an increasethe Company’s significant accounting policies, refer to goodwill adjustingNote 3 – “Basis Of Presentation And Summary of Significant Accounting Policies” to the amount recorded asconsolidated financial statements and “Management’s Discussion and Analysis of MarchFinancial 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, 2019. The adjustment resulted in corresponding increase of $6,215,000 to additional paid in capital.
9 |
Certain reclassifications have been made to amounts previously reported and some disclosures for prior periods have been added to conform with the current period presentation.
Note 3 - Liquidity, Going Concern and Management’s Plans
COVID-19 has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020, the Company took steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through mid-July 2020. The acquisition-date fair valueCompany made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, Nashville, and Dallas. The Company resumed operations in July at the Tampa and Nashville clinics, in August at the Scottsdale clinic, and plans to resume operations in September at the Pittsburgh clinic. The Pittsburgh clinic will re-open temporarily in September but will cease operations permanently at the end of October 2020. The Dallas clinic will not re-open and will be closed permanently.
The Company incurred net losses of approximately $6,432,000 and $8,849,000 for the three and six months ended June 30, 2020 and $5,297,000 and $8,992,000 for the three and six months ended June 30, 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue activities were suspended until July. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company will incur losses until sufficient revenue is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process. Due to the coronavirus outbreak (“COVID-19”), the Company was unable to perform treatments from March 23, 2020 until July 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled many of these patients to July, August, and September 2020. There is no guarantee that the Company will be able to continue to treat patients due to the coronavirus outbreak; as such, the Company cannot estimate if it will be safe to continue to treat patients and generate revenue. The Company’s second quarter 2020 revenue was approximately $20,000 compared to first quarter 2020 revenue of approximately $1,017,000. The Company’s future quarters’ revenue is dependent upon being able to continue to treat patients in the LHI clinics. The Company will continue to focus on its goal of taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases.
With the Company’s revenue-generating activities suspended during the second quarter, and the uncertainty around the COVID-19 outbreak, the Company will need to raise cash from debt and/or equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.
On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company to further cover the Company’s working capital needs, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the consideration transferred isCompany, which served as follows:lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further below in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor.
Common shares issued and outstanding | 24,717,271 | |||
Common shares reserved for issuance upon conversion of the outstanding Series B Preferred Stock | 2,312,500 | |||
Total Common shares | 27,029,771 | |||
Closing price per share of MDVX Common stock on January 8, 2019 | $ | 0.40 | ||
10,811,908 | ||||
Fair value of outstanding warrants and options | 2,220,000 | |||
Cash consideration to RMS | (350,000 | ) | ||
Total consideration | $ | 12,681,908 |
10 |
Just priorNote Purchase Agreement
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale to the transaction, H-CYTE had 24.5 millionPurchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,842,695. This sum included the issuance by the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.
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. A price of $0.014 per share has now been set for the price of the Qualified Financing.
Short-term notes, related parties
On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a market capitalizationrate of $9.8 million.12% per annum. The estimated fair valueInvestor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the net assets of H-CYTE was $8.4 millionCompany, which served as of January 8, 2019. Measuring the fair value of the net assets to be received by RMS was readily determinable based upon the underlying nature of the net assets. The fair value of the H-CYTE common stock is above the fair value of its net assets. The H-CYTE net asset value is primarily comprised of definite-lived intangibles as of the closing and the RMS interestlead investor in the merger is significantly related to obtaining accessCompany’s recent Series D Convertible Preferred Stock Offering. As discussed further above in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the public market. Therefore, the fair value of the H-CYTE stock price and market capitalization as of the closing date is considered to be the best indicator of the fair value and, therefore, the estimated purchase price consideration.Investor.
The following table summarizesother short-term notes, related parties were issued by the fair valuesCompany during 2019, and as of March 31, 2020 and December 31, 2019 consist of five loans, totaling $1,635,000, made to the assets acquiredCompany by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes and liabilities assumed athad the date of acquisition on January 8, 2019:
Cash | $ | (302,710 | ) | |
Accounts receivable | 145,757 | |||
Inventory | 131,455 | |||
Prepaid expenses | 46,153 | |||
Property and equipment | 30,393 | |||
Other | 2,751 | |||
Intangibles | 3,680,000 | |||
Goodwill | 11,348,724 | |||
Total assets acquired | $ | 15,082,523 | ||
Accounts payable and other accrued liabilities | 1,645,399 | |||
Interest-bearing liabilities and other | 755,216 | |||
Net assets acquired | $ | 12,681,908 |
Intangible assets are recordedterms as definite-lived assets and amortized overindicated below. The loans bear interest ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the estimated period of economic benefit. Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. Goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist.
Total interest bearing and other liabilities assumed are as follows:
Notes payable | $ | 99,017 | ||
Convertible notes payable | 598,119 | |||
Dividend payable | 57,813 | |||
Deferred rent | 267 | |||
Total interest-bearing and other liabilities | $ | 755,216 |
Notes payable relate to promissory notes assumed by Aquiree in a 2015 acquisition, which was later divested in 2016, with the assumed promissory notes being retained by Aquiree. Payments on both of the notes are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have arespective maturity date ranging from March 26, 2020 to May 13, 2020. Some of August 1, 2019. The Company is inthese loans provided for the processissuance of finalizingwarrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans have been repaid and 840,000 warrants have been issued at an eighteen month extension onexercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the notes. The promissoryrelated notes had outstanding balances of approximately $99,000 plus accrued interest of approximately $3,000 at January 8, 2019. (See Note 11.)
Convertible notes were issued pursuant to a securities purchase agreement with select accredited investors, whereby the Acquiree offered up to 1,000,000 in units at a purchase price of $50,000 per unit. Each Unit consisted ofinto (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any4,368,278 shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-yearten-year warrant to purchase suchup to an equivalent number of shares of the Company’s common stock equalwith such conversion to one hundred percent (100%)be effective as of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants are exercisable at aApril 17, 2020. This warrant will have an exercise price equal to the lesserprice per share at which securities are offered to investors for purchase at the Qualified Financing, which has been established as $0.014 and is exercisable beginning on the day immediately following the earlier to occur of $0.75 or ninety percent (90%)(x) the closing of the per share purchase price of any shares of common stockQualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or common stock equivalents issued in future private placements ofprior to October 31, 2020, the debt and/or equity securities completed by the Company following the issuance of warrants. As a result of the price adjustment feature, the conversionexercise price of the convertible notes was adjustedwarrant will be equal to $0.36the price per share. The convertible notes have maturity dates between August and September 2019. share obtained by dividing $3,000,000 by the number of fully diluted shares of the Company outstanding on October 31, 2020.
The Company had cash on hand of $1,829,912 as of June 30, 2020 and $1,252,126 as of August 7, 2020. The Company’s cash is ininsufficient to fund its operations over the process of negotiating a 30-day extension ofnext year and the maturity dates. The notes are secured by all of the assets of the Company. (See Note 11.)Company will need to raise additional capital through debt or equity offerings to continue operations.
11 |
ASU 2017-11, Earnings Per Share (Topic 260), providedThere can be no assurance that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists,be able to raise additional funds or that the terms and if one is determinedconditions of any future financings will be workable or acceptable to exist the Company will record the amount asor its shareholders. The Company has commenced a debt discount and will amortize it over the remaining termrights offering, entitling each holder of the debt.
The down round feature embedded in the conversion option was triggeredcommon stock on January 8, 2019, as such, the Company recognized the down round as a deemed dividend of approximately $437,000 which reduced the income available to common stockholders.
In the offering, the Acquiree sold an aggregate of 15 units and issued to investors an aggregate of $750,000 in principal amount of convertible notes and 1,875,000 warrantsJuly 28, 2020 to purchase commonup to three (3) shares of Series A preferred stock resulting in totalat $0.014 for an offering of up to $5,129,856. While it cannot be determined what the gross proceeds of $750,000 to the Company. If convertedfrom such rights offering will be, there will be at $0.40 the convertible notes sold in the offering are convertible into an aggregate of 1,875,000 shares of common stock. The Acquiree recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of approximately $505,000 and $245,000, respectively. At acquisition date, the value of the notes was approximately $598,000.
The following schedule represents the amounts of revenue and net loss attributable to the MedoveX acquisition which have been included in the consolidated statements of operations for the periods subsequent to the acquisition date:
Three Months Ended | Six Months Ended | |||||||
June 30, 2019 | June 30, 2019 | |||||||
Revenues | $ | - | $ | 35,505 | ||||
Net loss attributable to H-CYTE | (894,585 | ) | (1,948,962 | ) |
The following unaudited pro forma financial information represents the consolidated financial information as if the acquisition had been included in the consolidated results beginning on the first day of the fiscal year prior to its acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entity to remove any intercompany transactions and transaction costs incurred and to reflect any additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on the first day of the fiscal year prior to its acquisition date, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined entities may achieveleast $2,842,695 raised as a result of the acquisition;backstop portion of the costsrights offering. Depending on the amount of funds raised in the rights offering, the Company will need to combineraise additional funds of which there can be no assurance and if the companies’ operations;Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the Company may be forced to reduce expenses or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the costsamounts and classification of liabilities that might be necessary should the Company be unable to achieve these cost savings, operating synergies or revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies’ under the current ownership and operation.continue as a going concern.
For the Three Months Ending June 30, 2018 | ||||||||||||
RMS | MedoveX | Pro Forma | ||||||||||
Revenues | $ | 2,441,007 | $ | 249,425 | $ | 2,690,432 | ||||||
Net loss | (362,722 | ) | (1,085,900 | ) | $ | (1,448,622 | ) | |||||
Net loss attributable to common shareholders | (362,722 | ) | (1,352,957 | ) | $ | (1,715,679 | ) | |||||
Loss per share- basic and diluted | $ | (0.01 | ) | $ | (0.03 | ) |
For the Six Months Ending June 30, 2018 | ||||||||||||
RMS | MedoveX | Pro Forma | ||||||||||
Revenues | $ | 5,343,804 | $ | 392,614 | $ | 5,736,418 | ||||||
Net loss | (1,259,922 | ) | (2,339,686 | ) | $ | (3,599,608 | ) | |||||
Net loss attributable to common shareholders | (1,259,922 | ) | (2,606,743 | ) | $ | (3,866,665 | ) | |||||
Loss per share- basic and diluted | $ | (0.01 | ) | $ | (0.07 | ) |
Note 4 - Inventory
Inventory consists only of finished goods and is valued at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method. Inventories were acquired in the merger transaction from the H-CYTE business and therefore there were no inventories prior to January 8, 2019.
Inventory consisted of the following:
June 30, 2019 | December 31, 2018 | |||||||
DenerveX device | $ | 3,014 | $ | — | ||||
Pro-40 generator | 126,250 | — | ||||||
Total | $ | 129,264 | $ | — |
Note 54 – Right-of-use Asset And Lease LiabilityBusiness Acquisition
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company implemented the new standard effective January 1, 2019.
On adoption, additional currentJanuary 8, 2019, MedoveX completed its business combination with RMS under which MedoveX purchased certain assets and assumed certain liabilities of RMS, otherwise referred to as the Merger. Pursuant to the terms of the APA, MedoveX issued to the shareholders of RMS 33,661 shares plus 6,111 additional Exchange Shares (based on closing the sale of $2,000,000 of new securities) for a total of 39,772 shares of Series C Preferred Stock where each share of Series C Preferred stock automatically converted into 1,000 shares of common stock and represent approximately $475,00055% of the outstanding voting shares of the Company.
Under the terms of the APA, the Company issued additional “Exchange Shares” to the shareholders of RMS to maintain the 55% ownership and long-termnot be diluted by the sale of convertible securities (“New Shares Sold”) until MedoveX raised an additional $5,650,000 via the issuance of new securities. On the date of closing the Company issued 6,111 additional Exchange Shares to RMS Shareholders as a result of the issuance of additional securities, which are included in the 39,772 shares above. Subsequent to the closing of the purchase transaction, an incremental 11,153 additional Exchange Shares were issued, for a total of 17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS and these Series C Preferred shares converted to 17,263,889 shares of common stock; no additional equity will be issued to RMS.
Because RMS shareholders owned approximately 55% of the voting stock of MedoveX after the transaction, RMS was deemed to be the acquiring company for accounting purposes (the “Acquirer”) and the transaction is accounted for as a reverse acquisition under the acquisition method of accounting for business combinations in accordance with U.S. GAAP. The assets acquired and the liabilities assumed of RMS included as part of the purchase transaction are recorded at historical cost. Accordingly, the assets and liabilities of approximately $713,000 with corresponding ROUMedoveX (the “Acquiree”) are recorded as of the Merger closing date at their estimated fair values.
Purchase Price Allocation
The purchase price for the acquisition of the Acquiree has been allocated to the assets of approximately $1,167,000 were recognized,acquired and liabilities assumed based on the presenttheir estimated fair values.
The acquisition-date fair value of the remaining minimum rental payments under current leasing standards for existing operating leases.consideration transferred is as follows:
Common shares issued and outstanding | 24,717,270 | |||
Common shares reserved for issuance upon conversion of the outstanding Series B Preferred Stock | 2,312,500 | |||
Total Common shares | 27,029,770 | |||
Closing price per share of MedoveX Common stock on January 8, 2019 | $ | 0.40 | ||
10,811,908 | ||||
Fair value of outstanding warrants and options | 2,220,000 | |||
Cash consideration to RMS | (350,000 | ) | ||
Total consideration | $ | 12,681,908 |
Prior to the transaction, MedoveX had 24,500,000 shares of common stock outstanding at a market capitalization of $9,800,000. The consolidated balance sheet at June 30, 2019 reflects current lease liabilitiesestimated fair value of approximately $483,000 and long-term liabilities of $512,000, with corresponding ROUthe net assets of $973,000.
MedoveX was $8,400,000 as of January 8, 2019. Measuring the fair value of the net assets to be received by RMS was readily determinable based upon the underlying nature of the net assets. The Company leases corporate office space in Tampa, FLfair value of the MedoveX common stock was above the fair value of its net assets. The MedoveX net asset value was primarily comprised of definite-lived intangibles as of the closing and Atlanta, GA. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increasesthe RMS interest in the consumermerger is significantly related to obtaining access to the public market. Therefore, the fair value of the MedoveX stock price index or agreed upon rates.and market capitalization as of the closing date is considered to be the best indicator of the fair value and, therefore, the purchase price consideration.
12 |
AsThe following table summarizes the fair values of June 30,the assets acquired and liabilities assumed at the date of acquisition on January 8, 2019:
Cash | $ | (302,710 | ) | |
Accounts receivable | 145,757 | |||
Inventory | 131,455 | |||
Prepaid expenses | 46,153 | |||
Property and equipment | 30,393 | |||
Other | 2,751 | |||
Intangibles | 3,680,000 | |||
Goodwill | 12,564,401 | |||
Total assets acquired | $ | 16,298,200 | ||
Accounts payable and other accrued liabilities | 1,645,399 | |||
Derivative liability | 1,215,677 | |||
Interest-bearing liabilities and other | 755,216 | |||
Net assets acquired | $ | 12,681,908 |
Intangible assets are recorded as definite-lived assets and amortized over the estimated period of economic benefit. Intangible assets represent the fair value of patents and related proprietary technology for the DenerveX System. During the fourth quarter of 2019 maturitiesthe Company recorded an impairment charge of lease$2,944,000 related to the carrying value of its intangible assets.
Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired, and liabilities assumed. Goodwill is not expected to be deductible for income tax purposes. Goodwill is recorded as an indefinite-lived asset and is not amortized but tested for impairment on an annual basis or when indications of impairment exist. During the fourth quarter of 2019 the Company recorded an impairment charge of approximately $12,564,000 related to the carrying value of goodwill.
The derivative liability relates to the liability associated with warrants issued with the securities purchase agreements executed in May 2018, which liability was assumed in the Merger (see Note 12).
Total interest-bearing liabilities and other liabilities assumed are as follows:
Remainder of 2019 | $ | 240,000 | ||
2020 | 454,000 | |||
2021 | 139,000 | |||
2022 | 94,000 | |||
2023 | 68,000 | |||
$ | 995,000 |
Notes payable | $ | 99,017 | ||
Short-term convertible notes payable | 598,119 | |||
Dividend payable | 57,813 | |||
Deferred rent | 267 | |||
Total interest-bearing and other liabilities | $ | 755,216 |
For further discussion of the notes payable and short-term convertible notes payable, refer to Note 11- “Short-term Debt” to these interim financial statements.
Note 5 – Right-of-use Asset And Lease Liability
On January 9, 2019, the Company adopted ASU No. 2016-02 (as amended), and additional current liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding ROU assets of approximately $1,167,000 were recognized, based on the present value of the remaining minimum rental payments under the new leasing standards for existing operating leases.
The consolidated balance sheet at June 30, 2020 reflects current lease liabilities of approximately $306,000 and long-term liabilities of $201,000, with corresponding ROU assets of $489,000.
13 |
The audited consolidated balance sheet at December 31, 2019 reflects current lease liabilities of approximately $454,000 and long-term liabilities of $302,000, with corresponding ROU assets of $738,000.
Operating lease expense and cash flows from operating leases for the three and six months ending June 30, 2020 totaled approximately $151,000 and $302,000, respectively. Operating lease expense and cash flows from operating leases for the three and six months ending June 30, 2019 totaled approximately $153,000 and $289,000, respectively. Operating lease expense is included in the “Other general and administrative” section of the unaudited consolidated statement of operations.
Supplemental balance sheet and other information related to operating leases are as follows:
June 30, 2020 | December 31, 2019 | |||||||
Operating leases right-of-use assets | $ | 489,268 | $ | 738,453 | ||||
Lease liability, current portion | 306,108 | 453,734 | ||||||
Lease liability, net of current portion | 200,848 | 302,175 | ||||||
Total operating lease liabilities | $ | 506,956 | $ | 755,909 | ||||
Weighted average remaining lease term | 1.91 years | 2.25 years | ||||||
Weighted average discount rate | 7.75 | % | 7.75 | % |
Future maturities of operating lease liabilities as of June 30, 2020 are as follows:
Operating leases | ||||
Remainder of 2020 | $ | 231,000 | ||
2021 | 155,000 | |||
2022 | 103,000 | |||
2023 | 69,000 | |||
Total lease payments | $ | 558,000 |
The Company leases corporate office space in Tampa, FL and Atlanta, GA. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. Each location has its own expiration date ranging from July 31, 2020 to August 31, 2023.
Note 6 - Property And Equipment
Property and equipment, net, consists of the following:
Useful Life | June 30, 2019 | December 31, 2018 | Useful Life | June 30, 2020 | December 31, 2019 | |||||||||||||||
Furniture and fixtures | 5-7 years | $ | 214,272 | $ | 149,285 | 5-7 years | $ | 231,222 | $ | 231,222 | ||||||||||
Computers and software | 3-7 years | 292,510 | 278,234 | 3-7 years | 244,116 | 244,039 | ||||||||||||||
Leasehold improvements | 15 years | 156,279 | 156,133 | 15 years | 157,099 | 157,107 | ||||||||||||||
663,061 | 583,652 | 632,437 | 632,368 | |||||||||||||||||
Less accumulated depreciation | (403,852 | ) | (316,736 | ) | (452,008 | ) | (412,665 | ) | ||||||||||||
Total | $ | 259,209 | $ | 266,916 | $ | 180,429 | $ | 219,703 |
Depreciation expense amounted towas approximately $17,000 and $39,000 for the three months and six months ended June 30, 2020. Depreciation expense was approximately $25,000 and $52,000 respectively, for the three months and six months ended June 30, 2019, respectively. The Company uses the straight-line depreciation method to calculate depreciation expense.
14 |
Note 7 - Intangible Assets And Goodwill
The Company’s intangible assets are patents and related proprietary technology for the DenerveX System for which an impairment charge was made in the fourth quarter of 2019 writing off this asset as of December 31, 2019.
For the three and six months ended June 30, 2019. Depreciation expense amounted to approximately $25,000 and $49,000 respectively, for2020, there was no amortization expense. For the three and six months ended June 30, 2018.2019, total amortization expense related to acquisition-related intangible assets was $184,000 and $368,000, respectively, and is included in operating expense in the accompanying consolidated statement of operations.
Note 7 - Intangible Assets
The following table presentsGoodwill represents the changes inexcess of purchase price over fair value of net identified tangible and intangible assets duringand liabilities acquired in the period:
Balance at December 31, 2018 | $ | — | ||
Acquisition during the period | 3,680,000 | |||
Balance at June 30, 2019 | 3,680,000 | |||
Amortization during the six months ended June 30, 2019 | (368,000 | ) | ||
Intangible assets, net | $ | 3,312,000 |
The following is a scheduleMerger. As of expected future amortization of intangible assetsDecember 31, 2019, the Company’s goodwill balance was determined to be impaired as of June 30, 2019:the balance sheet date and as a result, the Company recorded a goodwill impairment charge writing off the goodwill balance.
Amount | ||||
Remainder of 2019 | $ | 368,000 | ||
2020 | 736,000 | |||
2021 | 736,000 | |||
2022 | 736,000 | |||
2023 | 736,000 | |||
Total | $ | 3,312,000 |
Note 8 – Related Party Transactions
Consulting Expense
As described in Note 10,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 receivesreceived $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. ThisChair in addition to regular quarterly board meeting fees. Effective March 25, 2020, the Company reduced the advisory services to $5,000 per month and the fees per quarter as the Audit Committee Chair to $2,500. For the three months and six months ended June 30, 2020, the Company expensed approximately $17,500, and $47,500 in compensation to Mr. Monteleone, respectively. For the three months and six months ended June 30, 2019, the Company expensed approximately $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.
The Company entered into an oral consulting arrangement haswith St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For the three months and six months ended June 30, 2020, the Company had no specified termination date.consulting fees expense for St. Louis Family Office. For three months and six months ended June 30, 2019, the Company expensed approximately $44,000 and $71,000 respectively in consulting fees to St. Louis Family Office.
The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve months, unless otherwise terminated by giving thirty days prior written notice. A close family member of the Company’s CEO is a partner in Strategos. The monthly fee started at $4,500 and increased to approximately $7,500 per month. Strategos provided information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by LHI, advocated for legislation that supports policies beneficial to patient access and opposed any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. The Company terminated this agreement in March 2020. For the three and six months ended June 30, 2020, the Company expensed approximately $0 and $15,000, respectively. For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.approximately $26,000 for both periods.
Officers and Board MemberMembers and Related Expenses
In connection with the April Offering, the Company’s CEO William Horne entered into an amendment letter to his employment agreement which provides that his salary will be reduced to $0 per month. This agreement was amended on July 29, 2020 to provide that Mr. Horne will receive a monthly base salary of $12,500 effective on June 1, 2020 and that his base salary will increase to $20,833 per month upon the first day of the month when the Company completes a Qualified Financing. Mr. Horne agreed to continue to defer the $108,000 in base salary deferred by him in 2018 (the “Deferred Salary”) until such time as there is a positive cash flow to meet the Company’s financial obligations and then the Company and Mr. Horne will work together in good faith to negotiate a payment plan for such Deferred Salary.
15 |
For the three months and six months ended June 30, 2020, the Company paid no Board of Director fees to Michael Yurkowsky and to Raymond Monteleone. For the three months and six months ended June 30, 2019, the Company paid $5,000 each for$10,000 and $10,000, respectively, in Board of Director fees to Michael Yurkowsky and to Raymond Monteleone for a total of $10,000 and $10,000 respectively.Monteleone.
Debt and Other Obligations
The Company had various related party transactions in 2018. For the period of January 1, 2018 to March 13, 2018, the Company received $528,175 from one of its shareholders (RMS members) and $228,175 from its CEO (RMS CEO) as part of a line of credit that was established in 2017. The entire line of credit between the Member and the CEO in the amount of $1,856,350, including contributions from 2017, was transferred to the BioCell Capital, LLC debt instrument on March 13, 2018.
The BioCell Capital Line of Credit also consisted ofshort-term notes, related parties which contributed approximately $4,306,000, inclusive of the aforementioned $1,856,300, to the Companyare detailed in 2018. The BioCell Capital Line of Credit was converted to equity as part of the APA on January 8, 2019.
The Company also received a short-term advance from one of its shareholders (RMS members), who was also the CEO of H-CYTE,Note 3 - “Liquidity, Going Concern and Management’s Plans” in the amount of $180,000 in December 2018 for working capital needs. Approximately $114,000 of the advance was repaid in January 2019 and approximately $66,000 was converted to equity as part of the APA on January 8, 2019.this Form 10-Q.
Note 9 - Equity Transactions
For the Consolidated Statementsconsolidated statement of Stockholders’ Equity (Deficit)stockholders’ deficit as of December 31, 2018,January 1, 2019, the common stock, preferred stock and additional paid in capital reflect the accounting for the stock received by the RMS members as of the mergerMerger as if it was received as of the beginning of the periods presentedthat date and the historical accumulated deficit of RMS. As of the acquisition closing of the Merger, before the contingent additional exchange shares impact from the sale of new securities, the stock received by RMS was 33,661 shares of Series C Preferred Stock, which was later converted into approximately 33,661,000 shares of common stock, with common stock par value of approximately $33,700 and additional paid-in capital of approximately $3,566,000. The historical accumulated deficit and non-controlling interest of RMS as of the closing was approximately $9,296,000.$9,296,000 and $370,000, respectively.
Common Stock Issuance
On January 8, 2019, the Company entered into a securities purchase agreement (the “SPA”) with four purchasers (the “Purchasers”) pursuant to which the four Purchasers invested in the Company an aggregate amount of $2,000,000, with $1,800,000 in cash and $200,000 by cancellation of debt as explained below, in exchange for forty (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the principal amount of $50,000 and a warrant (the “Warrant”) to purchase common stock (the “Common Stock”“common stock”) of the Company. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000, and subsequently increased to a maximum of $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of i) the closing of the subscription of the Maximum Amount and ii) March 31, 2019 (the “Termination Date”), subject to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company in exchange for four (4) Units on the same terms as all other Purchasers. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.
Each Convertible Note offered by the Company as part of the Unit bears an interest rate of 12% per annum, had a principal amount of $50,000, shall mature in one year from the original issue date on January 8, 2019, and will be convertible into shares of Common Stock at a price of $0.40 subject to adjustment stated in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Notes shall not own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of such Convertible Note. If defaulted, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, pursuant to the SPA, the Company offers, as part of the Unit, Warrants to purchase the Common Stock at a price of $0.75 per share (the “Exercise Price”), subjectshare. For further discussion of the SPA, refer to adjustments stated therein. The holder of each Warrant may purchase the number of shares of Common Stock equalNote 9 - “Equity Transactions” to the number of shares of Common Stock issuable upon conversion of each Convertible Note while the Warrant is exercisable. The Warrants have a term of three years and shall be exercised in cash or on a cashless basis as describedconsolidated financial statements in the Warrant. All of such notes have been converted into an aggregate of 18,000,000 shares of common stock.Company’s Annual Report on Form 10-K is incorporated by reference herein.
As reported on Form 8-K filings on January 25, 2019, February 8, 2019, March 15, 2019 and April 5, 2019, theThe Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,200,000,$7,000,000, as of that latest date.April 5, 2019, excluding the shares issued for conversion of short-term debt, discussed below.
As a result of the sales of new securities of at least $5.65 million, total$5,650,000, the Company issued an additional Exchange shares of approximately 17,264 Series C Preferred Stock were issued andto RMS members in accordance with the provisions of the APA in the first quarter of 2019. These shares automatically converted to 17,263,889 shares of Common Stock.
common stock. All the Convertible Notes from the SPA, as well as the shares of Series C Preferred Stock issued to RMS members, were automatically converted into shares of Common Stock.
The foregoing description of the SPA, Convertible Note, and Warrant is qualified in its entirety by reference to the respective agreements.common stock at closing on January 8, 2019.
In February 2019, 250,000 shares of common stock were issued pursuant to conversion of short-term debt and accrued interest.
In March 2019, the Company issued an aggregate of 130,085 shares of common stock at $0.40 per share shares for consulting fees in an amount equivalent to $52,034.$52,033. In August 2019, the Company issued 150,000 shares of common stock to consultants in consideration of consulting services rendered to the Company. At the time of issuance, the fair market value of the shares was $0.29, and, as a result, $43,500 was expensed for the year ending December 31, 2019.
In February 2020, the Company issued LilyCon Investments $35,000 in shares of the Company’s common stock at a weighted average share price of $0.32 per share for a total of 109,375 shares per the terms of the consulting agreement executed in February 2019.
16 |
On April 25, 2019,23, 2020, Horne Management, LLC agreed to convert the Company issued 4,225,634related notes plus accrued interest into (i) 4,368,278 shares of common stock valued at $.40 per share to Mr. William Horne, the Company’s CEO, in a restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement withof the Company which stated that this restricted stock award (as well as the incentive stock options issued in the quarter ended March 31, 2019) would be fully vested if not issued within fifteen days of the RMS merger transaction. Neither award was issued within that time frame and both awards became fully vested when issued. The aggregate(ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock from these two awardswith 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 are offered to investors for purchase at the Qualified Financing, which such price is 4,475,634expected to be approximately $0.014, and was calculated basedis exercisable beginning on 7% of the Company’s issued and outstanding common stock asday immediately following the earlier to occur of the closing of the RMS merger.
The Company recognized approximately $1,690,000Qualified Financing and November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of compensation expense in the quarter ended June 30, 2019 relatedwarrant will be equal to the restricted stock award. This expense should have been recognized inprice per share obtained by dividing $3,000,000 by the quarter ended March 31, 2019. Though the quantitative impact is material,number of fully diluted shares of the Company believes the qualitative aspects of this misstatement should be the primary driver in determining whether or not this misstatement is material. The Company believes this misstatement to be immaterial to the quarter ended Marchoutstanding on October 31, 2019 and June 30, 2019 financial statements from a qualitative impact evaluation.
During the six months ended June 30, 2019, 636,480 shares were issued pursuant to convertible Preferred Series B Stock and accrued dividends conversion.2020.
Series B Preferred Stock Preferences
Voting Rights
PreferredHolders of Series B StockholdersPreferred Stock (“Series B Holders”) have the right to receive notice of any meeting of holders of Common Stockcommon stock or Series B Preferred Stock and to vote upon any matter submitted to a vote of the holders of Common Stockcommon stock or Series B Preferred Stock. Each holder of Series B Preferred StockHolder shall vote on each matter submitted to them with the holders of Common Stock.common stock.
Liquidation
Upon the liquidation dissolution or winding updissolution of the business of the Company, whether voluntary or involuntary, each holder of Series B Preferred StockHolder shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefor,therefore, a preferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the holders of Series B Preferred StockHolders in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company’sCompany to the holders of the Company’s Common Stock.common stock but after the Series D Holders receive their respective liquidation value. The Company accrues these dividends as they are earned each period.
On January 8, 2019, the Company completed the issuance of convertible debt in the SPA transactionConvertible Notes with a conversion price of $0.40. As a result, accordingly the exercise price on all of the warrants issued with the Series B Shares werePreferred Stock was adjusted downward to 90% of that conversion price or $0.36. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $117,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.
TheIn the first quarter of 2019, the Company recognized a beneficial conversion feature related to the Series B SharesPreferred Stock of approximately $33,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. BecauseSince the Series B SharesPreferred Stock can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders.
Series B preferred Stock Conversions and Repurchase
During the six monthsyear ended June 30,December 31, 2019, 9,250 shares of Series B Preferred Stock, with a par value of $.001$0.001, and accrued dividends were assumed with the merger transactionMerger and an aggregate of 2,2502,650 shares of Series B Preferred Stock, and accrued dividends, were subsequently converted into an aggregate of 562,500715,279 shares of authorizedthe Company’s common stock, par value $0.001 per share.stock.
Debt Conversion
Convertible Notes and Promissory Note to Related Party
The $750,000 convertible notes payable assumed in the acquisition transaction,Merger had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 of the outstanding convertible notesConvertible Notes was converted into an aggregate of 250,000 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares of common stock at $0.40 per share, which was the conversion price per the SPA.
In connectionin accordance with the Asset Purchase Agreement (“APA”) and APA Amendment, on January 8, 2019, Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company pursuant to the same terms of the SPA entered into by other investors to consummate the acquisition on January 8, 2019. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.SPA. See more details in Note 11 – Short-term Debt.
Stock-Based Compensation Plan
2013Stock Option Incentive 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.
17 |
Stock Option Activity
For the three and six months ended June 30, 2020, the Company recognized approximately $0 and $1,000, respectively, as compensation expense with respect to vested stock options. For the three and six months ended June 30, 2019, the Company recognized approximately $3,000 and $92,000, respectively, as compensation expense with respect to vested stock options. No compensation expense was recorded prior to the RMS reverse merger transaction. Since these stock options were assumed on January 8, 2019 as part of the RMS reverse merger transaction,Merger, there were no historical costs related to this prior to January 8, 2019. The expense for the six months ended June 30, 2019 is primarily related to an option forto purchase 250,000 shares of the Company’s common stock that were awardedwas issued to the Company’s CEO that were 100% vested and were issued pursuant to his employment agreement. This option was granted pursuant to his employment agreement with the Company, which stated that this option grant would be fullyThese options were immediately vested if not issued within fifteen days of the RMS reverse merger transaction. The option was not granted within that time frame and was fully vested when issued.upon issuance.
Including the expense of approximately $1,690,000 related to the restricted stock award to the Company’s CEO, total stock-based compensation expense for the three and six months ended June 30, 2019 were approximately $1,693,000 and $1,782,000, respectively. The three and six months ended June 30 include $1,690,254 related to the Company’s CEO restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this option grant would be fully vested if not issued within fifteen days of the RMS reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued.
Stock Option Activity
As of June 30, 2019, there2020, all outstanding stock options were 9,502 shares of unvested stock options. Unrecognizedfully vested, and related compensation cost amounted to approximately $3,900 as of June 30, 2019 and will be recognized as an expense on a straight-line basis over a remaining weighted average service period of 1 year.recognized.
The following is a summary of stock option activity for the six months ending June 30, 2019:2019 and June 30, 2020:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
Outstanding at December 31, 2018 | — | — | — | |||||||||
Assumed with the RMS merger transaction | 557,282 | $ | 2.78 | 6.99 | ||||||||
Granted | 250,000 | 0.40 | — | |||||||||
Expired/Cancelled | (289,774 | ) | 2.59 | — | ||||||||
Outstanding at June 30, 2019 | 517,508 | $ | 1.81 | 7.87 | ||||||||
Exercisable at June 30, 2019 | 508,006 | $ | 1.81 | 7.87 | ||||||||
Outstanding at December 31, 2019 | 425,000 | $ | 1.38 | 7.71 | ||||||||
Granted | — | — | — | |||||||||
Expired/Cancelled | (15,000 | ) | 1.35 | — | ||||||||
Outstanding and exercisable at June 30, 2020 | 410,000 | $ | 1.39 | 7.23 |
Non-Controlling Interest
For the six months ended June 30, 2020 and 2019, 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 which own their respective clinics; however, the Company maintains control through their management role for each of the clinics, in accordance with each clinic’s respective management agreement. Based on these agreements, the Company (RMS and RMS Management and now H-CYTE) 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 each month for each VIE to a net of zero. Due to this change in policy, there was no change in the non-controlling interest for the six months ended June 30, 2020 or 2019 related to the net income as it was $0 each month through the management fee charged by the Company.
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
Outstanding at December 31, 2018 | — | $ | — | — | ||||||||
Assumed with the RMS merger transaction | 557,282 | $ | 2.78 | 6.99 | ||||||||
Other activity since January 8, 2019: | ||||||||||||
Granted | 250,000 | $ | 0.40 | 9.53 | ||||||||
Cancelled | (289,774 | ) | $ | 2.59 | — | |||||||
Outstanding at June 30, 2019 | 517,508 | $ | 1.81 | 7.87 | ||||||||
Exercisable at June 30, 2019 | 508,006 | $ | 1.81 | 7.87 |
18 |
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 periods presented, there is no difference between the basic and diluted net loss per share: 404,821,082 warrants and 410,000 common stock options outstanding were considered anti-dilutive and excluded for the six months ended June 30, 2020. At June 30, 2020, the only potentially dilutive shares would be from the conversion of the convertible debt and the conversion of preferred stock, Series B and Series D totaling 38,308,600 of common stock to be issued upon conversion of all these securities. There was no option or warrant exercises that would have been potentially dilutive.
Note 10 – Commitments & Contingencies
Biotechnology Agreement
The Company, on June 21, 2019, entered into a 10-year exclusive and extendable product supply agreement with Rion LLC (“Rion”) that will enhance its existing cytotherapy product line, developing a disruptive technology for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a unique exosome technology to harness the healing power of the body. Rion’s novel exosome 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. With this agreement, Rion will serve as the product supplier and will co-develop a proprietary cellular platform with H-CYTE for the treatment of COPD. H-CYTE will control the commercial development and facilitate clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the U.S. Food and Drug Administration (“FDA”) for treatment of COPD.
Sublease AgreementLitigation
The Company entered into a sub-lease agreement for the lease in Alpharetta, Georgia. The period of the lease is from July 1, 2019 to December 31, 2020 and sublessee shall pay to sublessor a minimum rent, of two thousand dollars ($2,000) per month.
Consulting Agreements
The Company has an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $13,333 per month. The Company is in the process of negotiating a new contract with Mr. Crowne. The Company incurred expense of $0 and $39,999, for the three and six months ended June 30, 2019 related to this consulting agreement. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
The Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 for services related to evaluation and negotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The contract duration is for a period of twelve (12) months in the amount of $12,500 per month with a $15,000 signing bonus which was paid in full during the quarter ending March 31, 2019. The agreement also provides LilyCon Investments with $35,000 in stock (calculated using an annual Variable Weighted Average Price from February 2019 through January 2020) to be granted on the one year anniversary of this agreement, if the agreement has not been terminated prior to that date. Either party may terminate this agreement with or without cause upon 30 days written notice. For the three and six months ended June 30, 2019, the Company has expensed a total of $37,500 and $77,500 in compensation to LilyCon Investments, respectively.
The Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee, in which Mr. Monteleone received $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. This arrangement has no specified termination date. For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For the three and six months ended June 30, 2019, the Company has expensed $44,000 and $71,000 in consulting fees to St. Louis Family Office, respectively.
The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve (12) months, unless otherwise terminated by giving thirty (30) days prior written notice. Strategos will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by the Lung Health Institute, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the three and six months ended June 30, 2019, the Company has expensed $26,000 and $26,000 to Strategos Group for consulting services.
Distribution center and logistic services agreement
The Company has a non-exclusive distribution center agreement with a logistics service provider in Berlin, Germany pursuant to which they manage and coordinate the DenerveX System products which the Company exports to the EU through June 2019. The Company pays a fixed monthly fee of €4,500 (approximately $5,040) for all accounting, customs declarations and office support, and a variable monthly fee ranging from €1,900 to €6,900 (approximately $2,300 to $8,300), based off volume of shipments, for logistics, warehousing and customer support services.
Total expenses incurred for the distribution center and logistics agreement were approximately $22,500 and $45,000, respectively, for the three and six months ended June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
Patent Assignment and Contribution Agreements
The terms of a Contribution and Royalty Agreement dated January 31, 2013 with Dr. Scott Haufe, M.D was assumed in the merger transaction as of January 8, 2019. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.
The Company incurred approximately $0 and $1,100, respectively, in royalty expense under the Contribution and Royalty agreement for the three months and six months ended June 30, 2019, all of which was included in accounts payable at June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
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 itthe Company in the future, and these matters could relate to prior, current or future transactions or events. As of June 30, 2020, 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 two affiliated physicians related to LI Dallas, LI Nashville, LI Scottsdale,Pittsburgh, LI Pittsburgh,Scottsdale, and LI Dallas.Tampa. For the three months and six months endingended June 30, 2020 payments totaling approximately $0 and $22,000, respectively, were made to these physicians’ legal entities. For three months and six months ended June 30, 2019 payments totaling approximately $34,000 and $56,000, respectively, were made to these affiliates. Forphysicians’ legal entities. Due to the threeCompany ceasing operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, and six months ending June 30, 2018,LI Tampa, the guaranteed payments totaling approximately $20,000for these clinics were suspended until operations recommenced in July 2020. The payments to the LI Dallas physician ceased in March 2020 as LI Dallas will permanently cease operations and $59,000, respectively were made to these affiliates.
Note 11 - Short Term and Long-term Debt
Short Term Liabilitiesnot reopen.
Notes PayableManufacturer Liability Dispute
Short-term notes payable relates to financing arrangements for Directors and Officers and general liability insurance premiums that were financed at various points throughout 2018 and first quarter 2019 and two promissory notes assumed in the merger transaction.
These insurance financing arrangements require aggregate monthly payments of approximately $18,000 reflect interest rates ranging from 7% to 12.8% and are to be paid in full by April 2020 and had balances of approximately $95,000 at June 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these insurance financing arrangements was approximately $2,000 and $2,300 for the three and six months ended June 30, 2019 and was $0 for the three and six months ended June 30, 2018 respectively.
Bothof the promissory notes payable assumed in the merger are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. The Promissory Notes had outstanding balances of approximately $99,000 at date of merger transaction and approximately $99,000 at June 30, 2019. No scheduled payments have been made on these notes since the scheduled payment for January 2018 except for a $5,700 payment made in June 2019. Both of the notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes.
The Company incurred interest expense relatedselected an FDA registered contract manufacturer, to manufacture the promissory notes forDenerveX product. In 2019, the three and six months ended June 30, 2019Company became aware of events which resulted in the manufacturer not meeting certain contract performance requirements. As a result, the Company is in a dispute with the manufacturer. The Company intends to vigorously defend its position that the manufacturer did not meet its contract performance obligations. The Company believes the likelihood of incurring a material loss regarding the dispute with the manufacturer is reasonably possible but is unable to estimate the amount of approximately $1,300 and $2,100, respectively; no interest expense was incurred during 2018the loss based on information available at this time. As such, the Company has not recorded a loss as these notes were assumed on January 8,of June 30, 2020 or December 31, 2019. The Company is not aware of any legal action regarding this matter.
The Company’s interest expenseRion Services Agreement
On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of approximately $42,000Rion’s resources and $71,000expertise for the threelimited purpose of (i) consulting with and six months ended June 30, 2018 was related to convertible debt not assumedassisting H-CYTE in the RMS acquisition asfurther research and development for the generation of January 8, 2019.a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. 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 L-CYTE-01. An additional $550,000 in expense will be incurred upon the achievement of certain milestones in the services agreement. At this time, the Company is not able to estimate when these milestones will occur.
19 |
Note 11 – Short-term Debt
Convertible Notesnote
The Convertible notesNotes payable represents a securities purchase agreement with select accredited investors, which werewas assumed in the merger transaction.Merger. The debt assumed by the Company consisted of $750,000 inof units at(the “Units”) with a purchase price of $50,000 per unit were assumed.Unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants were initially exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. The notesConvertible Notes are secured by all of the assets of the Company.
The Company recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of $505,424 and $244,576, respectively. Interest expense related to the discount on these convertible notes for the three and six month period ending June 30, 2019 was approximately $63,600 and $127,900, respectively. The Company recognized approximately $21,500 and $41,200, respectively, in unpaid accrued interest expense related to the notes for the three and six months ended June 30, 2019.
The convertible notesConvertible Notes sold in the offering were initially convertible into an aggregate of 1,875,000 shares of common stock. The down round feature was triggered on January 8, 2019, and the conversion price of the convertible debt wereConvertible Notes was adjusted to $0.36. The Company recognized the down round as a deemed dividend of approximately $288,000 which reduced the income available to common stockholders.
On February 6, 2019, $100,000 of the Company’s $750,000 outstanding convertible notesConvertible Notes, plus accrued interest, was converted into an aggregate of 251,667 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the SPA subsequent to the trigger of the down round feature. TheIn 2019, the Company redeemed $350,000 of convertible notes have maturity dates between Augustpayable in principal and September 2019. $52,033 in interest payable for three of the noteholders.
The Company is inalso reached an extension with the process of negotiating a 30-day extension of the maturity dates. If the Company is unable to extendremaining noteholder which extended the maturity date the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the Hawes Notes for one year, until September 30, 2020. The notes had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of $424,615 as of March 31, 2020 and December 31, 2019. In connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020. The Hawes Notes had a principal amountbalance of this$424,615 as of June 30, 2020 and December 31, 2019. The amendment to the Hawes Note plus 100%among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing. The Company determined the proper classification of the amendment based on ASC 470-50, Debt Modifications and unpaidExtinguishments. Because the change in the present value of cash flows of the modified debt was less than 10% when compared to the present value of the cash flows of the original debt, extinguishment accounting did not apply. The effective interest hereon,rate was reassessed resulting in an effective interest rate of 11.90% and (b) all other amounts, costs, expenses and liquidated damages due in respectinterest expense for the three months ended June 30, 2020, of these notes. approximately $13,000.
Long-Term DebtNotes Payable
Notes payable were assumed in the Merger and are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. Each note originally had a maturity date of August 1, 2019. The convertible debtCompany finalized an eighteen-month extension to related partiesMarch 1, 2021. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 at June 30, 2020 and December 31, 2019. The Company has not made payments on this note since February 10, 2020, due to COVID-19, resulting in accrued interest of $1,000.
On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further above in Footnote 3, this A&R Note was further amended and superseded by an April Secured Note in the BioCell Capital Lineamount of Credit which was$1,000,000 issued by the Company to the Investor. The Company expects that this note will be converted to equity as partSeries A Preferred Stock at a price of $0.014 per share upon the closing of the APA on January 8, 2019. (See Note 8.)rights offering although such conversion is subject to certain conditions.
20 |
The other short-term notes, related parties were issued by the Company during 2019, and as of March 31, 2020 and December 31, 2019 consist of five loans, totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes and had the terms as indicated below. The loans bear interest ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the respective maturity date ranging from March 26, 2020 to May 13, 2020. Some of these loans provided for the issuance of warrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans have been repaid and 840,000 warrants have been issued at an exercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing, which price is set at $0.014, and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of the warrant will be equal to the price per share obtained by dividing $3,000,000 by the number of fully diluted shares of the Company outstanding on October 31, 2020. On the date of the transaction, the carrying amount of the note and accrued interest was approximately $1,717,000. The fair value of the Common Stock was valued based on the trading market price on the date of the transaction and the warrants were valued using a Lattice model. The fair value of the Common Stock and warrants issued in the transaction was approximately $218,000 and $199,000, respectively. Since the fair value of the common stock and warrants was less than the carrying amount of the note, the Company recorded a gain on extinguishment of the debt of approximately $1,300,000.
On April 29, 2020, the Company issued a promissory note in the principal amount of $809,082 to the Bank of Tampa in connection with a loan in such amount made under the Paycheck Protection Program (“PPP Loan”). The PPP Loan bears interest at a rate of 1% per annum and is payable in eighteen monthly payments of $45,533 commencing six months from the date of the note on October 29, 2020. While the note is dated April 29, 2020, the loan was not formally approved and funded until May 7, 2020.
The Company can apply for loan forgiveness in an amount equal to the sum of the following costs incurred by the Company:
1) payroll costs;
2) any payment of interest on covered mortgage obligations;
3) any payment on a covered rent obligation; and
4) any covered utility payment
The amount forgiven will be calculated (and may be reduced) in accordance with the Paycheck Protection Program. Not more than 40% of the amount forgiven can be attributed to non-payroll costs.
Note 12 – Derivative Liability - Warrants
Financial assets and liabilities carried at fair value as of June 30, 2020 and December 31, 2019 are classified in the tables below:
Fair Value Measurement at June 30, 2020 (1) | ||||
Using Level 3 | ||||
Liability: | ||||
Derivative Liability - Warrants | $ | 10,055,676 | ||
Derivative Put Liability | $ | 97,998 |
Fair Value Measurement at December 31, 2019 (1) | ||||
Using Level 3 | ||||
Liability: | ||||
Derivative Liability - Warrants | $ | 315,855 | ||
Derivative Put Liability | $ | 267,399 |
(1) 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 June 30, 2020 and December 31, 2019.
21 |
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 is a reconciliation of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2020:
Derivative Liability - Warrants | ||||
Balance at December 31, 2019 | $ | 315,855 | ||
Series D Warrant reclass from equity to liability | 509,764 | |||
Warrants issued with modification of Horne Note | 198,994 | |||
Warrants issued with April 17, 2020 financing | 6,148,816 | |||
Fair value adjustments | 2,882,247 | |||
Balance at June 30, 2020 | $ | 10,055,676 |
Redemption Put Liability | ||||
Balance at December 31, 2019 | $ | 267,399 | ||
Issuance of Series D Convertible Preferred Stock | 5,306 | |||
Fair value adjustments | (174,707 | ) | ||
Balance at June 30, 2020 | $ | 97,998 |
Derivative Liability- Warrants
Series B Warrants
In connection with the securities purchase agreements executed in May 2018 (which the Company assumed in the Merger), whereby 108,250 shares of the Company’s Series B Convertible Preferred Stock (the “Series B Shares”) and warrants were issued to purchase 2,312,500 shares of the Company’s common stock (“Series B Warrants”). The Series B Warrants had a three-year term at an exercise price of $0.75. The Series B Warrants contain two features such that in the event of a downward price adjustment the Company is required to reduce the strike price of the existing warrants (first feature or “down round”) and issue additional warrants to the award holders such that the aggregate exercise price after taking into account the adjustment, will equal the aggregate exercise price prior to such adjustment (second feature or “additional issuance”).
On January 8, 2019, the Company issued equity securities which triggered the down round and additional issuance warrant features. As a result, the exercise price of the warrants was lowered from $0.75 to $0.40 and 2,023,438 additional warrants were issued. The inclusion of the additional issuance feature caused the warrants to be accounted for as liabilities in accordance with ASC Topic 815. The fair market value of the warrants, approximately $1,200,000, was recorded as a derivative liability as a measurement period adjustment to the purchase price allocation in the third quarter of 2019.
22 |
As part of the April 2020 offering, the holders of the Series B Warrants agreed to terminate all anti-dilution price protection in their warrants and adjusted the exercise price to equal the price per share at which shares of preferred stock are offered for purchase in a Qualified Financing. The modification resulted in an increase of approximately $75,000 to the fair value of the derivative liability related to the Series B Warrants.
Series D Warrants
In conjunction with their Series D Preferred Financing, the Company originally issued Series D warrants to purchase 14,669,757 shares of Common Stock with an exercise price of $0.75 per share. At inception, the Series D warrants met all the criteria to be classified as equity. As part of the April Offering, the exercise price of the Series D Warrants was reduced to the price per share at which shares of preferred stock are offered for purchase in a Qualified Financing. The modification of the exercise price resulted in the warrants requiring liability classification. The Series D Warrants were measured at fair value before and after the modification, resulting in an increase of approximately $510,000 which is recorded as a change in the fair value of the derivative liability.
Horne Warrants
On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. The warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing. The revised exercise price caused the warrants to require liability classification at fair value and the warrants were valued using a Lattice model with the following assumptions: Trading market price- $0.05, estimated exercise price- $0.014, volatility- 101%, risk free rate- 0.65% and an estimated term of 10 years. At inception, the estimated fair value of the Horne Warrants was approximately $199,000.
April Bridge Loan and Converted Advance Warrants
The April Offering entitled the investors to warrants with the right to purchase up to 100% of the aggregate number of shares of Common Stock into which the Purchaser’s Note may ultimately be converted. The Company also received a $1,000,000 advance which was converted into a Converted Advance Note and Converted Advance Warrants in April 2020. The Converted Advance Warrants entitle the holder to purchase up to 200% of the aggregate number of shares of Common Stock into which the Converted Advanced Note may ultimately be converted.
The Company received an aggregate of $2,842,695 in gross proceeds through the April Offering and an advance of $1,000,000 which was converted into an Advance Note on April 17, 2020. The Company expects the price per share at which securities will be offered for purchase in the Qualified Financing to be $0.014 resulting in the assumption there will be approximately 203,050,000 and 142,857,000 shares issuable upon exercise of the Purchaser Warrants and the Converted Advance Warrants, respectively. The warrants were valued using a Lattice model with the following assumptions: Trading market price- $0.05, estimated exercise price- $0.014, volatility- 103%, risk free rate- 0.65% and an estimated term of 10 years. At inception, the estimated fair value of the Purchaser Warrants and the Converted Advance Warrants was approximately $3,279,000 and $2,869,300, respectively.
When the Company entered into the April Offering and revised the exercise price of their warrants to the price per share at which shares of preferred stock are offered for purchase in a Qualified Financing, they no longer had sufficient authorized and unissued shares available to satisfy all their commitments to issue shares under their equity-linked contracts. The Company has adopted the sequencing approach based on the earliest issuance date. Therefore, warrants issued before the April Offering did not require liability classification, while Warrants issued with the April financing, or subsequently, will be classified as liabilities until such time the Company has sufficient authorized shares.
The derivative liability has been remeasured to fair value at the end of each reporting period and the change in fair value, of approximately ($3,057,225) and ($2,882,247), has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months and six months ended June 30, 2020, respectively. The derivative liability has been remeasured to fair value at the end of each reporting period and there was no change in fair value for the three and six months ended June 30, 2019. The fair value of the derivative liability included on the consolidated balance sheet was approximately $10,056,000 and $316,000 as of June 30, 2020 and December 31, 2019, respectively.
23 |
The Company estimated the fair value of the warrant derivative liability as of June 30, 2020 and December 31, 2019, respectively, using the following assumptions:
June 30, 2020 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.05 | $ | 0.13 | ||||
Exercise price | $ | 0.014 | $ | 0.40 | ||||
Risk free rate | 0.14% - 0.66% | % | 1.58 – 1.59 | % | ||||
Expected term (in years) | 0.17- 10.27 | 1.34 – 2.02 | ||||||
Stock price volatility | 109% - 312 | % | 143 - 154 | % | ||||
Expected dividend yield | — | — |
At December 31, 2019, due to the down round provision contained in the warrants, which could provide for the issuance of additional warrant shares as well as a reduction in the exercise price, the model also considered subjective assumptions related to the shares that would be issued in a down-round financing and the potential adjustment to the exercise price. 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.
On November 15, 2019, the Company redeemed a shareholder’s Series B Preferred shares for its initial face value, plus accrued dividends.
In conjunction with the Series D Preferred financing (See Note 14), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock with a fair value of approximately $73,000. On the date of the exchange, the Series B Warrants were first adjusted to fair value with the change in fair value being recorded in earnings.
Redemption Put Liability
As described in Note 14, 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 and December 31, 2019:
June 30, 2020 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.05 | $ | 0.056 | ||||
Exercise price | $ | 0.20409 | $ | 0.20409 | ||||
Risk free rate | 0.66 | % | 1.92 | % | ||||
Expected term (in years) | 9.5 | 9.9 | ||||||
Stock price volatility | 107 | % | 92 | % | ||||
Expected dividend yield | — | — |
24 |
The fair market value of the redemption put liability at inception was approximately $614,000 which has been recorded as a liability and is remeasured to fair value at the end of each reporting period. The change in fair value of approximately ($19,000) and $175,000 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three and six months ended June 30, 2020, respectively. The change in fair value of approximately $0 and $0 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three and six months ended June 30, 2019, respectively. The fair value of the redemption put liability included on the consolidated balance sheet was approximately $98,000 and $267,000 as of June 30, 2020 and December 31, 2019, respectively.
Note 1213 - Common Stock Warrants
Fair value measurement valuation techniques, to the extent possible, should maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s fair value measurements of all warrants are designated as Level 1 since all of the significant inputs are observable and quoted prices used for volatility were available in an active market.
A summary of the Company’s warrant issuance activity and related information for the six monthsquarters ended June 30, 2019 is as follows:2020 and June 30, 2019:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Assumed as of the January 8, 2019 merger | 12,108,743 | $ | 1.38 | 2.6 | ||||||||
Issued | 18,000,000 | $ | 0.75 | 2.59 | ||||||||
Outstanding and exercisable at June 30, 2019 | 30,108,743 | $ | 0.95 | (1)(2) | 2.38 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Assumed as of the January 8, 2019 merger | 12,108,743 | $ | 1.38 | 2.60 | ||||||||
Issued | 17,500,000 | 0.75 | 2.84 | |||||||||
Outstanding and exercisable at June 30, 2019 | 29,608,743 | $ | 1.00 | 2.63 | ||||||||
Outstanding and exercisable at December 31, 2019 | 44,806,076 | $ | 0.78 | 4.59 | ||||||||
Issued and exercisable | 5,178,720 | 0.015 | 9.79 | |||||||||
Outstanding and exercisable at June 30, 2020 | 49,984,796 | $ | 0.104 | 9.16 | ||||||||
Issued, not yet exercisable | 354,836,286 | 0.015 | 9.79 | |||||||||
Total outstanding at June 30, 2020 | 404,821,082 | 0.104 | 9.16 |
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 issued at June 30, 2019 as of their respective issue dates are as follows:
Event Description | Date | H-CYTE Stock Price | Exercise Price of Warrant | Grant Date Fair Value | Life of Warrant | Risk Free Rate of Return (%) | Annualized Volatility Rate (%) | 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 (%) | |||||||||||||||||||||||||||||||||||||||||||
Private placement | 1/8/2019 | 5,000,000 | $ | 0.40 | $ | 0.75 | $ | 0.24 | 3 years | 2.57 | 115.08 | |||||||||||||||||||||||||||||||||||||||||||||||
Antidilution provision(1) | 1/8/2019 | 2,023,438 | $ | 0.40 | $ | 0.40 | $ | 0.28 | 3 years | 2.57 | 115.08 | |||||||||||||||||||||||||||||||||||||||||||||||
Private placement | 1/8/2019 | $ | 0.40 | $ | 0.75 | $ | 0.24 | 3 years | 2.57 | 115.08 | 1/18/2019 | 6,000,000 | $ | 0.40 | $ | 0.75 | $ | 0.23 | 3 years | 2.60 | 114.07 | |||||||||||||||||||||||||||||||||||||
Private placement | 1/18/2019 | $ | 0.40 | $ | 0.75 | $ | 0.23 | 3 years | 2.60 | 114.07 | 1/25/2019 | 1,250,000 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.72 | |||||||||||||||||||||||||||||||||||||
Private placement | 1/25/2019 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.72 | 1/31/2019 | 437,500 | $ | 0.54 | $ | 0.75 | $ | 0.34 | 3 years | 2.43 | 113.47 | |||||||||||||||||||||||||||||||||||||
Private placement | 1/31/2019 | $ | 0.54 | $ | 0.75 | $ | 0.34 | 3 years | 2.43 | 113.47 | 2/7/2019 | 750,000 | $ | 0.57 | $ | 0.75 | $ | 0.36 | 3 years | 2.46 | 113.23 | |||||||||||||||||||||||||||||||||||||
Private placement | 2/7/2019 | $ | 0.57 | $ | 0.75 | $ | 0.36 | 3 years | 2.46 | 113.23 | 2/22/2019 | 375,000 | $ | 0.49 | $ | 0.75 | $ | 0.30 | 3 years | 2.46 | 113.34 | |||||||||||||||||||||||||||||||||||||
Private placement | 2/22/2019 | $ | 0.49 | $ | 0.75 | $ | 0.30 | 3 years | 2.46 | 113.34 | 3/1/2019 | 125,000 | $ | 0.52 | $ | 0.75 | $ | 0.33 | 3 years | 2.54 | 113.42 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/1/2019 | $ | 0.52 | $ | 0.75 | $ | 0.33 | 3 years | 2.54 | 113.42 | 3/8/2019 | 150,000 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.53 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/8/2019 | $ | 0.59 | $ | 0.75 | $ | 0.38 | 3 years | 2.43 | 113.53 | 3/11/2019 | 2,475,000 | $ | 0.61 | $ | 0.75 | $ | 0.40 | 3 years | 2.45 | 113.62 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/11/2019 | $ | 0.61 | $ | 0.75 | $ | 0.40 | 3 years | 2.45 | 113.62 | 3/26/2019 | 500,000 | $ | 0.51 | $ | 0.75 | $ | 0.32 | 3 years | 2.18 | 113.12 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/26/2019 | $ | 0.51 | $ | 0.75 | $ | 0.32 | 3 years | 2.18 | 113.12 | 3/28/2019 | 375,000 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.18 | 112.79 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/28/2019 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.18 | 112.79 | 3/29/2019 | 62,500 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.21 | 112.79 | |||||||||||||||||||||||||||||||||||||
Private placement | 3/29/2019 | $ | 0.51 | $ | 0.75 | $ | 0.31 | 3 years | 2.21 | 112.79 | 4/4/2019 | 500,000 | $ | 0.48 | $ | 0.75 | $ | 0.29 | 3 years | 2.29 | 112.77 | |||||||||||||||||||||||||||||||||||||
Private placement | 4/4/2019 | $ | 0.48 | $ | 0.75 | $ | 0.29 | 3 years | 2.29 | 112.77 | 7/15/2019 | 200,000 | $ | 0.53 | $ | 1.00 | $ | 0.31 | 3 years | 1.80 | 115.50 | |||||||||||||||||||||||||||||||||||||
Convertible debt extension | 9/18/2019 | 424,000 | $ | 0.40 | $ | 0.75 | $ | 0.25 | 3 years | 1.72 | 122.04 | |||||||||||||||||||||||||||||||||||||||||||||||
Private placement of Series D Convertible Preferred Stock | 11/15/2019 | 14,669,757 | $ | 0.28 | $ | 0.75 | $ | 0.19 | 10 years | 1.84 | 89.75 | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term note related party | 11/26/2019 | 400,000 | $ | 0.20 | $ | 0.75 | $ | 0.13 | 3 years | 1.58 | 144.36 | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term note, related party | 12/30/2019 | 171,429 | $ | 0.14 | $ | 0.75 | $ | 0.08 | 3 years | 1.59 | 145.29 | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term note, related party | 1/13/2020 | 268,571 | $ | 0.12 | $ | 0.75 | $ | 0.07 | 3 years | 1.60 | 145.76 | |||||||||||||||||||||||||||||||||||||||||||||||
Private placement of Series D Convertible Preferred Stock | 1/17/2020 | 244,996 | $ | 0.15 | $ | 0.75 | $ | 0.13 | 10 years | 1.84 | 144.32 | |||||||||||||||||||||||||||||||||||||||||||||||
Granted for bridge financing | 4/8/2020 | 296,875 | $ | 0.05 | $ | 0.40 | $ | 0.04 | 3 years | 0.34 | 131.82 | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term note, related party conversion | 4/17/2020 | 4,368,278 | $ | 0.05 | $ | 0.014 | $ | 0.05 | 10 years | 0.65 | 102.54 | |||||||||||||||||||||||||||||||||||||||||||||||
Granted for bridge financing | 4/17/2020 | 345,906,786 | $ | 0.05 | $ | 0.014 | $ | 0.05 | 10 years | 0.65 | 102.54 | |||||||||||||||||||||||||||||||||||||||||||||||
Granted for bridge financing | 6/30/2020 | 8,929,500 | $ | 0.07 | $ | 0.014 | $ | 0.07 | 10 years | 0.66 | 108.66 |
(1)Warrants issued withThe Company had warrants that triggered the May 2018 private placement and debt conversion hadrequired issuance of an initial exercise price of $0.75 and containadditional 2,023,438 warrants as a contingent feature which would adjust the exercise priceresult of the Company’s capital raise that gave those new investors a $0.40 per share investment price which required the old warrant in the event the Company issues any shares of common stock or common stock equivalents in a private placement of equity or debt securities at aholders to receive additional warrants since their price less thanwas $0.75 per share. On August 8, 2018, the Company completed the issuance of convertible debt at an initial conversion price of $0.40. Accordingly, the exercise price on these warrants was adjusted downward to $0.40.
(2)Warrants issued with the August 8, 2018 and September 28, 2018 convertible notes had an initial exercise price of $0.75 and contain a contingent feature which would adjust the exercise price of the warrants in the event the Company issued any shares of common stock or common stock equivalents in a private placement of equity or debt securities to 90% of the issuance price if it is less than $0.75.
25 |
(3)On January 8, 2019, the Company completed the issuance of convertible debt in the SPA transaction with a conversion price of $0.40. As a result, accordingly the exercise price on all of the warrants issued with the Series B Shares were adjusted downward to 90% of that conversion price or $0.36. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $117,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.
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 14- Mezzanine Equity and Series D Convertible Preferred Stock
Series D Convertible preferred Stock
On November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered (i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants are exercisable for a period of 10 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional equity restructurings and reorganizations.
On November 21, 2019, the Company entered into a securities purchase agreement with FWHC HOLDINGS, LLC (“FWHC”) an accredited investor for the purchase of 146,998 shares of Series D Preferred Stock, par value $0.001 per share and the Series D Warrant resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). For further discussion of the Series D Shares, refer to Note 14 - “Mezzanine Equity and Series D Convertible Preferred Stock” on the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019.
The Company determined that the nature of the Series D Shares was more analogous to an equity instrument, and that the economic characteristics and risks of the embedded conversion option was clearly and closely related to the Series D Shares. As such, the conversion option was not required to be bifurcated from the host under ASC 815, Derivatives and Hedging. The Company recognized a beneficial conversion feature related to the Series D Shares of approximately $623,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series D Shares can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders. Since the Series D Shares are redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, they have been classified as mezzanine equity in the Consolidated Balance Sheets.
The Company determined that the economic characteristics and risks of the embedded redemption provision were not clearly and closely related to the Series D Shares. The Company assessed the embedded redemption provision further, and determined it met the definition of a derivative and required classification as a derivative liability at fair value. The redemption put liability as of June 30, 2020 and December 31, 2019, was approximately $98,000 and $267,000, respectively.
The Company’s approach to the allocation of the proceeds to the financial instruments was to first allocate basis to the redemption put liability at its fair values and the residual to the Series D Shares and the Series D Warrants. Based upon the amount allocated to the Series D Shares the Company was required to determine if a beneficial conversion feature (“BCF”) was present. A BCF represents the intrinsic value in the convertible instrument, adjusted for amounts allocated to other financial instruments issued in the financing. The effective conversion price is calculated as the amount allocated to the convertible instrument divided by the number of shares to which it is indexed. However, a BCF is limited to the basis initially allocated. After allocating a portion of the proceeds to the other instruments, the effective conversion price was $0.24 compared to the share price of $0.28, resulting in a BCF of $623,045 or $0.04 per share.
26 |
Note 13 - Liquidity, Going ConcernBased upon the above accounting conclusions and Management’s Plansthe additional information provided below, the allocation of the proceeds arising from the Series D Preferred financing transaction is summarized in the table below:
November 21, 2019 Series D Convertible Preferred and warrant financing: | Proceeds Allocation | Financing Cost Allocation | Total Allocation | |||||||||
Gross proceeds | $ | 6,000,000 | $ | — | $ | 6,000,000 | ||||||
Financing costs paid in cash | — | (111,983 | ) | (111,983 | ) | |||||||
$ | 6,000,000 | $ | (111,983 | ) | $ | 5,888,017 | ||||||
Derivative Liability: | ||||||||||||
Derivative Put Liability | $ | (614,095 | ) | $ | — | $ | (614,095 | ) | ||||
Deferred Financing costs | — | 8,100 | 8,100 | |||||||||
Redeemable preferred stock: | ||||||||||||
Series D Convertible Preferred Stock | (2,869,854 | ) | — | (2,869,854 | ) | |||||||
Financing costs (APIC) | — | 1,106 | 1,106 | |||||||||
Financing costs (Retained Earnings) | — | 66,265 | 66,265 | |||||||||
Beneficial Conversion Feature | (623,045 | ) | — | (623,045 | ) | |||||||
Investor Warrants (equity classified): | ||||||||||||
Proceeds allocation | (1,893,006 | ) | — | (1,893,006 | ) | |||||||
Financing costs (APIC) | — | 36,512 | 36,512 | |||||||||
$ | (6,000,000 | ) | $ | 111,983 | $ | (5,888,017 | ) |
Since the Series D Convertible Preferred Stock is perpetual and convertible at any time, the resulting discount of $3,130,146 was accreted as a Preferred Stock dividend on the date of issuance to record the Series D Convertible Preferred Stock to its redemption value of $6,000,000.
On January 17, 2020, the Company entered into a securities purchase agreement with an accredited investor for the purchase of 2,450 shares of Series D Preferred Stock, par value $0.001 per share and a Series D Warrant resulting in $100,000 in gross proceeds to the Company. The Company incurred net lossesSeries D Preferred Stock and Warrants had the same terms as the FWHC Investment. There was no BCF associated with this financing because the effective conversion price after allocating a portion of approximately $8,992,000the proceeds to the other instruments was higher than the share price.
January 17, 2020 Series D Convertible Preferred and warrant financing: | Proceeds Allocation | |||
Gross proceeds | $ | 100,000 | ||
Financing costs paid in cash | — | |||
$ | 100,000 | |||
Derivative Liability: | ||||
Derivative Put Liability | $ | (5,306 | ) | |
Redeemable preferred stock: | ||||
Series D Convertible Preferred Stock | (62,792 | ) | ||
Investor Warrants (equity classified): | ||||
Proceeds allocation | (31,902 | ) | ||
$ | (100,000 | ) |
Since the Series D Convertible Preferred Stock is perpetual and $1,260,000 forconvertible at any time, the resulting discount of $37,207 was accreted as a Preferred Stock dividend on the date of issuance to record the Series D Convertible Preferred Stock to its redemption value of $100,000.
27 |
For the six months ended June 30, 2019 and 2018, respectively.2020, the Company recorded $278,476 in deemed dividends on the Series D Convertible Preferred stock in accordance with the 8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,401,762 at June 30, 2020.
The RMS products and services division will incur losses until sufficient revenue volume and geographical coverage is attained utilizing the infusion of capital resources to expand marketing and sales initiatives.Series D CONVERTIBLE Preferred Stock Preferences
Voting Rights
In April 2019,
Holders of our Series D Preferred Stock (“Series D Holders”) have the right to receive notice of any meeting of holders of common stock or Series D Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series D Preferred Stock. Each Series D Holder shall vote on each matter submitted to them with the holders of common stock.
Liquidation
Upon the liquidation, dissolution or winding up of the Company, determined that their contract manufacturer was not ablewhether voluntary or involuntary, each Series D Holder shall be entitled to meet the quality and quantity requirementsreceive, for producing the DenerveX product. As a result, the manufactureeach share thereof, out of assets of the DenerveX product has been temporarily suspended whileCompany legally available therefore, a preferential amount in cash equal to the Company sources alternative manufacturing options. Additionally,stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the Series D Holders in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company’s review and evaluation of its current distribution channels,to the Company has determined that many of these channels were not cost effective. As a resultholders of the above evaluations, certain European distributor agreements were terminated,Company’s Series B and all other representatives have been notified that thecommon stock. The Company is temporarily suspending the manufacture and sale of the DenerveX product while the Company sources alternative manufacturing and distributor optionsaccrues these dividends as well as considers other product monetizing strategies. The MedoveX operations will continue to incur losses until the plan for the DenerveX System monetization is determined and executed.they are earned each period.
The Company’s independent registered public accounting firm has included an explanatory paragraph with respect to our ability to continue as a going concern in its report on the Company’s consolidated financial statements for the year ended December 31, 2018. 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 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 Company through July 2019 has raised $7,100,000 (excluding $200,000 of debt conversions) year to date in additional cash to sustain the Company. Cash as of June 30, 2019 was approximately $300,000. The present level of cash is insufficient to satisfy the Company’s current operating requirements.Note 15 - Subsequent Events
On July 25 and July 26, 2019,28, 2020, the Company issued two promissory notesan aggregate of 17,893,075 shares of its common stock upon the conversion of all of its issued and outstanding Series B and Series D Preferred Stock (the “Notes”“Preferred Stock”). The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Preferred Stock as set forth in the aggregate principal amountCertificate of $900,000Designations for the Preferred Stock. As a result, all outstanding shares of Series B and Series D Preferred stock were cancelled.
The Company established July 28, 2020 as the Record Date for purposes of establishing a date for the Company’s rights offering whereby each holder of the Company’s Common stock on the Record Date will be entitled to Horne Management, LLC,three subscription rights, each to purchase one share of Series A Preferred Stock.
On July 29, 2020, the Company filed its Second Amended and controlled by Mr. William E. Horne,Restated Certificate of Incorporation (the “Amended COI”). The Amended COI provides for the issuance of up 1,600,000,000 shares of Common Stock and 1,000,000,000 shares of Preferred Stock, of which 800,000,000 shares are designated as Series A Preferred Stock and eliminates the previously authorized classes of preferred stock. The Amended COI also delineates the rights of the Series A Preferred Stock.
On July 29, 2020, H-Cyte, Inc. (the “Company”) entered into an amendment to the employment agreement (the “Amendment”) of its Chief Executive Officer, Bill Horne. The Amendment provides that Mr. Horne will receive a monthly base salary of $12,500 effective on June 1, 2020 and that his base salary will increase to $20,833 per month upon the first day of the Company. The Notes bear an interest rate of 5.5% per annummonth when the Company completes a Qualified Financing. Mr. Horne agreed to continue to defer the $108,000 in base salary deferred by him in 2018 (the “Deferred Salary”) until such time as there is a positive cash flow to meet the Company’s financial obligations and are due on demand. Thethen the Company has received the funds represented by the Notes.and Mr. Horne will work together in good faith to negotiate a payment plan for such Deferred Salary.
The Company has certain convertible promissory notesevaluated subsequent events occurring through the date that the financial statements were available to be issued for events requiring recording or disclosure in the aggregate principal amount of approximately $650,000 that mature in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.
The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on the notes.
The Company is pursuing raising additional funds from the sale of equity securities. On June 7, 2019 the Board of Directors approved a new private placements securities offering up to $8,500,000 of Common Stock at a price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurances that the Company will be able to obtain additional financing on commercially reasonable terms, if at all. If the Company is required to curtail operations, there would be substantial doubt about the Company’s ability to continue as a going concern.
The unaudited2020 consolidated financial statements do not include any adjustments to the carrying value of amounts of its assets or liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 14 - Subsequent Eventsstatements.
On July 11, 2019, MedoveX changed its named to H-CYTE by filing the Amendment to the Company’s Certificate of Incorporation with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT became effective with FINRA on July 15, 2019.
On July 25 and July 26, 2019, H-CYTE, Inc. issued two promissory notes (the “Notes”) in the principal amount (the “Principal Amount”) of an aggregate of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.
On July 29, 2019, the board of directors (the “Board”) of the Company appointed Dr. Andre Terzic to the Board. Dr. Andre Terzic, 57, has served as a director at the Center for Regenerative Medicine of Mayo Clinic in Rochester, Minnesota for the last five years. Dr. Andre Terzic is the Chair of the Pharmaceutical Science and Clinical Pharmacology Advisory Committee of Food and Drug Administration, the President of the American Society for Clinical Pharmacology & Therapeutics, and one of the co-founders of Rion LLC. Rion is a Minnesota Bio-tech Company focused on cutting-edge regenerative technologies. Dr. Terzic received his M.D. at University of Belgrade in Paris, France in 1985 and his Ph.D. from the Department of Pharmacology of University of Illinois in 1991.
On July 30, 2019, the Board appointed Dr. Atta Behfar as a member of the Board. Dr. Atta Behfar, 42, has worked as a cardiologist at the Department of Cardiovascular Medicine of Mayo Clinic for the last five years. Dr. Atta Behfar is a Director of the Van Cleve Cardiac Regenerative Medicine program at Mayo Clinic and one of the founders of Rion LLC. Dr. Behfar received a Bachelor of Science degree in Biochemistry from Marquette University in 1998 and a M.D. and Ph.D. from Mayo Clinic College of Medicine, Mayo Graduate School in 2006.
The Company has certain convertible promissory notes in the aggregate principal amount of approximately $650,000 that mature between August 8, 2019 and September 28, 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of this Note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.
The company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on the notes.
28 |
IItem 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
On July 11, 2019, Medovex Corp. (“MedoveX”) changed its named to “H-CYTE, Inc.” (H-CYTE or the Company) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019.
On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the Asset Purchase Agreement was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the Asset Purchase Agreement and its amendment, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome 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 ten-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 cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. 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 L-CYTE-01.
With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the FDA for treatment of COPD.
Due to COVID-19, all of the LHI clinics are closed. The Company’s RMS divisionCompany will evaluate reopening these clinics at the appropriate time. The Company is a healthcare medical biosciences companynot expecting to be able to generate revenue until, at the earliest, July 2020. The Company has contacted its patients that developsare scheduled for treatment, both first time patients and implements advance innovative treatment options in regenerative medicinerecurring patients, and have rescheduled man of these patients for July, August, and September 2020. However, there is no guarantee that the Company will be able to continue to treat an array of debilitating medical conditions. In addition, the company is the operator and manager of the various Lung Health Institute clinics. Committed to an individualized patient-centric approach, RMS consistently provides oversight and management of the highest quality care while producing positive outcomes. RMS offices are located in Tampa, Florida. The Lung Health Institute located in Tampa, Florida is a wholly owned subsidiary of RMS. RMS also provides oversight and managementpatients due to the Lung Health Institutes located in Nashville, TN, Scottsdale AZ, Pittsburgh, PA,ambiguity of COVID-19; as such, the Company cannot estimate if it will continue to be safe to treat patients and Dallas, TX.generate revenue. Future quarters’ revenue is dependent on the ability for the Company to treat patients and not have to cease operations again due to COVID-19.
The Company is also inwill continue to focus on its goal of taking the businessL-CYTE-01 protocol to the FDA for treatment of designing and marketing proprietary medical devices for commercial use inchronic lung diseases. With the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company plans to seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the United States. The Company is presently reevaluating its approaches to revenue generation including the continuing use of distribution channels.
In April,revenue-generating activities suspended, the Company determined that their contract manufacturer was not ablewill need to meetraise cash from debt and equity offerings to continue with its efforts to take the quality and quantity requirementsL-CYTE-01 protocol to the FDA for producing the DenerveX product. As a result, the manufacturetreatment of the DenerveX product has been temporarily suspended while the Company sources alternative manufacturing options. Additionally, in the Company’s review and evaluation of its current distribution channels, the Company has determined that many of these channels were not cost effective. As a result of the above evaluations, certain European distributor agreements were terminated, and all other representatives have been notifiedchronic lung diseases. There can be no assurance that the Company is temporarily suspending the manufacture and sale of the DenerveX product while the Company sources alternative manufacturing and distributor options as well as considers other product monetizing strategies.will be successful in doing so.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with 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 an ongoinga continual basis, we evaluate our estimates and judgments, including those described in greater detail below.
29 |
We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our consolidated financial statements for the fiscal year ended December 31, 2018,2019, included in the Company’s Annual Report on Form 10K as well as in the notes to our unaudited consolidated financial statements for the six months ended June 30, 2019 included in this Quarterly Report on Form 10-Q. The December 31, 2018 financial information included in the Company’s Annual Report on Form 10K reflect the historical financial information of H-CYTE (formerly Medovex) business and do not include the RMS financial information. With the reverse merger, historical financial information for periods prior to the merger on January 8, 2019 presented in the comparative financial information included in the 2019 Quarterly Reports on Form 10-Q will only reflect the historical financial information related to RMS prior to the merger.10-K.
Results of Operations - Three and Six Months Ended June 30, 20192020 and 20182019
Revenue, Cost of Sales and Gross Profit
The Company recorded gross revenue for the three months and six months ended June 30, 2020 of approximately $20,000 and $1,036,000, respectively. The Company recorded revenue for the three months and six months ended June 30, 2019 of approximately $2,432,000 and $3,756,000, respectively. The Company recorded grossdecrease in revenue for the three months ended June 30, 2020, as compared to the prior year is attributable to suspending operations of the Biosciences division due to COVID-19 effective March 23, 2020.
The Company recorded cost of sales for the three months and six months ended June 30, 20182020 of approximately $2,441,000$70,000 and $5,344,000$447,000, respectively. The decrease in revenueCompany recorded cost of sales for the six-month period ended June 30, 2019 is mainly attributable to a decrease in the number of treatments provided by the biomedical services business (RMS). The revenue for the sixthree months ended June 30, 2019 is derived predominantly from the RMS and the revenue for the six months ended June 30, 2018 is exclusively RMS. As a result of the reverse merger accounting, the historical financials prior to January 8, 2019 represent the RMS only.
For the three and six months ended June 30, 2019 the Company incurredof approximately $492,000 and $989,000, in costs of sales, respectively. For the three and six months ended June 30, 2018 the Company incurred approximately $644,000 and $1,475,000, in costs of sales, respectively. The decrease in cost of sales for the three and six months ended June 30, 20192020, as compared to the prior year is derived predominantly from RMS andattributable to suspending operations of the cost of sales for the three and six months ended June 30, 2018 is exclusively the RMS business.
Biosciences division due to COVID-19 effective March 23, 2020. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the biomedical services business, RMS.Biosciences division. Medical supplies are predominantly variable costs and based on the number of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments currently being provided, during normal operations, can be handled adequately with the Company’s presentcurrent 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 decrease in cost of sales forFor the three months endingand six months ended June 30, 2019 as compared to2020, the prior year is attributable to reduced costs for medical supply purchases from cost control initiativesCompany generated a gross loss totaling approximately ($51,000) and the ability to perform treatments using fewer staff members. The decrease in cost of sales for the six months ending June 30, 2019 as compared to the prior year is attributable to reduced costs for medical supply purchases from cost control initiatives as well as reduced variable costs associated with reduced revenue volume and the ability to perform treatments using fewer staff members.
a gross profit totaling approximately $589,000, respectively. For the three months and six months ended June 30, 2019, the Company generated a gross profit totaling approximately $1,940,000 (80%) and $2,767,000 (74%), respectively. The decrease in gross profit was due to suspending operations of the Biosciences division due to COVID-19 effective March 23, 2020. The gross loss for the three months ending June 30, 2020 is due partially to hourly clinical personnel being kept on staff for administrative purposes while the Biosciences division operations were suspended due to COVID-19.
Operating Expenses
Salaries and Related Costs
For the three and six months ended June 30, 2018,2020 the Company generated a gross profit totaling $1,797,000 (74%)incurred approximately $594,000 and $3,868,000 (72%), respectively. The increase$1,819,000 in gross margin for the three months ending June 30, 2019 as compared to the prior year is attributable to reduced cost of sales from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members. The decline in gross margin for the six months ended June 30, 2019 as compared to the prior year is attributable to the decline in revenue, net of the decline in cost of sales.
Operating Expenses
We classify our operating expenses into four categories: salaries and related costs, other general and administrative, advertising, and depreciation and amortization.
Salaries and Related Costs
respectively. For the three and six months ended June 30, 2019 the Company incurred approximately $3,480,000 and $5,165,000 in salaries and related costs, respectively. The decrease in salaries and related costs for the three months ended June 30, 2020 is mainly attributable to a 40% reduction in clinical and corporate staff due to LHI operations ceasing in March in response to COVID-19. The Company anticipates that salaries and related costs will be fairly consistent going forward as the Company shifts its business model in its pursuit of becoming a leading biomedical services company and due to its recent cost reduction measures effective in March 2020.
30 |
Other General and Administrative
For the three and six months ended June 30, 2018,2020, the Company incurred approximately, $889,000$1,035,000, and $2,178,000,$2,265,000 in salariesother general and relatedadministrative costs, respectively. Included in salaries and related costs for the three and six months ended June 30, 2019 was approximately $1,690,000 in compensation expense related to the 4,225,634 shares of common stock valued at $.40 per share issued to Mr. William Horne on April 25, 2019. These shares were granted in a restricted stock award which was 100% vested when issued. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this award would be fully vested if not issued within fifteen days of the RMS reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued. The Company recognized approximately $1,690,000 million of compensation expense in the quarter ended June 30, 2019. The remaining increase in salaries and related costs is primarily attributable to the three and six months ended June 30, 2018 reflecting only the expenses of the RMS business and 2019 reflecting the consolidated costs for RMS and H-CYTE. Excluding the stock compensation expense of approximately $1,690,000, the Company anticipates that salaries and related costs will continue at a comparable rate in the future.
Other General and Administrative
For the three and six months ended June 30, 2019, the Company incurred approximately, $1,885,000, and $3,284,000 in other general and administrative costs, respectively. For the three and six months ended June 30, 2018, the Company incurred approximately $785,000 and $1,674,000, in other general and administrative costs, respectively. The increasedecrease is primarily attributable to reduction in operating activities in the three and six months ended June 30, 2018 reflecting only the expenses of the RMS business and 2019 reflecting the consolidated business costs for RMS and H-CYTE.DenerveX division.
Of the total other general and administrative costs, for the three months and six months ended June 30, 2020, professional fees were approximately $510,000 and $826,000, respectively. Total other general and administrative costs, for the three months and six months ended June 30, 2019, professional fees were approximately $416,000$369,000 and $856,000, respectively.
For the three and six months ended June 30, 2018, professional fees were approximately $46,000 and $135,000,$536,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs incurred to maintain CE Mark in Europe. The Company has incurred additional accounting and legal fees due to the reverse acquisition in 2019 and 2018 did not reflect patent and public company compliance costs.
The Company anticipates that the other general and administrative expenses will increase during the second and third quarter, 2020 as the professional fees are expensed in relation to the filing of the S-1 and completing the Rights Offering during the third quarter of 2020. Outside of the aforementioned one-time costs, the Company believes other general and administrative expenses will continue at a comparable rate in the future and include the continued costs of operating as a public company.
Advertising ExpensesResearch and Development
For the three months and six months ended June 30, 2020, the Company incurred approximately $200,000 and $950,000 in research and development expenses, respectively. For the three months and six months ended June 30, 2019, the Company did not incur research and development expenses. The expense was in connection with the Rion services agreement. An additional $550,000 in expense will be incurred upon the achievement of certain milestones in the services agreement. At this time, the Company is not able to estimate when these milestones will occur.
Advertising
For the three and six months ended June 30, 2020, the Company had approximately $26,000 and $171,000 respectively, in advertising costs. For the three and six months ended June 30, 2019, the Company had approximately $1,585,000 and $2,720,000 respectively, in advertising costs. The decrease is attributable mainly to the Company determining that its marketing channels were not yielding the expected results for promoting the Company’s Biosciences division. The Company expects advertising costs to increase back to first quarter 2020 levels over the remainder of the year as comparedthe Company begins to $419,000advertise again now that the LHI clinics are back in operation.
Depreciation and $1,157,000 forAmortization
For the three and six months ended June 30, 2018. The increases were attributable to increased marketing efforts to promote2020 the Company’s healthcare medical biosciences business. We expect these expenses will continue at a comparable rate as we expand penetrationCompany recognized approximately $17,000 and $39,000 respectively, in existing markets.
Depreciationdepreciation and Amortization
amortization expense. For the three and six months ended June 30, 2019 the Company recognized approximately $209,000 and $420,000 respectively, in depreciation and amortization expense. OfThe decrease is mainly attributable to amortization expense declining from $184,000 and $368,000 in the three and six months ended June 30, 2019, respectively to $0 in the three months and six months ended June 30, 2020 due to the complete write-off of intangibles at fiscal year-end 2019.
Other Income (Expense)
Interest expense for the three months and six months ended June 30, 2020 was approximately $363,000 and $419,000, respectively. Interest expense for the three months and six months ended June 30, 2019 was approximately $87,000 and $179,000 respectively. The increase is attributable to the bridge loan financing that the Company recognized approximately $184,000received in April 2020.
The change in fair value of redemption put liability for the three and $368,000 respectively,six months ended June 30, 2020 was ($19,000) and $175,000, respectively. There was no change in amortization expensefair value of redemption put liability for the three and six months ended June 30, 2019. ForThe change in fair value of the derivative liability - warrants for the three and six months ended June 30, 2018,2020 was approximately $3,057,000 and $2,882,000 respectively. There was no change in fair value of the Company recognized approximately $24,000derivative liability - warrants for the three and $49,000 respectively, in depreciation and amortization expense.six months ended June 30, 2019. The 2019 amortization expenseredemption put liability is related to the technology intangibles that aroseSeries D Convertible Preferred Stock financing in the fourth quarter 2019. The Series B Convertible Preferred Stock’s derivative liability-warrants was recorded as a resultmeasurement period adjustment to the purchase price allocation related to the Merger in the third quarter of the reverse merger by RMS of H-CYTE.2019.
31 |
Departure of Directors and Certain Officers, Election of Directors, Appointment of Certain Officer, Compensatory Agreement of Certain Officers
On January 8, 2019, in connection with the Asset Purchase AgreementNew Board Members and APA Amendment, the Board of the Company appointed Michael Yurkowsky and Raymond Monteleone as additional members of the Board.
Mr. Michael Yurkowsky is to receive $5,000 per Board Meeting. Besides this arrangement, there are no arrangements or understandings between the Company and Mr. Yurkowsky and any other person or persons pursuant to which Mr. Yurkowsky was appointed as a member of the Board and there is no family relationship between Mr. Yurkowsky and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.
Mr. Raymond Monteleone is to receive $5,000 per Board Meeting. Besides this arrangement and the consulting agreement (see Note 11), there are no arrangements or understandings between the Company and Mr. Monteleone and any other person or persons pursuant to which Mr. Monteleone was appointed as a member of the Board and there is no family relationship between Mr. Monteleone and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.Officers.
On February 4, 2019, the board of directors of29, 2020, the Company accepted the resignationresignations of Mr. Charles Farrahar as theBriley Cienkosz, Chief FinancialMarketing Officer effective immediately. Mr. Farrahar resigned as theand Gary Mancini, Chief FinancialRelationship Officer for personal reasons and not as a result of any disputes or disagreements between Mr. Farrahar and the Company on any matter relating to the Company’s operations, policies, accounting policies, or practices.disagreements.
On February 4, 2019,May 7, 2020, William Horne, the board of directors ofCompany’s CEO and Chairman tendered his resignation as CEO effective when the Company appointedfinds a suitable replacement with more FDA experience. Until such successor is retained, Mr. Jeremy DanielHorne will remain as the Chief Financial Officer of the Company. There are no arrangements or understandings between the Company andCEO. Mr. Daniel and any other person or persons pursuantHorne’s resignation does not pertain to which Mr. Daniel was appointed as the Chief Financial Officer of the Company and there is no family relationship between Mr. Daniel and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.
On February 15, 2019, Dennis Moon resigned from his position as the executive vice presidentChairman of the Company, effective immediately. Mr. Moon resigned from his position at the Company for personal reasons,Board or as a Director. The resignation was not as a result of or caused by any disagreements between Mr. Moon and the Company on any matter relating to the Company’s operations, policies, or practices.
On June 7, 2019, the board of directors of the Company appointed Briley Cienkosz as the Chief Marketing Officer, Ann Miller as the Chief Operating Officer, and Gary Mancini as the Chief Relationship Officer. There are no arrangements or understandings and there is no family relationshipdisagreement with any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer between the Companyits policies and Ann Miller, Briley Cienkosz, or Gary Mancini.
On July 29, 2019, the board of directors (the “Board”) of the Company appointed Dr. Andre Terzic to the Board. On July 30, 2019, the Board appointed Dr. Atta Behfar as a member of the Board. There are no arrangements or understandings among the Company, Dr. Andre Terzic and Dr. Atta Behfar and any other person or persons pursuant to which Dr. Andre Terzic or Dr. Atta Behfar was appointed as a member of the Board of the Company and there is no family relationship between each of Dr. Andre Terzic and Dr. Atta Behfar and any other director or executive officer of the Company or any person nominated or chosen by the Company to become a director or executive officer.practices.
Funding Requirements
We anticipate our cash expenditures will increase as we continue to operate as a publicly traded entity, as we move forward with increased sales and marketing initiatives for the RMS services and as we incur losses associated with temporarily suspending the manufacture and sale of the DenerveX product. In addition, the Company is pursuing the acquisition of new technologies to expand the business lines and with the intent of increasing profitability.
The Company has certain convertible promissory notes inhistorically incurred losses from operations and expects to continue to generate negative cash flows as the aggregate principal amount of approximately $650,000 that mature in AugustCompany’s generating activities are temporarily suspended and September 2019. The convertible notes are secured by all ofas the assets ofCompany implements its business plan to focus on taking the Company. The Company is currently negotiating a 30 day extensionL-CYTE-01 protocol to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sumFDA for treatment of (a) 120% of the outstanding principal amount of this note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.
The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes.
The present level of cash is insufficient to satisfy our current operating requirements.chronic lung diseases. The Company will need to seek additional sources of fundsraise cash from the sale ofdebt and equity or debt securities or through a credit facility.offerings to continue its operations. There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, if at all.
The Company is pursuing raising additional funds from the sale of equity securities. On June 7, 2019 the Board of Directors approved a new private placements securities offering up to $8,500,000 of Common Stock at a price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurancesassurance that the Company will be able to obtain additional financing on commercially reasonable terms, if at all. The sale of additional equity or convertible debt securities would likely resultsuccessful in dilution to current stockholders.doing so.
Going Concern
The Company incurred net losses of approximately $8,992,000$6,432,000 and $1,260,000$8,849,000 for the three months and six months ended June 30, 2020, respectively. The Company incurred net losses of approximately $5,297,000 and $8,992,000 for the three months and six months ended June 30, 2019, and 2018, respectively.
The RMS products and services division will incur losses until sufficient revenue volume and geographical coverage is attained utilizing the infusion of capital resources to expand marketing and sales initiatives. The MedoveX operations will continue to incur losses until the plan for the DenerveX System commercialization is determined and executed.
The Company’s independent registered public accounting firm has 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, 2018.2019. 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 Company through July 2019 has raised $7,100,000 (excluding $200,000 of debt conversions) year to date in additional cash to sustain the Company. Cash as of June 30, 2019 was approximately $300,000. The present level of cash is insufficient to satisfy our current operating requirements.
On July 25, 2019 and July 26, 2019,In the Company issued two promissory notes in the aggregate principal amount of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.
The Company has certain convertible promissory notes in the aggregate amount of $650,000 that mature in August and September 2019. The convertible notes are secured by all of the assets of the Company. The Company is currently negotiating a 30 day extension to the maturity date. Ifevent the Company is unable to extend the maturity date, the notes will go into default untilfund its operations from existing cash on hand, operating cash flows, additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.
The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen month extension on the notes.
The Company is pursuingborrowings or raising additional funds from the sale of equity securities. On June 7, 2019 the Board of Directors approved a new private placements securities offering up to $8,500,000 of Common Stock at a price of $0.50 per share, and a three-year warrant to purchase such number of shares of Common Stock equal to fifty percent (50%) of the number of shares of Common Stock issuable as part of this Agreement (the “Warrants”), at an exercise price of $1.00 per share. The Company has raised $100,000 from these new private placement securities since June 30, 2019. There can be no assurances thatcapital, the Company willmay be ableforced to obtain additional financing on commercially reasonable terms, if at all. Ifreduce 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 is required to curtail operations, there would be substantial doubt about the Company’s abilityunable to continue as a going concern.
Liquidity and Capital Resources
Since its inception, the Company has incurred losses and anticipates that we will continue to incur losses in foreseeable future.
Sources of Liquidity
Equity
On January 8, 2019,With the Company entered into a securities purchase agreement (the “SPA”) with four purchasers (the “Purchasers”) pursuant to whichhistorically having experienced losses, the four Purchasers invested in the Company an aggregate amountprimary source of $2,000,000, with $1,800,000 in cashliquidity has been raising capital through debt and $200,000 by cancellation of debt as explained below, in exchange for forty (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the principal amount of $50,000 and a warrant (the “Warrant”) to purchase common stock (the “Common Stock”) of the Company. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000, and subsequently increased to a maximum of $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of i) the closing of the subscription of the Maximum Amount and ii) March 31, 2019 (the “Termination Date”), subject to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company in exchange for four (4) Units on the same terms as all other Purchasers.
Each Convertible Note offered by the Company as part of the Unit bears an interest rate of 12% per annum, has a principal amount of $50,000, shall mature in one year from the original issue date on January 8, 2019, and will be convertible into shares of Common Stock at a price of $0.40 subject to adjustment stated in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Notes shall not own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon exercise of such Convertible Note. Upon default, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, pursuant to the SPA, the Company offers, as part of the Unit, Warrants to purchase the Common Stock at a price of $0.75 per share (the “Exercise Price”), subject to adjustments stated therein. The holder of each Warrant may purchase the number of shares of Common Stock equal to the number of shares of Common Stock issuable upon conversion of each Convertible Note while the Warrant is exercisable. The Warrants have a term of three years and shall be exercised in cash or on a cashless basisequity offerings, as described in the Warrant. All of such notes have been converted into an aggregate of 18,000,000 shares of common stock.
Steve Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company pursuant to the same terms of the SPA entered into by other investors to consummate the acquisition in January 8, 2019. The promissory note was converted into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.
As reported on Form 8-K filings on January 25, 2019, February 8, 2019, March 15, 2019 and April 5, 2019 the Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,200,000, as of that latest date.below.
Debt
The $750,000 convertible notes payable assumed inOn April 17, 2020, the acquisition transactionCompany entered into the April SPA with RMS, had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 ofPurchasers pursuant to which the outstanding convertible notes was converted intoCompany received an aggregate of 250,000$2,842,695 in gross proceeds through the sale to the Purchasers of the April Secured Notes and April Warrants to purchase shares of common stock eliminating $100,000 of the Company’s debt obligation.Company in the April Offering. After taking into account subsequent closings occurring after April 17, 2020, an aggregate of thirty-three Purchasers participated in the April Offering by purchasing April Secured Notes and April Warrants. The debt was convertedproceeds 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 in an aggregate principal amount of $2,842,695. As part of the April Offering, the Notes previously issued by the Company to the Investor on March 27, 2020 and April 9, 2020 were amended and superseded by an April Secured Note in the amount of $1,000,000 issued to the Investor. Additionally, in connection with the April Offering, the Company entered into shares at $0.40 per share,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 conversion price perMerger and which was purchased by the securities purchase agreement.Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The $650,000 remainingHawes Notes had a principal balance of these convertible notes, mature in August$424,615 as of March 31, 2020 and SeptemberDecember 31, 2019. The convertible notes are secured by allamendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the assetsCompany offered for purchase at the Qualified Financing at the closing of the Company.
The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.Qualified Financing.
32 |
The Company has certain promissory notes with outstanding balances of approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on the notes.
In connection with the Asset Purchase Agreement and APA Amendment, on January 8, 2019, Steve Gorlin, the Company’s former ChairmanAs part of the Board, converted a $200,000 promissory note owed to himApril Offering, the holders of certain existing warrants issued by the Company pursuantwhich 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 same termsprice 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 security purchase agreement enteredQualified Offering, into by other investors to consummate the acquisition in January 8, 2019. The promissory note was converted into an aggregate of 500,0004,368,278 shares of common stock eliminatingand a ten-year warrant to purchase up to an equivalent number of shares of the Company’s debt obligation.common stock.
The Company recently commenced a rights offering whereby each shareholder of record on July 28, 2020 shall receive the right to purchase three (3) shares of Series A Preferred Stock for each share of common stock owned at a purchase price of $0.014 per Series A Preferred Share. The rights offering is for up to $5,129,856 While there can be no assurance as to the total amount of proceeds that will be raised in the rights offering, the rights offering will result in gross proceeds of at least $2,842,695 as a result of backstop agreements entered into with existing investors in the Company.
Cash activity for the six months ended June 30, 20192020 and 20182019 is summarized as follows:
Working Capital Deficit
Six Months Ended June 30, | As Of | |||||||||||||||
2019 | 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
Current Assets | $ | 804,000 | $ | 150,000 | $ | 1,979,000 | $ | 2,275,000 | ||||||||
Current Liabilities | 4,260,000 | 2,193,000 | 4,227,000 | 5,774,000 | ||||||||||||
Working Capital Deficit | $ | (3,456,000 | ) | $ | (2,043,000 | ) | $ | 2,248,000 | $ | 3,499,000 |
Cash Flows
Cash activity for the six months ended June 30,31, 2020 and 2019 and 2018 is summarized as follows:
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash used in operating activities | $ | (6,592,000 | ) | $ | (1,584,000 | ) | ||
Cash used in investing activities | (386,000 | ) | (204,000 | ) | ||||
Cash provided by financing activities | 7,208,000 | 1,973,000 | ||||||
Net increase in cash | $ | 230,000 | $ | 185,000 |
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash used in operating activities | $ | (4,335,024) | $ | (6,361,331 | ) | |||
Cash used in investing activities | — | (385,677 | ) | |||||
Cash provided by financing activities | 4,740,840 | 6,977,448 | ||||||
Net (decrease) increase in cash | $ | 405,816 | $ | 230,440 |
As of June 30, 2019,2020, the Company had approximately $300,000$1,830,000 of cash on hand.
33 |
Off-Balance Sheet Arrangements
We do 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.
Contractual Obligations and Commercial Commitments
Contractual Debt ObligationsThe 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. The Note bears an interest rate of 8.0% per annum and is due on demand. If any amounts payable under this Note are not paid within ten days after they are due, the interest rate shall accrue on the principal in the amount of 18.0% per annum.
Contractual debt obligations relate to financing arrangements for D&O and general liability insurance premiums that were financed at various points throughout 2018 andThe extended maturity date of the first quartershort-term convertible notes payable of 2019, and two Promissory Notes and Convertible Notes assumed in the merger transaction.approximately $425,000 is September 30, 2020. No payments of principal or interest are due until maturity.
These insurance financing arrangements require aggregate monthly paymentsNotes payable of approximately $18,000, reflect interest rates ranging from 7% to 12.8% and are to be paid in full by April 2020 and had balances of approximately $251,000 June 30, 2019 and $31,000 at December 31, 2018. Interest expense related to these insurance financing arrangements was approximately $2,100 and $3,000 for the three and six months ended June 30, 2019 and was $0 for the three and six months ended June 30, 2018 respectively.
Payments on both of the promissory notes assumed$67,000 are due in aggregate monthly installments of approximately $5,700$5,800 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019. The Promissory Notes had outstanding balances of approximately $103,000 at date of merger transaction and approximately $99,000 at June 30, 2019. The notes have a maturity date of August 1, 2019. The Company is in the process of finalizing an eighteen-month extension on the notes.
The Convertible Notes represent a securities purchase agreement with select accredited investors, which were assumed in the reverse merger transaction. The debt consisted of $750,000 in units at a purchase price of $50,000 per Unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants were initially exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants.
The $750,000 convertible notes payable assumed in the acquisition transaction with RMS, had a fair value of approximately $598,000 on the acquisition date. Subsequently, on February 6, 2019, $100,000 of the outstanding convertible notes was converted into an aggregate of 250,000 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.40 per share, which was the conversion price per the securities purchase agreement. The $650,000 remaining principal balance of these convertible notes, mature in August and September 2019. The convertible notes are secured by all of the assets of the Company.
The Company is currently negotiating a 30-day extension to the maturity date. If the Company is unable to extend the maturity date, the notes will go into default until additional funding is received to payoff these notes and the mandatory default amounts will have to be paid. The mandatory default amount means the sum of (a) 120% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of these notes.
On February 6, 2019, $100,000 of the Company’s $750,000 outstanding convertible notes was converted into an aggregate of 277,778 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the securities purchase agreement subsequent to the trigger of the down round feature.
On July 25, 2019 and July 26, 2019, H-CYTE, Inc. (the “Company”) issued two promissory notes (the “Notes”) in the principal amount (the “Principal Amount”) of an aggregate of $900,000 to Horne Management, LLC controlled by Mr. William E. Horne, the Chief Executive Officer of the Company. The Notes bear an interest rate of 5.5% per annum and are due on demand. The Company has received the funds represented by the Notes.
Commitments
Biotechnology Agreement
The Company entered into a 10-year exclusive and extendable supply agreement with Rion LLC (“Rion”) that will enhance its existing cytotherapy product line, developing a disruptive technology for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s novel exosome 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. With this agreement, Rion will serve as the product supplier and will co-develop a proprietary cellular platform with H-CYTE for the treatment of COPD. H-CYTE will control the commercial development and facilitate clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the U.S. Food and Drug Administration (“FDA”) for treatment of COPD.
Sublease Agreement
The Company entered into a sub-lease agreement for the lease in Alpharetta, Georgia. The period of the lease is from July 1, 2019 to December 31, 2020 and sublessee shall pay to sublessor a minimum rent, of two thousand dollars ($2,000) per month.
Consulting Agreements
The Company has an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $13,333 per month. The Company is in the process of negotiating a new contract with Mr. Crowne. The Company incurred expense of $0 and $39,999, for the three and six months ended June 30, 2019 related to this consulting agreement. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
The Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 and shall continue for a period of twelve (12) months in the amount of $12,500 per month with a $15,000 signing bonus which was paid in full during the quarter ending March 31, 2019. The agreement also provides LilyCon Investments with $35,000 in stock (calculated using an annual Variable Weighted Average Price from February 2019 through January 2020) to be granted upon completion of the consulting services first year. Either party may terminate this agreement with without cause upon (30) days written notice. For the three and six months ended June 30, 2019, the Company has expensed a total of $37,500 and $77,500 in compensation to LilyCon Investments, respectively.
The Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee, in which Mr. Monteleone received $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair. This arrangement has no specified termination date. For the three and six months ended June 30, 2019, the Company has expensed $35,000 and $70,000 in compensation to Mr. Monteleone, respectively.
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC (Jimmy St. Louis, former CEO of RMS) in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For the three and six months ended June 30, 2019, the Company has expensed $34,000 and $71,000 in consulting fees to St. Louis Family Office, respectively.
The Company entered into a consulting agreement with Strategos Public Affairs, LLC (Strategos) on February 15, 2019 for a period of twelve (12) months, unless otherwise terminated by giving thirty (30) days prior written notice. Strategos will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by the Lung Health Institute, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the three and six months ended June 30, 2019, the Company has expensed $26,000 and $26,000 to Strategos Group for consulting services.
Distribution center and logistic services agreement
The Company has a non-exclusive distribution center agreement with a logistics service provider in Berlin, Germany pursuant to which they manage and coordinate the DenerveX System products which the Company exports to the EU through June 2019. The Company pays a fixed monthly fee of €4,500 (approximately $5,040) for all accounting, customs declarations and office support, and a variable monthly fee ranging from €1,900 to €6,900 (approximately $2,300 to $8,300), based off volume of shipments, for logistics, warehousing and customer support services.
Total expenses incurred for the distribution center and logistics agreement were approximately $22,500 and $43,000, respectively, for the three and six months ended June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
Patent Assignment and Contribution Agreements
The terms of a Contribution and Royalty Agreement dated January 31, 2013 with Dr. Scott Haufe, M.D was assumed in the merger transaction as of January 8, 2019. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.
The Company incurred approximately $0 and $1,100, respectively, in royalty expense under the Contribution and Royalty agreement for the three months and six month ended June 30, 2019, all of which was included in accounts payable at June 30, 2019. Since this agreement was assumed January 8, 2019 as part of the RMS reverse merger transaction, there were no historical costs related to this prior to January 8, 2019.
Guarantee
The Company has guaranteed payments based upon the terms found in the management services agreements to two affiliated physicians related to LI Nashville, LI Scottsdale, LI Pittsburgh, and LI Dallas. For the three and six months ending June 30, 2019, payments totaling approximately $34,000 and $56,000, respectively were made to these affiliates. For the three and six months ending June 30, 2018, payments totaling approximately $20,000 and $59,000, respectively were made to these affiliates.
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
The Company maintains “disclosureWe maintain disclosure controls and procedures” as definedprocedures designed to provide reasonable assurance that information required to be disclosed in Rules 13a-15(e) and 15d-15(e)reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the specified time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’sour management, including its Chief Executive Officer, Chief Financial Officer,our principal executive officer and Board of Directors,principal accounting officer, as appropriate to allow timely decisions regarding required disclosures.disclosure.
34 |
Our Chief Executive Officer (our “CEO”) and our Chief Financial Officer (our “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, 2020. 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.
The Company’s management, including itsBased on such evaluation, our Chief Executive Officer and Chief Financial Officer evaluated the effectivenesshave concluded that, as of the design and operation ofJune 30, 2020, the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting as discussed below, and as a result, the Company engaged consultants 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, 2019 and concluded2020, we determined that control deficiencies existed that constituted material weaknesses:
● | The Company has an ineffective control environment due to a lack of internal resources with expertise to determine entries and disclosures related to some of the Company’s more complex transactions. |
● | The Company lacks qualified accounting personnel with appropriate knowledge and experience of generally accepted accounting principles for the complexity of some of the Company’s transactions. |
● | The Company lacks a robust accounting system infrastructure to handle the timeliness of the reporting requirements necessary for a public company. |
In light of the Company has a material weakness inconclusion that our internal disclosure controls and procedureswere ineffective as of June 30, 2019.
The2020, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. Accordingly, the Company has an ineffective control environment duebelieves, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a lack of internal resources with expertisematerial fact necessary to determine entries and disclosures related to somemake the statements made, in light of the Company’s more complex transactions. Management believescircumstances under which they were made, not misleading with respect to the period covered by this lackreport; 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 internal expertise has been somewhat mitigated by continuing to retain consultants withoperations and cash flows as of and for the periods presented in this expertise in the quarter ended June 30, 2019. This material weakness in the Company’s disclosure controls and procedures will be further remediated in 2019.annual report.
Changes in Internal Control Over Financial Reporting
During the six months ended June 30, 2019,2020, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is not a party to any pending legal proceeding, nor is the Company’s property the subject of a pending legal proceeding. None of the Company’s directors, officers or affiliates are involved in a proceeding adverse to our business or has a material interest adverse to the Company’s business.
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.
35 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the six month period endingmonths ended June 30, 2019,2020, the Company received proceeds of $100,000 and issued an aggregate2,449 of $7,200,000 of convertible promissory notes and an aggregate of 18,000,000 warrants to purchase common stock. The convertible notes automatically converted into commonpreferred stock at $0.40a price of $40.617 per share, and the warrants are exercisable at $0.75 per sharea ten-year warrant to certain accredited investors under Regulation D. As of the date hereof, all of such convertible notes have been converted into an aggregate of 18,000,000 shares of common stock.
During the six month period ending June 30, 2019, the Company issued RMS Shareholders, LLC an aggregate of 50,925,277purchase 244,996 shares of common stock upon the conversionat an exercise price of Series C Preferred Stock issued to RMS in the merger.$0.75 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
Not applicable.
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.
36 |
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 14, 20192020
H-CYTE, INC | ||
By: | /s/ William E. Horne | |
William E. Horne | ||
Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ Jeremy Daniel | |
Jeremy Daniel | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
37 |
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 ** | |
101.SCH | XBRL Taxonomy Extension Schema Document ** | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document ** | |
101.LAB | XBRL Taxonomy Labels Linkbase Document ** | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document ** | |
101.DEF | XBRL 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. |
38 |