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 SeptemberJune 30, 20202021

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 name of registrant as specified in its charter)

Nevada46-3312262
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)

201 East Kennedy Blvd, Suite 700425
Tampa, Florida33602
(Address of principal executive offices)(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 classTicker symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareHCYTOTC 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

☒ Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

[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. [  ]☐

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 November 10, 2020, 124,416,166August 11, 2021, 148,596,889 shares of the registrant’s common stock were outstanding.

 

 
 

H-CYTE, INC AND SUBSIDIARIES

TABLE OF CONTENTS

Page
PART I – FINANCIAL INFORMATION
Special Note Regarding Forward-looking Statements3
Item 1.Financial Statements4
Consolidated Balance Sheets4
Consolidated Statements of Operations5
Consolidated Statements of Stockholders’ Equity (Deficit)Deficit76
Consolidated Statements of Cash Flows87
Notes to Consolidated Financial Statements98
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3122
Item 3.Quantitative and Qualitative Disclosures About Market Risks3728
Item 4.Controls and Procedures3728
PART II – OTHER INFORMATION
Item 1.Legal Proceedings3829
Item 1A.Risk Factors3829
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3829
Item 3.Defaults Upon Senior Securities3829
Item 4.Mine Safety Disclosures3829
Item 5.Other Information3829
Item 6.Exhibits3829
SIGNATURES3930

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 ourthe Company’s actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

●ourthe Company’s ability to market, commercialize, and achieve broader market acceptance for ourits products;
●ourthe Company’s ability to successfully expand and achieve full productivity from ourits sales, clinical support, and marketing capabilities;
●ourthe Company’s ability to successfully complete the development of, and obtain regulatory clearance or approval for, ourits products; and
●the estimates regarding the sufficiency of ourthe Company’s cash resources, ourthe ability to obtain additional capital or ourthe 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 believethe Company believes that we haveit has a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by usthe Company and ourits projections of the future, about which weit cannot be certain. As a result of these factors, wethe Company cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if ourthe 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,the Company, or any other person, that weit will achieve ourits objectives and plans in any specified time frame, or at all. We doThe Company does not undertake to update any of the forward-looking statements after the date of this Quarterly Report, except to the extent required by applicable securities laws.

3

Item 1. Financial Statements

H-CYTE, INC AND SUBSIDIARIESH-Cyte, Inc and Subsidiaries

CONSOLIDATED BALANCE SHEETSConsolidated Balance Sheets

  (Unaudited)
September 30, 2020		  December 31, 2019 
Assets        
         
Current Assets        
Cash $3,437,247  $1,424,096 
Accounts receivable  2,500   22,667 
Other receivables  2,301   18,673 
Prepaid expenses  114,415   810,143 
Total Current Assets  3,556,463   2,275,579 
         
Right -of-use asset  373,121   738,453 
Property and equipment, net  152,541   219,703 
Other assets  25,381   36,877 
Total Assets $4,107,506  $3,270,612 
         
Liabilities, Mezzanine Equity, and Stockholders’ Equity (Deficit)        
         
Current Liabilities        
Interest payable $6,267  $53,198 
Accounts payable  1,248,132   1,485,542 
Accrued liabilities  303,778   324,984 
Other current liabilities  159,501   175,181 
Short-term notes, related parties  -   1,635,000 
Short-term convertible notes payable  -   424,615 
Notes payable, current portion  67,444   66,836 
PPP Loan, current portion  355,839   - 
Dividend payable  -   108,641 
Deferred revenue  636,781   1,046,156 
Lease liability, current portion  247,552   453,734 
Total Current Liabilities  3,025,294   5,773,887 
         
Long-term Liabilities        
Lease liability, net of current portion  143,258   302,175 
Notes payable, net of current portion  -   11,545 
PPP Loan, net of current portion  453,243   - 
Derivative liability - warrants  -   315,855 
Redemption put liability  -   267,399 
Total Long-term Liabilities  596,501   896,974 
         
Total Liabilities  3,621,795   6,670,861 
         
Commitments and Contingencies        
         
Mezzanine Equity        
Series D Convertible Preferred stock - $.001 par value: 238,871 shares authorized with 0 and 146,998  issued and outstanding at September 30, 2020 and December 31, 2019, respectively.  -   6,060,493 
Total Mezzanine Equity  -   6,060,493 
         
Stockholders’ Equity (Deficit)        
Series A Preferred Stock - $.001 par value; 800,000,000 shares authorized, 542,129,440 shares issued and outstanding at September 30, 2020 and 0 shares issued and outstanding at December 31, 2019, respectively.  542,129   - 
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and 6,100 shares issued and outstanding on December 31, 2019, respectively.  -   6 
Common stock - $.001 par value: 1,600,000,000 shares authorized, 122,139,433 and 99,768,704 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively  122,139   99,769 
Additional paid-in capital  42,489,998   28,172,146 
Accumulated deficit  (42,298,423)  (37,362,531)
Non-controlling interest  (370,132)  (370,132)
Total Stockholders’ Equity (Deficit)  485,711   (9,460,742)
         
Total Liabilities, Mezzanine Equity and Stockholders’ Equity (Deficit) $4,107,506  $3,270,612 

  (Unaudited)    
  June 30, 2021  December 31, 2020 
Assets        
         
Current Assets        
Cash $1,516,522  $1,640,645 
Patient financing receivable, current portion  22,990   - 
Other receivables  1,809   22,123 
Prepaid expenses  156,020   94,434 
Total Current Assets  1,697,341   1,757,202 
         
Right-of-use asset  183,685   278,552 
Property and equipment, net  40,644   139,175 
Patient financing receivable, net of current portion  42,470   - 
Other assets  18,412   29,239 
Total assets $1,982,552  $2,204,168 
         
Liabilities and Stockholders’ Deficit        
         
Current Liabilities        
Accounts payable $955,691  $1,006,968 
Accrued liabilities  208,025   276,415 
Other current liabilities  212,310   154,812 
Notes payable, current portion  67,444   67,444 
Convertible notes payable, related parties  1,554,220   - 
Convertible notes payable  1,070,118   - 
PPP Loan, current portion  809,082   606,811 
Deferred revenue  542,198   634,149 
Lease liability, current portion  90,276   139,189 
Interest payable  13,610   6,898 
Total Current Liabilities  5,522,974   2,892,686 
         
Long-term Liabilities        
Lease liability, net of current portion  111,096   157,050 
PPP Loan, net of current portion  -   202,271 
Total Long-term Liabilities  111,096   359,321 
         
Total Liabilities  5,634,070   3,252,007 
         
Stockholders’ Equity (Deficit)        
Preferred Stock - $.001 par value: 1,000,000,000 shares authorized; Series A Preferred Stock - $.001 par value: 800,000,000 shares authorized, 520,305,884 and 538,109,409 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively  520,305   538,109 
Common stock - $.001 par value: 1,600,000,000 shares authorized, 144,962,989 and 127,159,464 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively  144,963   127,159 
Additional paid-in capital  43,377,999   42,515,999 
Accumulated deficit  (47,324,653)  (43,858,974)
Non-controlling interest  (370,132)  (370,132)
Total Stockholders’ Deficit  (3,651,518)  (1,047,839)
         
Total Liabilities and Stockholders’ Deficit $1,982,552  $2,204,168 

See accompanying notes to the consolidated financial statements

4

 

H-CYTE, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONSH-Cyte, Inc and Subsidiaries

(Unaudited)Consolidated Statements of Operations

  Three months ended Sept 30,  Nine months ended Sept 30, 
  2020  2019  2020  2019 
Revenues $649,892  $2,742,442  $1,686,168  $6,498,404 
Cost of Sales  (161,252)  (550,139)  (608,079)  (1,539,104)
Gross Profit  488,640   2,192,303   1,078,089  ��4,959,300 
                 
Operating Expenses                
Salaries and related costs  606,294   1,913,845   2,425,094   7,078,531 
Other general and administrative  542,317   2,025,980   2,807,350   5,309,791 
Research and development  201,658   -   1,151,658   - 
Advertising  51,643   1,467,691   222,196   4,188,087 
Depreciation and amortization  30,095   211,885   69,447   631,722 
Total Operating Expenses  1,432,007   5,619,401   6,675,745   17,208,131 
                 
Operating Loss  (943,367)  (3,427,098)  (5,597,656)  (12,248,831)
                 
Other Income (Expense)                
Other income (expense)  (34,504)  -   (25,182)  8,990 
Interest expense  (1,039,349)  (80,092)  (1,458,521)  (259,436)
Change in fair value of redemption put liability  97,997   -   272,705   - 
Loss on derivative instrument  -   -   (2,306,121)  - 
Gain on extinguishment of debt  -   -   1,300,088   - 
Warrant modification expense  -   -   (70,851)  - 
Change in fair value of derivative liability - warrants  5,869,102   883,527   2,986,853   883,527 
Total Other Income (Expense)  4,893,246   803,435   698,971   633,081 
                 
Net Income (Loss) $3,949,879  $(2,623,663) $(4,898,685) $(11,615,750)
                 
Accrued dividends on outstanding Series B Convertible Preferred Stock  7,856   21,000   44,456   66,639 
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants  -   -   -   404,384 
Deemed dividend on Series D Convertible Preferred Stock  36,450   -   277,719   - 
Deemed dividend on beneficial conversion features  -   -   -   32,592 
Net Income (Loss) attributable to common stockholders $3,905,573  $(2,644,663) $(5,220,860) $(12,119,365)
                 
Net Income (Loss) per share       
Basic $0.03  $(0.03) $(0.05) $(0.13)
Diluted $0.01  $(0.03)  (0.05) $(0.13)
                 
Weighted average outstanding shares - basic  116,970,322   98,991,805   106,691,185   96,150,811 
Weighted average outstanding shares - diluted  664,244,972   98,991,805   106,691,185   96,150,811 

  2021  2020  2021  2020 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2021  2020  2021  2020 
             
Revenues $450,456  $19,500  $826,625  $1,036,276 
Cost of Sales  (216,018)  (70,011)  (414,668)  (446,827)
Gross Profit  234,438   (50,511)  411,957   589,449 
                 
Operating Expenses                
Salaries and related costs  586,119   594,447   1,247,894   1,818,157 
Share based compensation  862,000   -   862,000   643 
Loss on disposal of property and equipment  92,804   -   92,804   - 
Other general and administrative  609,641   1,034,898   1,439,755   2,265,033 
Research and development  -   200,000   -   950,000 
Advertising  88,000   25,935   165,228   170,553 
Depreciation and amortization  1,989   17,244   13,559   39,352 
Total Operating Expenses  2,240,553   1,872,524   3,821,240   5,243,738 
                 
Operating Loss  (2,006,115)  (1,923,035)  (3,409,283)  (4,654,289)
                 
Other Income (Expense)                
Other Income  2,255   6,783   3,534   9,321 
Interest expense  (54,145)  (363,023)  (59,930)  (419,172)
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)  (51,890)  (4,509,301)  (56,396)  (4,194,275)
                 
Net Loss $(2,058,005) $(6,432,336) $(3,465,679) $(8,848,564)
                 
Accrued dividends on outstanding Series B Convertible Preferred Stock  -   18,300   -   36,600 
Deemed dividend on Series D Convertible Preferred Stock  -   120,329   -   278,476 
Net loss attributable to common stockholders $(2,058,005) $(6,570,965) $(3,465,679) $(9,163,640)
                 
Loss per share - Basic and Diluted $(0.01) $(0.06) $(0.03) $(0.09)
                 
Weighted average outstanding shares - basic and diluted  138,092,414   103,430,305   135,827,192   101,634,961 

See accompanying notes to the consolidated financial statements

H-CYTE, INC AND SUBSIDIARIES

5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)H-Cyte, Inc and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

For the three and ninesix months ended SeptemberJune 30, 2020 and 2021

(Unaudited)

1 Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Three months ended                                  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’ 
June 30, 2020 and 2021 Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Balances - March 31, 2020  -  $-   6,100  $6   99,878,079  $99,878  $28,117,978  $(39,815,966) $(370,132) $(11,968,236)
Accrued dividends on Series B Convertible Preferred Stock  -   -   -   -   -   -   (18,300)  -   -   (18,300)
Deemed dividend on Series D Convertible 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 
Conversion of Series A Preferred Stock to common stock                                        
Deemed dividend on Series D Preferred Stock at issuance                                        
Issuance of warrants in connection with Series D Convertible Preferred Stock                                        
Issuance of common stock in exchange for consulting fees incurred                                        
Issuance of warrants pursuant to extension of maturity date on convertible debt                                        
Stock based compensation                                        
Net loss  -   -   -   -   -   -   -   (6,432,336)  -   (6,432,336)
Balances – June 30, 2020  -  $-   6,100  $6   104,246,357  $104,246  $27,761,076  $(46,248,302) $(370,132) $(18,753,106)

Three months ended September 30, 2019 and 2020

  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-Controlling  Total Stockholders’ (Deficit) 
 Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
Balance - June 30, 2019 (unaudited)  —   —   7,000  $7   98,886,360  $98,887  $25,705,975  $(13,480,691) $(370,132) $11,954,046 
Issuance of Common Stock in connection with private placement offering  —   —   —   —   200,000   200   77,164   —   —   77,364 
Issuance of warrants in connection with private placement offering  —   —   —   —   —   —   22,636   —   —   22,636 
Issuance of Common Stock in exchange for consulting services  —   —   —   —   150,000   150   43,349   —   —   43,499 
Derivative liability adjustment  —   —   —   —   —   —   (116,842)  116,842   —   — 
Issuance of warrants pursuant to extension of maturity date on convertible debt  —   —   —   —   —   —   106,158   —   —   106,158 
Stock based compensation  —   —   —   —   —   —   1,473   —   —   1,473 
Dividends payable  —   —   —   —   —   —   (21,000)  —   —   (21,000)
Net loss  —   —   —   —   —   —   —   (2,623,663)  —   (2,623,663)
Balance September 30, 2019 (unaudited)  —  $-   7,000  $7   99,236,360  $99,237  $25,818,913  $(15,987,512) $(370,132) $9,560,513 

  Preferred Series A Stock  Preferred Series B Stock  Common Stock  

Additional

Paid-in

  Accumulated  Non-Controlling  Total
Stockholders’ (Deficit)		 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Equity 
Balance - June 30, 2020 (unaudited)  —  $-   6,100  $6   104,246,357  $104,246  $27,761,076  $(46,248,302) $(370,132) $(18,753,106)
Conversion of Series B Preferred Stock to Common Stock  —   —   (6,100)  (6)  2,119,713   2,120   150,983   —   —   153,097 
Accrued dividends on Series B Preferred Stock  —   —   —   —   —   —   (7,856)  —   —   (7,856)
Deemed dividend on Series D Preferred Stock  —   —   —   —   —   —   (36,450)  —   —   (36,450)
Conversion of Short-term convertible notes to Preferred Stock  287,984,337   287,984   —   —   —   —   4,751,484   —   —   5,039,468 
Conversion of related party warrants to equity  —   —   —   —   —   —   107,123   —   —   107,123 
Conversion of Series D Preferred Stock to Common Stock  —   —   —   —   15,773,363   15,773   6,422,441   —   —   6,438,214 
Reclassification of Series B warrants to Common Stock  —   —   —   —   —   —   73,805   —   —   73,805 
Reclassification of Series D warrants to Common Stock  —   —   —   —   —   —   337,400   —   —   337,400 
Issuance of Series A Preferred Stock in Rights Offering  218,285,024   218,285   —   —   —   —   2,517,451   —   —   2,735,736 
Conversion of Short-term related party convertible notes to Preferred Stock  35,860,079   35,860   —   —   —   —   412,541   —   —   448,401 
Net Income  —   —   —   —   —   —   —   3,949,879   —   3,949,879 
Balance - September 30, 2020 (unaudited)  542,129,440  $542,129   —  $-   122,139,433  $122,139  $42,489,998  $(42,298,423) $(370,132) $485,711 

Nine months ended September 30, 2019 and 2020

  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-Controlling  Total
Stockholders’
(Deficit)		 
  Shares  Amount  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 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 purchase transaction  —   —   —   —   —   —   —   5,244,780   —   5,244,780 
Issuance of Common Stock in connection with private placement offering  —   —   —   —   17,700,000   17,700   4,402,087   —   —   4,419,787 
Issuance of warrants in connection with private placement offering  —   —   —   —   —   —   2,663,797   —   —   2,663,797 
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 Series B Preferred 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 
 Series B Stock accrued dividend  —   —   —   —   32,313   32   12,894   —   —   12,926 
Issuance of Common Stock in exchange for consulting fees incurred  —   —   —   —   280,085   280   95,254   —   —   95,534 
Adjustment of exercise price on convertible debt  —   —   —   —   —   —   287,542   (287,542)  —   — 
Beneficial conversion of Series B Preferred Stock  —   —   —   —   —   —   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 
Issuance of warrants pursuant to extension of maturity date on convertible debt  —   —   —   —   —   —   106,158   —   —   106,158 
Stock based compensation  —   —   —   —   —   —   93,632   —   —   93,632 
Dividends payable  —   —   —   —   —   —   (66,639)  —   —   (66,639)
Net loss  —   —   —   —   —   —   —   (11,615,750)  —   (11,615,750)
Balance - September 30, 2019 (unaudited)  —  $-  $7,000  $7   99,236,360  $99,237  $25,818,913  $(15,987,512) $(370,132) $9,560,513 

  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-Controlling  Total
Stockholders’
(Deficit)		 
  Shares  Amount  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) $(9,460,743)
Accrued dividends on Series B Preferred Stock  —   —   —   —   —   —   (44,456)  —   —  $(44,456)
Adjustment of exercise price on certain warrants  —   —   —   —   —   —   (438,913)  —   —   (438,913)
Reclassification of Series B warrants to equity  —   —   —   —   —   —   73,805   —   —   73,805 
Reclassification of Series D warrants to equity  —   —   —   —   —   —   337,400   —   —   337,400 
Conversion of Series B Preferred Stock  —   —   (6,100)  (6)  2,119,713   2,120   150,983       —   153,097 
Conversion of Series D Preferred Stock to Common Stock  —   —   —   —   15,773,363   15,773   6,422,441   —   —   6,438,214 
Conversion of Short-term related party convertible notes to Preferred Stock  35,860,079   35,860   —   —   —   —   412,541   —   —   448,401 
Issuance of Common Stock in connection with extinguishment of short term notes, related parties  —   —   —   —   4,368,278   4,368   214,046   —   —   218,414 
Deemed dividend on Series D Preferred Stock  —   —   —   —   —   —   (277,719)  —   —   (277,719)
Deemed dividend on Series D Preferred Stock at issuance  —   —   —   —   —   —   —   (37,207)  —   (37,207)
Conversion of related party warrants to equity  —   —   —   —   —   —   107,123   —   —   107,123 
Issuance of Common Stock in exchange for consulting fees incurred  —   —   —   —   109,375   109   34,891   —   —   35,000 
Issuance of warrants pursuant to private placement of Series D Convertible Preferred Stock  —   —   —   —   —   —   31,902   —   —   31,902 
Conversion of short-term convertible notes to Preferred Stock  287,984,337   287,984   —   —   —   —   4,751,484   —   —   5,039,468 
Issuance of warrants pursuant to extension of convertible short-term notes  —   —   —   —   —   —   17,636   —   —   17,636 
Issuance of warrants pursuant to extension of maturity date on convertible debt  —   —   —   —   —   —   6,595   —   —   6,595 
Issuance of Series A Preferred Stock in Rights Offering  218,285,024   218,285   —   —   —   —   2,517,451   —   —   2,735,736 
Stock based compensation  —   —   —   —   —   —   643   —   —   643 
Net loss  —   —   —   —   —   —   —   (4,898,685)  —   (4,898,685)
Balance - September 30, 2020 (unaudited)  542,129,440  $542,129   —  $-   122,139,433  $122,139  $42,489,998  $(42,298,423) $(370,132) $485,711 
  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’ 
                                  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Balances - March 31, 2021  528,429,575  $528,429   -   -   136,839,298  $136,839  $42,515,999  $(45,266,648) $(370,132) $(2,455,513)
Conversion of Series A Preferred Stock to common stock  (8,123,691)  (8,124)  -   -   8,123,691   8,124   -   -   -  - 
Share based compensation  -   -   -   -   -   -   862,000   -   -  862,000 
Net Loss  -   -   -   -   -   -   -   (2,058,005)  -  (2,058,005)
Balances – June 30, 2021  520,305,884  $520,305   -   -   144,962,989  $144,963  $43,377,999  $(47,324,653) $(370,132) $(3,651,518)

Six months ended                                   Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’ 
June 30, 2020 and 2021 Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Balances - December 31, 2019              -  $-   6,100  $6   99,768,704  $99,769  $28,172,146  $(37,362,531) $(370,132) $(9,460,742)
Deemed dividend on Series D Convertible Preferred Stock at issuance  -   -   -   -   -   -   -   (37,207)  -   (37,207)
Deemed dividend on Series D Convertible Preferred Stock  -   -   -   -   -   -   (241,269)  -   -   (241,269)
Issuance of warrants in connection with Series D Convertible 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 short-term notes, related party  -   -   -   -   -   -   17,636   -   -   17,636 
Share based compensation  -   -   -   -   -   -   643   -   -   643 
Accrued dividends on Series B Convertible 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)
Balances – June 30, 2020  -  $-   6,100  $6   104,246,357  $104,246  $27,761,076  $(46,248,302) $(370,132) $(18,753,106)

  Preferred Series A Stock  Preferred Series B Stock  Common Stock  Additional Paid-in  Accumulated  Non-controlling  Total Stockholders’ 
                                    Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Deficit 
Balances - December 31, 2020  538,109,409  $538,109   -  $-   127,159,464  $127,159  $42,515,999  $(43,858,974) $(370,132) $(1,047,839)
Beginning balance  538,109,409  $538,109   -  $-   127,159,464  $127,159  $42,515,999  $(43,858,974) $(370,132) $(1,047,839)
Conversion of Series A Preferred Stock to common stock  (17,803,525)  (17,804)  -   -   17,803,525   17,804   -   -   -   - 
Share based compensation  -   -   -   -   -   -   862,000   -   -   862,000 
Net loss  -   -   -   -   -   -   -   (3,465,679)  -   (3,465,679)
Balances – June 30, 2021  520,305,884  $520,305   -  $-   144,962,989  $144,963  $43,377,999  $(47,324,653) $(370,132) $(3,651,518)
Ending balance  520,305,884  $520,305   -  $-   144,962,989  $144,963  $43,377,999  $(47,324,653) $(370,132) $(3,651,518)

See accompanying notes to the consolidated financial statements

H-CYTE, INC AND SUBSIDIARIES

6

H-Cyte, Inc and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  2021  2020 
  Six Months Ended June 30, 
  2021  2020 
Cash Flows from Operating Activities        
Net loss $(3,465,679) $(8,848,564)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  13,559   39,352 
Amortization of debt discount  —   242,627 
Issuance of warrants pursuant to short-term notes, related party  —   17,636 
Issuance of warrants to extend short-term debt  —   6,594 
Share based compensation expense  862,000   643 
Common stock issued for consulting services  —   35,000 
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 
Loss on disposal of property and equipment  92,804   — 
Gain on extinguishment of debt  —   (1,300,088)
Changes in operating assets and liabilities:        
Accounts receivable  —  19,667 
Patient financing receivable, current portion  (22,990)  — 
Other receivables  20,314   14,782 
Patient financing receivable, net of current portion  (42,470)  — 
Prepaid expenses and other assets  (50,759)  668,656 
Interest payable  6,712   158,113 
Accounts Payable  (51,277)  (164,792)
Accrued liabilities  (68,390)  (72,619)
Other current liabilities  57,498   62,581 
Deferred revenue  (91,951)  (299,125)
         
Net Cash Used in Operating Activities  (2,740,629)  (4,335,024)
         
Cash Flows from Investing Activities        
Purchase of property and equipment  (7,832)  — 
Net Cash Used in Investing Activities  (7,832)  — 
         
Cash Flows from Financing Activities        
Proceeds from convertible notes payable, related parties  1,554,220   — 
Proceeds from convertible notes payable  1,070,118   — 
Payments on debt obligations  —   (10,937)
Proceeds from paycheck protection program loan  —   809,082 
Proceeds from warrants, net of issuance costs  —   3,842,695 
Proceeds from issuance of Series D Convertible Preferred Stock  —   100,000 
Net Cash Provided by Financing Activities  2,624,338   4,740,840 
         
Net (Decrease)/ Increase in Cash  (124,123)  405,816 
         
Cash - Beginning of period  1,640,645   1,424,096 
         
Cash - End of period $1,516,522  $1,829,912 
         
Supplementary Cash Flow Information        
Cash paid for interest $3,880  $18,431 
         
Non-cash investing and financing activities        
Adjustment of exercise price on warrants  —   438,913 
Issuance of warrants to extend short-term debt  —   6,594 
Conversion of short-term notes, related parties  —   218,414 
Deemed dividend on Series D Convertible Preferred Stock  —   278,476 
Issuance of Warrants in connection with Series D Convertible Preferred Stock  —   31,902 
Dividends accrued on Series B Convertible Preferred Stock  —   36,600 

  Nine Months Ended September 30, 
  2020  2019 
Cash Flows from Operating Activities        
Net loss $(4,898,685) $(11,615,750)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  69,447   631,722 
Amortization of debt discount  1,395,007   151,881 
Interest and penalties on extension of short-term convertible notes  --   124,615 
Stock-based compensation  643   1,783,886 
Loss on write-off of inventory  --   5,205 
Common stock issued for consulting services  35,000   95,533 
Change in fair value adjustment of derivative liability - warrants  (2,986,853)  (883,527)
Change in fair value of redemption put liability  (272,705)  -- 
Change in fair value of Derivative Liability - Day one derivative loss  2,306,121     
Issuance of warrants to extend convertible debt  17,636   106,158 
Bad Debt Expense  --   60,112 
Issuance of warrants to extend short-term debt  6,595     
Gain on conversion of short-term notes, related party  (1,300,088)  -- 
Warrant modification expenses  70,851     
Changes in operating assets and liabilities, net of purchase transaction :        
Accounts receivable  20,167   63,707 
Other receivables  16,372   (28,724)
Prepaid expenses and other assets  707,457   (140,304)
Interest payable  35,565   (25,381)
Accounts payable  (237,419)  486,196 
Accrued liabilities  (21,206)  (102,099)
Other current liabilities  (15,680)  354,340 
Dividend payable  -   (12,928)
Deferred revenue  (409,375)  1,038,594 
         
Net Cash Used in Operating Activities  (5,461,140)  (7,906,764)
         
Cash Flows from Investing Activities        
Purchase of property and equipment  (2,285)  (17,238)
Purchase of business, net of cash acquired  --   (302,710)
Net assets not included in purchase transaction  --   (69,629)
Net Cash Used in Investing Activities  (2,285)  (389,577)
         
Cash Flows from Financing Activities        
Payments on short-term related party notes  --   (180,000)
Proceeds from short-term related party notes  --   1,250,000 
Payment of dividends  --   (6,136)
Proceeds from debt obligations  809,082   277,519 
Payment on debt obligations  (10,937)  (130,377)
Proceeds from issuance of common stock  --   4,419,787 
Proceeds from issuance of warrants  3,842,695   2,663,797 
Proceeds from shareholder contributions  --   300,000 
Proceeds from issuance of Preferred Stock Series D  100,000   -- 
Proceeds from issuance Preferred Stock Series A, net of issuance costs  2,735,736   -- 
Net Cash Provided by Financing Activities  7,476,576   8,594,590 
         
Net Increase in Cash  2,013,151   298,249 
         
Cash - Beginning of period  1,424,096   69,628 
         
Cash - End of period $3,437,247  $367,877 
         
Supplementary Cash Flow Information        
Cash paid for interest $17,066  $132,937 
         
Non-cash investing and financing activities        
Commons stock issued to pay accrued dividends $--  $12,928 
Deemed Dividend on Series D Convertible Preferred Stock $314,926  $436,976 
Conversion of debt obligations to Common Stock $--  $225,937 
Conversion of Series D Preferred Stock to Common Stock $6,438,214  $-- 
Conversion of related party (Horne) warrants to equity $107,123  $-- 
Reclassification of Series B warrants to equity $73,805  $-- 
Reclassification of Series D warrants to equity $337,400  $-- 
Issuance of Common Stock in exchange for consulting fees $35,000  $-- 
Conversion of debt obligations to warrants $--  $74,063 
Issuance of warrants to extend short-term debt $6,595  $106,158 
 Issuance of warrants pursuant to extension of convertible short-term notes $17,636  $-- 
Conversion of Series B Preferred Stock to Common Stock $153,097  $-- 
Conversion of short-term related party notes payable to Common Stock $--  $114,000 
Conversion of short-term related party convertible notes to Preferred Stock $412,541  $-- 
Conversion of short-term convertible notes to Preferred Stock $4,751,484  $-- 
Conversion of note and accrued interest to Common Stock and warrants $--  $607 
Interest and penalties on extension of short-term convertible notes $--  $253,607 
Dividends accrued on Series B Preferred Stock $44,456  $66,639 
Adjustment of exercise price on convertible debt $438,913  $-- 
Issuance of Common Stock in connection with extinguishment of short-term notes, related parties $218,414  $-- 
Issuance of Warrants in connection with Series D Convertible Preferred Stock $31,902  $-- 

See accompanying notes to the consolidated financial statements

87

 

H-CYTE, INC

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Description of the Company

On July 11, 2019, MedoveX Corp.H-CYTE, Inc (“MedoveX”the Company”) changedis a hybrid-biopharmaceutical company dedicated to developing and delivering new treatments for patients with chronic respiratory and pulmonary disorders. During the last two years, the Company has evolved into two separate divisions with its name to H-CYTE, Inc.entrance into the biologics development space (“H-CYTE” or the “Company”Biologics Division”) by filing a Certificate of Amendment (the “Amendment”). This new division is complementary 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 Agreementcurrent Lung Health Institute (LHI) autologous infusion therapy business (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”Infusion Division”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the APA was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Basedis focused on the terms of the APA and its amendment (collectively the “APA”), the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.underserved disease states.

As of the merger, theThe consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC, (formerly Blue Zone Health Management, LLC), MedoveXMedovex Corp, Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the results includedinclude Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”). Additionally, H-CYTE Management, LLC is the operator and manager of the various Lung Health Institute (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary closure of all LI clinics due to COVID-19. These two clinics will remain permanently closed.

In 2019,On September 11, 2020, with the closing of the Rights Offering, FWHC, LLC, FWHC Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as “FWHC”) gained control of the Company had two divisions:by subsequently owning approximately 61% of the healthcare medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). In the first quarterfully diluted shares of 2020, the Company decided(for further discussion, see Notes 8 and 9-“Equity Transactions” to focus its available resourcesthe consolidated financial statements in the Company’s 2020 Annual Report on the Biosciences division as it represents a significantly greater opportunity than the DenerveX division as explained below. Form 10-K).

Autologous Infusion Therapy (“Infusion Division”)

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

Healthcare Medical BiosciencesInfusion Division (Biosciences division)

The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicineautologous cellular therapy (PRP-PBMC) to treat an array of debilitating medical conditions.chronic lung disorders. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality careto the LHI clinics, while producing positive medical outcomes.outcomes following the strictest Centers for Disease Control and Prevention (the “CDC”) guidelines.

Biotech Development (“Biologics Division”)

On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post U.S. Food & Drug Administration, the “FDA”, approval) a FDA approved therapy (known as L-CYTE-01)biologic combining its PRP-PBMC technology with Rion’s exosomes (“EV”) technology for the treatment of chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel EV technology to harness the healing power of the body. Rion’s innovative 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-year10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop combined proprietary biologics. The Company is currently evaluating the potential of a combined biologic and the utilization of this agreement.

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01)biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 investigational new drug (IND)IND clearance for L-CYTE-01.this biologic as necessary. Rion has also agreesagreed 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.its efforts.

8

 

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

After conducting the clinical trial investigation. After conducting joint research and developmentefficacy trials of these biologics, H-CYTEthis biologic, the Company intends to pursue submission of an IND applicationa Biologics License Application (“BLA”) for review by the FDA for treatment of COPD.COPD or similar lung disorders.

Proprietary Medical Device Business (DenerveX medical device division)

In the first quarter of 2020,On April 2, 2021, the Company madeentered into a series of agreements with Medovex, LLC to pursue a joint venture regarding the decision to stop any further efforts to source alternative manufacturingcontinued development and distributor options or other product monetizing relationships forcommercialization of the DenerveX product. Althoughdevice for business outside of the Company believes the DenerveX technology has value, the Company does not believe it will realize the value in the foreseeable future.U.S. The Company recorded an impairment chargehas determined that the transactions resulting from the series of agreements with Medovex, LLC are immaterial. The Company will assess the progress of the joint venture on a quarterly basis for intangibles associated with the DenerveX intellectual property and wrote off related inventory balances as of December 31, 2019.materiality.

Note 2 – Basis of presentation

Based on the terms of the APA, the former RMS members had voting control of the combined company as of the closing of the 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 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.

The accompanying interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of the Company’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The Company filed audited consolidated financial statements as of and for the fiscal years ended December 31, 20192020 and December 31, 20182019, which included all information and notes necessary for such complete presentation in conjunction with its 20192020 Annual Report on Form 10-K.

The results of operations for the interim period ended SeptemberJune 30, 20202021 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019,2020, which are contained in the Company’s 20192020 Annual Report on Form 10-K. For further discussion of the Company’s significant accounting policies, refer to Note 3 – “Basis2–“Basis Of Presentation And Summary of Significant Accounting Policies” to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operations–Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.

Certain reclassifications have been made to amounts previously reported and some disclosures for prior periods have been added to conform to the current period presentation.

Note 3 - Liquidity, Going Concern and Management’s Plans

The corona virus outbreak (COVID-19) has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020, the Company took steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through mid-July 2020. The Company also made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics located in Tampa, Scottsdale, Pittsburgh, Nashville, and Dallas. The Company resumed operations in July at the Tampa and Nashville clinics, in August at the Scottsdale clinic, and in September at the Pittsburgh clinic. The Pittsburgh clinic re-opening was temporary in September as it ceased operations permanently at the end of October 2020. The Dallas clinic did not re-open and will be closed permanently.

The Company reportedincurred net incomelosses of approximately $3,950,000$2,058,000 and a net loss of approximately $4,899,000$3,466,000 and for the three months and ninesix months ended SeptemberJune 30, 2020, and a net loss of $2,624,000 and $11,616,000 for the three and nine months ended September 30, 2019, respectively.2021. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as it implements its plan around the Company’s revenue-generating activities were suspended until July.Biosciences Division. The interim consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplatesconcern.

COVID-19 has adversely affected the realizationCompany’s financial condition and results of assets and liquidationoperations. The impact of liabilitiesthe outbreak of COVID-19 on the economy in the normal courseU.S. and the rest of business.

The Company will incur losses until sufficient revenuethe world is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process. Due to COVID-19, the Company was unable to perform treatments from March 23, 2020 until July 2020. The Company contacted its patients that were scheduled to have treatments completed, both first time patients and recurring patients, and have rescheduled many of these patients now that the Company is operational. There is no guarantee that the Company will be ableexpected to continue to treat patients duebe significant. The extent to which the coronavirus outbreak; as such,COVID-19 outbreak will continue to impact the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot estimate if itpredict the extent to which its financial condition and results of operations will be safe to continue to treat patients and generate revenue. The Company’s third quarter 2020 revenue was approximately $650,000 compared to first quarter 2020 revenue of approximately $1,017,000. The Company’s future quarters’ revenue is dependent upon being able to continue to treat patients in the LHI clinics. The Company will continue to focus on its goal of taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases.affected.

9

 

With the Company’s revenue-generating activities resuming during the third quarter at a significantly reduced volume, and the uncertainty around the COVID-19 outbreak, the Company will need to raise cash from debt and/or equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.

Note Purchase AgreementConvertible Notes Payable

On April 17, 2020, and in subsequent April closings,1, 2021, the Company, entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”2021 Note Purchase Agreement”) with thirty threefive (5) investors (the “Purchasers”“Holders”) pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale. Pursuant to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceedsterms 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 by2021 Note Purchase Agreement, the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note, eliminated the requirement that the Company make monthly payments of accrued interest.

As part of the April Offering, the holders of certain existing warrants issued by the Company, which contained anti-dilution price protection, entered into agreements terminating all anti-dilution price protection in their warrants. The Company implemented a one-time reduction of the exercise price of such warrants to be equal to the price per share of preferred stock totaling $0.014 per share for the Qualified Financing. The Qualified Financing closed on September 11, 2020 triggering the reset of certain existing warrants to $0.014 per share and the conversion of the April Secured Notes plus accrued interest into 287,984,337 Preferred A shares. The Company also converted the Hawes notes plus accrued interest into 35,860,079 shares of Preferred A shares upon the closing of the Qualified Financing.

Short-term notes, related parties

On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further above in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor. As explained above, the A&R Note was converted to Series A Preferred stock on September 11, 2020, the closing date of the Qualified Financing.

The short-term notes with related parties were issued by the Company during 2019, and as of March 31, 2020 consisted of five loans totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne for working capital purposes. The loans bore interest rates ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the respective maturity date ranging from March 26, 2020 to May 13, 2020. Some of these loans provided for the issuance of warrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans were repaid and 840,000 warrants were issued at an exercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant has an exercise price equal to the price per share at which securities were offered to investors for purchase at the Qualified Financing totaling $0.014 and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. The Qualified Financing closed on September 11, 2020.

Rights Offering (Qualified Financing)

The Company established July 28, 2020 as the Record Date for purposes of establishing a date for the Company’s rights offering whereby each holder of the Company’s Common stock on the Record Date will be entitled to three subscription rights, each to purchase one share of Series A Preferred Stock.

As mentioned below, the Company entered into a standby purchase agreement with certain creditors who had previously purchased secured convertible notes and warrants, pursuant to which such creditors agreed (a) not to exercise any subscription rights they may receive as stockholders of the Company in the registered rights offering (described below) and (b) instead to purchase any Series A preferred stock corresponding to the unexercised rights in the rights offering up to an aggregate amount of approximately $2.8 million at the same subscription price. The amounts due under the standby purchase agreements became calculable and payable upon the expiration of the rights offering as set forth below.

On September 11, 2020, the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985 excluding issuance costs of approximately $320,000. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.

In addition, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stock to the holders of outstandingsold promissory notes in the aggregate principal amount of $2,575,000 maturing on March 31, 2022with an annual interest rate of 8%. The Notes, plus accrued interest, and conversionare convertible into shares of certain warrants totaling $5,487,869.Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The notes were converted pursuant to mandatory conversion triggeredNotes are secured by the completionassets of the rights offering. Such shares were issuedCompany under an exemption from registration in reliance on Section 3(a)(9)a security agreement with the Holders. The lead investor of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the Securities Act.total amount to the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement. The Company chose early adoption of ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity effective January 1, 2021 related to the April 2021 Note Purchase Agreement.

The Company had cash on hand of approximately $3,437,000 $1,516,000 as of SeptemberJune 30, 20202021 and $2,481,000,approximately $1,099,000 as of November 12, 2020.August 11, 2021. The Company’s cash is insufficient to fund its operations over the next year and the Company will needis currently working to raiseobtain additional capital through debt or equity offeringsfinancing to continue operations.help support the Biosciences Division’s business model.

There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. The Company will need to raise additional funds of which there can be no assurance and ifIf the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings, or raising equity capital, the Company may be forced to reduce expenses or discontinue operations. The interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 4 – Business Acquisition

On January 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 55% 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 not 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 MedoveX (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 acquired and liabilities assumed based on their estimated fair values.

The acquisition-date fair value of the 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 estimated fair value of the net assets of 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 fair 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 the RMS interest in the merger is significantly related to obtaining access to the public market. Therefore, the fair value of the MedoveX stock price 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.

The following table summarizes the fair values of 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 the Company recorded an impairment charge of $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:

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 54 – Right-of-use Asset And Lease Liability

On January 9, 2019, the Company adopted ASU No. 2016-02 (as amended), and additional current liabilitiesThe components 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.

Operating lease expense, which are included in other general and cash flows from operating leasesadministrative expense, for the three months and ninesix months ending Septemberended June 30, 2021 and 2020, totaled approximately $140,000 and $442,000, respectively. Operatingrespectively, are as follows:

SCHEDULE OF COMPONENTS OF LEASE EXPENSE

  

Three Months Ended June 30,

  Six Months Ended June 30, 
  2021  2020  2021  2020 
Operating lease expense $75,058  $151,464  $183,650  $302,028 

Cash paid for amounts included in the measurement of lease expense and cash flows from operating leasesliabilities for the three months and ninesix months ending Septemberended June 30, 2019 totaled approximately $147,0002021 and $422,000, respectively. Operating lease expense is included in the “Other general and administrative” section of the unaudited consolidated statement of operations.2020, respectively, are as follows:

SCHEDULE OF CASH PAID FOR AMOUNTS INCLUDED THE MEASUREMENT OF LEASE LIABILITIES

  Three Months Ended June 30,  Six Months Ended June 30, 
  2021  2020  2021  2020 
Operating cash flows from operating leases $75,058  $151,464  $183,650  $302,028 

Supplemental balance sheet and other information related to operating leases are as follows:

SCHEDULE OF SUPPLEMENTAL BALANCE SHEET AND OTHER INFORMATION

  June 30, 2021  December 31, 2020 
       
Operating leases right-of-use assets $183,685  $278,552 
Lease liability, current portion  90,276   139,189 
Lease liability, net of current portion  111,096   157,050 
Total operating lease liabilities $201,372  $296,239 
Weighted average remaining lease term  2.17 years   2.32 years 
Weighted average discount rate  10.73%  10.31%

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  September 30, 2020  December 31, 2019 
       
Operating leases right-of-use assets $373,121  $738,453 
Lease liability, current portion  247,552   453,734 
Lease liability, net of current portion  143,258   302,175 
Total operating lease liabilities $390,810  $755,909 
Weighted average remaining lease term  1.67 years   2.25 years 
Weighted average discount rate  7.75%  7.75%

Future maturities of operating lease liabilities as of SeptemberJune 30, 20202021 are as follows:

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

 Operating leases  Operating leases 
      
Remainder of 2020 $116,000 
2021  221,000 
Remainder of 2021 $50,752 
2022  103,000  102,891 
2023  69,000   69,333 
Total lease payments  509,000  222,976 
Less: Interest  (118,190)  (21,604)
Total lease liability $390,810  $201,372 

The Company leasesdid not renew its corporate office space lease in Tampa, FL and Atlanta, GA.which expired on March 31, 2021. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, and Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX.AZ. These clinic locations have various expiration dates through August 31, 2023. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. The Company entered into a twelve-month lease for its Tampa location beginning April 1, 2021 totalling $71,775. The Dallas, TX lease expired on July 31, 2020 and the Pittsburgh, PA lease is set to expireexpired on October 31, 2020. 2020, neither of which were renewed as these clinic locations were permanently closed.The other locationsCompany decided that its corporate staff will continue working remotely but the Company will have various expiration dates through August 31, 2023.a small corporate meeting room in the Tampa LHI clinic.

Note 65 - Property And Equipment

Property and equipment, net, consists of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

 Useful Life September 30, 2020 December 31, 2019  Useful Life June 30, 2021 December 31, 2020 
Furniture and fixtures 5-7 years $                 231,222  $231,222  5-7 years $96,185  $231,222 
Computers and software 3-7 years  246,323   244,039  3-7 years 213,660 246,323 
Leasehold improvements 15 years  157,107   157,107  15 years  40,130  155,583 
    634,652   632,368    349,975 633,128 
Less: accumulated depreciation    (482,111)  (412,665)    (309,331)  (493,953)
                 
Total   $152,541  $219,703    $40,644 $139,175 

Depreciation expense was approximately $30,000 $2,000and $69,000 $14,000for the three and ninesix months ended SeptemberJune 30, 2020.2021, respectively. Depreciation expense was approximately $28,000 $17,000 and $80,000  $39,000 for the three months and ninesix months ended SeptemberJune 30, 2019,2020, respectively. The Company uses the straight-line depreciation method to calculate depreciation expense.

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 quarterCompany recorded a loss on disposal of 2019 writing off this asset as of December 31, 2019.

Forapproximately $93,000for the three and ninesix months ended SeptemberJune 30, 2020, there was no amortization expense. For the three and nine months ended September 30, 2019, total amortization expense related to acquisition-related intangible assets was $184,000 and $552,000, respectively, and is included in operating expense in the accompanying consolidated statements of operations.2021.

Goodwill represents the excess of purchase price over fair value of net identified tangible and intangible assets and liabilities acquired in the Merger. As of December 31, 2019, the Company’s goodwill balance was determined to be impaired as of the balance sheet date and as a result, the Company recorded a goodwill impairment charge writing off the goodwill balance.

Note 86 – Related Party Transactions

Consulting ExpenseBoard Members and Officers and Related Expenses

Effective February 1, 2019, the Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and Chairman of the Audit Committee in which Mr. Monteleone received $10,000 $10,000 per month for advisory services and $5,000 $5,000 per quarter as Audit Committee Chair in addition to regular quarterly board meeting fees. Effective March 25, 2020, the Company reduced the advisory services to $5,000 $5,000 per month and the fees per quarter as the Audit Committee Chair to $2,500.$2,500 per quarter. On January 12, 2021, Mr. Monteleone was appointed as Chairman of the Board and Compensation Committee Chair. There are understandings between the Company and Mr. Monteleone for him to receive $4,167 per month to serve on the Board of Directors and an additional $5,000 per quarter to serve as Chairman of the Board, Audit Committee Chair, and Compensation Committee Chair. The Company expensed approximately $17,500 and $35,000 in compensation to Mr. Monteleone for the three months and six months ended June 30, 2021, respectively. The Company expensed approximately $17,500 and $47,500 in compensation to Mr. Monteleone for the three months and six months ended June 30, 2020, respectively.

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Effective October 1, 2020, the Company entered into an oral agreement with Mr. Michael Yurkowsky in which Mr. Yurkowsky will receive $4,167 per month to serve on the Board of Directors. The Company expensed approximately $12,500 and $25,000 in compensation to Mr. Yurkowsky for the three and six months ended June 30, 2021, respectively. For the three and ninesix months ended SeptemberJune 30, 2020, the Company expensed approximately $17,500, and $65,000 in compensation to$0.

On January 12, 2021, Mr. Monteleone, respectively. ForWilliam Horne stepped down as Chairman of the three months and nine months ended September 30, 2019,Board. Mr. Horne will remain a member of the Company expensed approximately $35,000 and $90,000 in compensation to Mr. Monteleone, respectively.

TheBoard. Effective March 1, 2021, the Company entered into an oral consulting arrangementagreement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS,Mr. Horne in January 2019 in the amount of $10,000which Mr. Horne will receive $4,167 per month plus benefits reimbursement for advisory services.to serve on the Board of Directors. The Company terminated this agreement effectiveexpensed approximately $12,500 and $17,000 in Board fee compensation to Mr. Horne for the three and six months ended June 30, 2019.2021. For the three and ninesix months ended September 30, 2020, the Company had no consulting fees expense for St. Louis Family Office. For the three and nine months ended September 30, 2019, the Company expensed approximately $0 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 nine months ended SeptemberJune 30, 2020, the Company expensed approximately $0 and $15,000, respectively. For the three and nine months ended September 30, 2019, the Company expensed approximately $23,000 and $49,000, respectively.$0.

16

Officers and Board Members 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. On September 29, 2020, Mr. William Horne resigned as the Company’s Chief Executive Officer and President but will remain Chairman of the Board of Directors.

For the three and nine months ended September 30, 2020, the Company paid no Board of Director fees to Michael Yurkowsky or to Raymond Monteleone. For the three and nine months ended September 30, 2019, the Company paid $0 and $10,000, respectively, in Board of Director fees to Michael Yurkowsky and to Raymond Monteleone.

Debt and Other Obligations

The short-term notes, related parties and convertible notes payable, related parties are detailed in Note 3 - “Liquidity,3-“Liquidity, Going Concern and Management’s Plans” in this Form 10-Q.

Change in Control

On September 11, 2020, with the closing of the Rights Offering, FWHC, LLC, FWHC Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as “FWHC”) gained control of the Company by subsequently owning approximately 61% of the fully diluted shares of the Company. On July 28, 2020, the Company issued an aggregate of 15,518,111 shares of its common stock to FWHC upon the conversion of its issued Series D Convertible Preferred Stock. The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Series D Convertible Preferred Stock as set forth in the Certificate of Designations for the Series D Convertible Preferred Stock. On September 11, 2020, with the closing of the Rights Offering, FWHC was issued 123,031,819 shares of Preferred A Stock for conversion of the outstanding promissory notes from April 2020, 75,162,429 shares of Preferred A Stock for conversion of the April Secured Note, 35,860,079 shares of Preferred A Stock for conversion of the Hawes Notes, and 117,362,143 shares of Preferred A Stock issued upon the closing of the Rights Offering. FWHC was also issued 273,356,676 10-year warrants at $0.014 upon the closing of the Rights Offering.

Convertible Notes Payable

On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the terms of the April 2021 Note Purchase Agreement, the Company sold promissory notes in the aggregate principal amount of $2,575,000 maturing on March 31, 2022 with an annual interest rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by the assets of the Company under a security agreement with the Holders. The lead investor of the April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.

Note 97 - Equity Transactions

For the consolidated statement of stockholders’ deficit as of 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 Merger as if it was received as of that date and the historical accumulated deficit of RMS. As of the 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 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 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 at a purchase price of $0.75 per share. For further discussion of the SPA, refer to Note 9 - “Equity Transactions” to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K is incorporated by reference herein.

The Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,000,000, as of 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 $5,650,000, the Company issued an additional 17,264 Series C Preferred Stock to 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. 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 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 for consulting fees in an amount equivalent to $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$35,000 in shares of the Company’s common stock at a weighted average share price of $0.32$0.32 per share for a total of 109,375 shares per the terms of the consulting agreement executed in February 2019.

12

 

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 were offered to investors for purchase at the Qualified Financing, which was $0.014,$0.014, and is exercisable beginning on the day immediately following the closing of the Qualified Financing. The relative fair value allocation between common stock and warrants for the Horne Management, LLC notes is approximately $218,000 to common stock and approximately $199,000 to warrants.Rights Offering, which occurred on September 11, 2020.

On July 28, 2020, the Company issued an aggregate of 17,893,076 shares of its common stock upon the conversion of all of its issued and outstanding Series B and Series D Preferred Stock (the “Preferred Stock”) and accumulated dividends. The Preferred Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Series D Preferred Stock as set forth in the Certificate of Designations for the Series D Preferred Stock.

On July 29, 2020, the Company filed its Second Amended and Restated Certificate of Incorporation (the “Amended COI”). The Amended COI provides for the issuance of up to 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.

Series A Preferred Stock

On September 11, 2020, the registered rights offeringRights Offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering,Rights Offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014$0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering,Rights Offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.$3,055,985.

In addition,Additionally, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stockPreferred Stock to the holders of outstanding promissory notes, issued in April 2020, in the aggregate principal amount and accrued interest and conversion of certain warrants totaling $5,487,869.$4,483,617. The notes were converted pursuant to a mandatory conversion triggered by the completion of the rights offering. Such Rights Offering (for further discussion, see Note 9-“Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).

During the three and six months ended June 30, 2021, 8,123,691 and 17,803,525 shares of Series A Preferred Stock were issued under an exemption from registration in reliance on Section 3(a)(9)converted to Common Stock at the request of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act.certain Series A Preferred Shareholders.

Voting Rights

Holders of Series A Preferred Stock (“Series A Holders”) have the right to receive notice of any meeting of holders of common stock or Series A Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series A Preferred Stock.stock. Each Series A Holder shall vote on each matter on an as converted basis submitted to them with the holders of common stock.

Conversion

Series A Preferred Stock converts to common stock at a 1:1 ratio immediately upon request of the Series A Holder.

Liquidation

Series A Preferred Stock does not have preferential treatment over common stock shareholders if the Company liquidates or dissolves.

13

 

Series B Preferred Stock

Share-Based Compensation

Voting Rights

Holders of Series B Preferred Stock (“Series B Holders”) have the right to receive notice of any meeting of holders of common stock or Series B Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series B Preferred Stock. Each Series B Holder shall vote on each matter submitted to them with the holders of common stock.

Liquidation

Upon the liquidation or dissolution of the business of the Company, whether voluntary or involuntary, each Series B Holder shall be entitled to receive, for each share thereof, out of assets of the Company legally available 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 Series B 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 to the holders of the Company’s 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 Notes with a conversion price of $0.40. As a result, the exercise price on all of the warrants issued with the Series B Preferred Stock was adjusted downward to $0.36.

In the first quarter of 2019, the Company recognized a beneficial conversion feature related to the Series B Preferred Stock of approximately $33,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Since the Series B Preferred 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 year ended December 31, 2019, 9,250 shares of Series B Preferred Stock, par value $0.001, and accrued dividends were assumed with the Merger and an aggregate of 2,650 shares of Series B Preferred Stock, and accrued dividends, were subsequently converted into an aggregate of 715,279 shares of the Company’s common stock.

On July 28, 2020, the Company issued an aggregate of 2,119,713 shares of its common stock upon the conversion of all of its issued and outstanding Series B Preferred Stock (the “Preferred B Stock”). The Preferred B Stock was converted pursuant to a mandatory conversion triggered by the majority holder of the Preferred B Stock as set forth in the Certificate of Designations for the Preferred B Stock.

Debt Conversion

Convertible Notes and Promissory Note to Related Party

The $750,000 convertible notes payable assumed in the Merger 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 of common stock at $0.40 per share, in accordance with the SPA. See more details in Note 11 – Short-term Debt.

On September 24, 2020, the Company issued an aggregate of 323,844,416 Preferred A shares to holders of outstanding promissory notes in the aggregate principal amount, accrued interest, and conversion of certain warrants totaling $5,487,869. The notes were converted pursuant to a mandatory conversion feature triggered by the closing of a Qualified Financing. (See footnote 11)

Stock-Based Compensation Plan

The Company utilizes the Black-Scholes valuation method to recognize stock-basedshare-based compensation expense over the vesting period. The expected life represents the period that the stock-based compensation awards are expected to be outstanding.

Stock Option Activity

ForOn April 1, 2021, the three and nine months ended September 30, 2020,Board of Directors of the Company recognized approximately $0approved and $1,000, respectively, as compensation expense with respectgranted to vested stock options. For the threecertain directors and nine months ended September 30, 2019,officers of the Company recognized approximately $1,500 and $94,000, respectively, as compensation expense with respect to vested stock options. Since these an aggregate of 54,750,000 stock options were assumed on January 8, 2019 as part of the Merger, there were no historical costs related to this prior to January 8, 2019. The expense for the nine months ended September 30, 2019 is primarily related to an option to purchase 250,000 shares of the Company’s common stock that was issued to the Company’s CEO pursuant to his employment agreement. These options which 4,750,000 were immediately vested upon issuance.on the date of grant. Each option granted has an exercise price of $0.07 per share and an expiration date of ten yearsfrom the date of grant. These options are not included in the Company’s current stock option plan as they were granted outside of the plan.

As of September

For the six months ended June 30, 2020, all outstanding stock options were fully vested, and related compensation expense recognized. For the six months ended June 30, 2021, 55,135,000 options were outstanding and 5,718,133 were vested. As of June 30, 2021, the Company recognized $862,000 in stock-based compensation expense and has approximately $2,150,000 of unrecognized compensation costs related to non-vested stock options, which is expected to be recognized over a weighted average period of approximately 3.24 years.

Inputs used in the valuation models are as follows:

SCHEDULE OF ASSUMPTIONS USED TO CALCULATE FAIR VALUE OF STOCK OPTIONS

2021 Grants
Option value $0.054  to $0.056 
Risk Free Rate  0.90% to  1.37%
Expected Dividend- yield  -  to  - 
Expected Volatility  173.99% to  176.04%
Expected term (years)  5  to  7 

The following is a summary of stock option activity for the ninesix months ending Septemberended June 30, 20192020 and September 30, 2020:2021:

SUMMARY OF STOCK OPTION ACTIVITY

 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   6.06 
Granted  250,000   0.40   9.27 
Expired/Cancelled  (289,774)  2.46   — 
Outstanding at September 30, 2019  517,508  $1.81   7.62 
Exercisable at September 30, 2019  508,007  $1.81   7.62 
             Shares  

Weighted

Average

Exercise

Price

  Weighted Average Remaining Term (Years) 
Outstanding at December 31, 2019  425,000  $1.38   7.71   425,000  $1.38   7.71 
Granted  —   —   —   —   0   — 
Expired/Cancelled  (15,000)  1.35   —   (15,000)  1.35   — 
Outstanding and exercisable at September 30, 2020  410,000  $1.39   6.98 
Outstanding and exercisable at June 30, 2020  410,000  $1.39   7.23 
            
Outstanding at December 31, 2020  410,000  $1.39   6.72 
Granted  54,750,000   0.07   9.75 
Expired/Cancelled  (25,000)  2.16   — 
Outstanding at June 30, 2021  55,135,000  $0.08   9.73 
            

Exercisable at June 30, 2021

  

5,718,333

  $

0.16

   

9.52

 

 

The following is a summary of the Company’s non-vested shares for the six months ended June 30, 2021:

SUMMARY OF STOCK OPTION ACTIVITY NON-VESTED

  Shares  Weighted Average Grant Date Fair Value 
Non-vested at December 31, 2020  -  $- 
Granted  54,750,000   0.06 
Vested  (5,333,333)  0.05 
Forfeited  -   - 
Non-vested at June 30, 2021  49,416,667  $0.06 

Non-Controlling Interest

For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company consolidated the results for LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale as VIEs. The Company owns no portion of any of these four entities, 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 services 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 to $0 each month for each VIE to a net of zero.the VIEs. Due to this change in policy, there was no change in the non-controlling interest for the ninesix months ended SeptemberJune 30, 20202021 or 20192020 related to the net income (loss) as it was $0$0 each month through the management fee charged by the Company. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary closure of all LI clinics due to COVID-19. These two clinics will remain permanently closed.

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 Company excluded the three months ended September 30, 2020, the dilutivefollowing securities result from the potential conversioncalculation of outstanding Series A Preferred Shares and warrants of approximately 547,274,650 shares of common stock to be issued upon conversion of certain warrants and Series A Preferred. For the nine month period ended September 30, 2020, there is no difference between the basic and diluted net loss per share: 413,131,562share as the effect would have been antidilutive:

SCHEDULE OF ANTIDILUTIVE SECURITIES OF BASIC AND DILUTED NET LOSS PER SHARE

  For the Six Months Ended June 30, 
  2021  2020 
Options to purchase common stock (in the money)  4,977,273   410,000 
Warrants to purchase common stock (in the money)  386,908,082   404,821,082 
Series A Preferred Stock convertible to common stock  520,305,884   - 
Series B & D Preferred Stock convertible to common stock  -   38,308,600 
Total  912,191,239   443,539,682 

Excluded from the above table are 23,149,370 warrants and 410,000 common385,000 stock options outstanding were considered anti-dilutive and excluded. Forfor the three and nine month periodssix months ended SeptemberJune 30, 2019, there is no difference between2021 as they are out of the basic and diluted net loss per share: 32,756,180 warrants and 517,508 common stock options outstanding were considered anti-dilutive and were excluded.money (exercise price greater than $0.08). Inclusion of such would be anti-dilutive.

14

Note 108 – Commitments & Contingencies

Litigation

From time to time, the Company may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect the Company’s financial condition, results of operations, and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect the Company due to legal costs and expenses, diversion of management attention, and other factors. The Company expenses legal costs in the period incurred. The Company cannot assure that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against the Company in the future, and these matters could relate to prior, current or future transactions or events. As of SeptemberJune 30, 2020,2021, the Company had no litigation matters which required any accrual or disclosure.

Guarantee

The Company has guaranteed payments based upon the terms found in the management services agreements to affiliated physicians related to LI Dallas, LI Nashville LI Pittsburgh, LI Scottsdale, and LI Tampa.Scottsdale. For the three and ninesix months ended SeptemberJune 30, 20202021, payments totaling approximately $0 $26,000 and $22,000,$43,000, respectively, were made to these physicians’ legal entities. For the three and ninesix months ended SeptemberJune 30, 20192020, payments totaling approximately $36,000 $0and $107,000,$22,000, respectively, were made to these physicians’ legal entities. Due to COVID-19, the Company ceasingtemporarily ceased operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, LI Nashville, and LI Tampa, at which time, the guaranteed payments for these clinics were suspended until operations recommenced in July 2020.suspended. The guaranteed payments to thedid not resume for LI Dallas physician ceased in March 2020 asand LI Dallas wasPittsburgh due to those clinics being permanently closed.

Manufacturer Liability Dispute

The Company selectedresumed guaranteed payments in January 2021 for LI Nashville and LI Scottsdale.

Rion Agreements

On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post FDA registered contract manufacturer, to manufactureapproval) a biologic for chronic obstructive pulmonary disease (“COPD”), the DenerveX product. In 2019, the Company became awarefourth leading cause of events which resulteddeath in the manufacturer not meeting certain contract performance requirements. AsU.S. Rion has established a result,novel biologics technology to harness 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 amounthealing power of the lossbody. Rion’s innovative technology, based on information availablescience developed at this time. As such, the Company has not recordedMayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a loss as of September 30, 2020 or December 31, 2019. The Company is not aware of any legal action regarding this matter.10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.

Rion Services Agreement

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01)biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01.this biologic as necessary. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.the biologic. An additional $350,000 $350,000 in expense is expected to be incurred uponper the achievement of certain milestones in the services agreement.Rion Agreements. At this time, the Company is not able to estimate when these milestonesthis expense will occur. TheFor the three and six months ended June 30, 2021 the Company has expensed $1,150,000 for services provided by Rion in total thus far.$0. For the three and six months ended June 30, 2020 the Company expensed $200,000 and $950,000, respectively.

15

 

Note 119 – Short-term Debt

Convertible noteNotes Payable

The Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in the Merger.Asset Purchase Agreement between Medovex Corp and Regenerative Medicine Solutions, LLC (“Merger”) in 2019 (see Note 1 – “Description of the Company” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K). The debt assumed by the Company, as part of the merger, consisted of $750,000$750,000 of units (the “Units”) with a purchase price of $50,000$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$0.001 per share, at a conversion price equal to the lesser of $0.40$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-yearthree-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 Convertible Notes arewere secured by all of the assets of the Company.

The Convertible 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,

In 2019, and the conversion price$100,000 of the Convertible 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 Notes, plus accrued interest, waswere converted into an aggregate of 251,667 shares of common stock, eliminating $100,000and $350,000 of the Company’s debt obligation.Convertible Notes were redeemed by the Company. 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. In 2019, the Company redeemed $350,000 of convertible notes payable in principal and $52,033 in interest payable for three of the noteholders.

The Company also reached an extension with the remaining noteholder which extended the maturity date of the Hawes Notes for one year, until September 30, 2020. The notes had a principal balance of $300,000$300,000 plus penalties of approximately $85,000$85,000 and accrued interest of approximately $40,000$40,000 for a total adjusted principal balance upon renewal of $424,615$424,615 as of March 31, 2020 and December 31, 2019.2020. 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 balance of $424,615 as of December 31, 2019. The amendment2020 (see Note 11-”Debt” to the Hawes Notes among other things, eliminatesconsolidated financial statements in the requirement thatCompany’s 2020 Annual Report on Form 10-K).

On April 1, 2021, the Company, make monthly payments of accrued interest. The Company determinedentered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the proper classificationterms of the amendment based on ASC 470-50, Debt Modifications and Extinguishments. BecauseApril 2021 Note Purchase Agreement, the changeCompany sold promissory notes in the present valueaggregate principal amount 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 rate was reassessed resulting in$2,575,000 maturing on March 31, 2022 with an effectiveannual interest rate of 11.90%8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by the assets of the Company under a security agreement with the Holders. The lead investor of the April 2021 Note Purchase Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.

Interest expense is being accreted to the principal balance using the effective interest expense formethod. For the three months ended SeptemberJune 30, 2020,2021, the Company recorded interest expense of approximately $10,000. The Company converted the Hawes Notes plus accrued interest into 35,860,079 shares of Preferred A shares on September 11, 2020, upon the closing of the Qualified Financing.$29,220 and $20,118 for related party convertible notes payable and convertible notes payable, respectively.

Notes Payable

Notes payable were assumed in the Merger and are due in aggregate monthly installmentsinstalments of approximately $5,800 $5,800 and carry an interest rate of 5%. Each note originally had a maturity date of August 1, 2019. 2019. The Company finalized an eighteen-month extension to March 1, 2021.2021. The Company is working with the lender for an additional extension of the promissory notes. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 $67,000 at SeptemberJune 30, 20202021 and December 31, 2019.2020. The Company has not made payments on this note since February 10, 2020, due to COVID-19, resulting in accrued interest of $1,000.approximately $5,000.

On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 $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 $500,000 made by the Investor to the Company, the Company amended and restated the Notedemand note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The$1,000,000, which became 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(see Note 11-“Debt” to the Company, which served as lead investorconsolidated financial statements in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further above in Note 3, 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. The Company expected this note would be converted to Series A Preferred Stock at a price of $0.014 per share upon the closing of the rights offering although such conversion is subject to certain conditions. The A&R Note was converted to 75,162,429 Preferred A shares2020 Annual Report on September 11, 2020, the closing date of the Qualified Financing.Form 10-K).

The short-term notes with related parties were issued by the Company during 2019, and as of March 31, 2020 consisted of five loans totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne for working capital purposes. The loans bore interest rates ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the respective maturity date ranging from March 26, 2020 to May 13, 2020. Some of these loans provided for the issuance of warrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans were repaid and 840,000 warrants were issued at an exercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities were offered to investors for purchase at the Qualified Financing totaling $0.014 and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. The Qualified Financing closed on September 11, 2020. 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.

16

 

Paycheck Protection Program

On April 29, 2020, the Company issued a promissory note in the principal amount of $809,082 $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 an interest at a rate of 1% per annum and is payable in eighteen monthly payments of $45,533 beginningmatures on approximately August 14, 2021.April 29, 2022. The Company elected to use a 24-week Covered Period, per the SBA Paycheck Protection Program guidelines, the Covered Periodwhich ended on October 14, 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 criteria set by the SBA. Not more than 40% of the amount forgiven can be attributed to non-payroll costs.costs, as listed above. As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period (as defined below), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable. The Company filed its forgiveness application on April 20, 2021 and is still waiting for the application to be processed and approved.

Note 1210 – Derivative Liability - WarrantsLiabilities

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 reconciliationare rollforwards of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3)liabilities during the ninesix months ended SeptemberJune 30, 2020:

SCHEDULE OF FAIR VALUE, LIABILITIES MEASURED ON RECURRING BASIS

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 

17

 

Derivative Liability - Warrants   
    
Balance at December 31, 2019 $315,855 
Series D Warrant reclass from equity to liability classification  509,764 
Warrants issued with modification of Horne Note  198,994 
Warrants issued with April 17, 2020 financing  6,148,816 
Fair value adjustments  (2,986,853)
Warrant reclassification from liability to equity classification  (4,186,574)
Balance at September 30, 2020 $— 
Redemption Put Liability   
    
Balance at December 31, 2019 $267,399 
Issuance of Series D Convertible Preferred Stock  5,306 
Fair value adjustments  (272,705)
Balance at September 30, 2020 $— 

(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 September 30, 2020 and December 31, 2019.
(2)Upon the closing of a Qualified Financing on September 11, 2020, the Derivative Liability- Warrants were reclassed to stockholder’s equity.
(3)The Series D Preferred Stock was converted into common stock on July 28, 2020 at which time the Derivative Put Liability was no longer applicable, and its fair value as adjusted to zero and the extinguishment was recorded to income.
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.

As part of the April 2020 offering,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$75,000 to the fair value of the derivative liability related to the Series B Warrants. In addition, the Company recorded approximately a change in fair market value of $317,000 to the fair value of the derivative liability before the reclass to equity.

Upon the closing of a Qualified Financing, which occurred on September 11, 2020, the exercise price of the Series B Warrants became fixed at $0.014 and the warrants then met the conditions for equity classification. Consequently, they were revalued as of the date of the Qualified Financing using a Black Scholes valuation technique with the following assumptions: Trading market price - $0.027, estimated exercise price - $0.014, volatility - 260%, risk free rate - 0.13% and an estimated remaining term of 1.33 years. The fair value of the Series B Warrants totaling $73,805 was then reclassed from a derivative liability to stockholders’ equity.

Series D Warrants

In conjunction with thetheir 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$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 a fair market valuean increase of approximately $510,000 when$510,000 which is recorded as a change in the warrants were reclassified to a liability on July 28, 2020.

Upon the closing of a Qualified Financing, which occurred on September 11, 2020, the exercise price of the Series D Warrants became fixed at $0.014 and the warrants then met the conditions for equity classification. Consequently, the Series D Warrants were revalued as of the date of the Qualified Financing using a Black Scholes valuation technique with the following assumptions: Trading market price - $0.027, estimated exercise price - $0.014, volatility - 111%, risk free rate - 0.67% and an estimated term of 9.2 years. The fair value of the Series D Warrants totaling $337,400 was then reclassed from a derivative liability to stockholders’ equity.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-yearten-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,$0.05, estimated exercise price- $0.014,$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.$199,000.

Upon the closing of a Qualified Financing, which occurred on September 11, 2020, the exercise price of the Series D Warrants became fixed at $0.014 and the warrants then met the conditions for equity classification. Consequently, the Horne Warrants were revalued as of the date of the Qualified Financing using a Lattice valuation technique with the following assumptions: Trading market price- $0.027, estimated exercise price- $0.014, volatility- 103%, risk free rate- 0.67% and an estimated term of 10 years. The fair value of the Horne Warrants totaling $107,123 was then reclassed from a derivative liability to stockholders’ equity.

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 $2,842,695 in gross proceeds through the April 2020 Offering and an advance of $1,000,000 (A&R Note) $1,000,000 which was converted into an Advance Note on April 17, 2020. The Company expected the price per share at which securities would behave been offered for purchase in the Qualified Financing to be $0.014 resulting in the assumption there would 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,price- $0.05, estimated exercise price - $0.014, volatility - 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 $3,279,000 and $2,869,000, respectively for a total of approximately $6,149,000.$2,869,300, respectively.

18

Upon the closing of a Qualified Financing which occurred on September 11, 2020, the exercise price of the Purchaser and Converted Advance Warrants became fixed at $0.014 and the Company then had sufficient authorized and unissued shares available to satisfy all their commitments under their equity-linked contracts. There are 212,821,929 and 150,324,857 shares issuable upon exercise of the Purchaser and the Converted Advance Warrants, respectively. The Warrants were revalued as of the date of the Qualified Financing using a Lattice valuation technique with the following assumptions: Trading market price - $0.027, estimated exercise price - $0.014, volatility - 106%, risk free rate - 0.67% and an estimated term of 10 years. The fair value of the Warrants of $3,668,247 was then reclassed from a derivative liability to stockholders’ equity.

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 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, were classified as liabilities until such time the Company has sufficient authorized shares.

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 derivative liability has been remeasured to fair value at the end of each reporting period and the change in fair value, of approximately $5,869,102($3,057,225) and ($2,986,853)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 ninesix months ended SeptemberJune 30, 2020, respectively. For

The Company estimated the three month period ended Septemberfair value of the warrant derivative liability as of June 30, 2020 using the derivative liability has been remeasuredfollowing assumptions:

SCHEDULE OF ASSUMPTIONS FOR WARRANTS

  June 30, 2020 
    
Fair value of underlying stock $0.05 
Exercise price $0.014 
Risk free rate  0.14% - 0.66%
Expected term (in years)  0.17- 10.27 
Stock price volatility  109% - 312%
Expected dividend yield  0 

On April 17, 2020, the holders of the warrants agreed to fair value at September 11, 2020 and then converted to equity due to the Qualified Financing and fixed asterminate all derivative liabilities were converted.anti-dilution price protections in their warrants.

The fair value of the derivative liability included onwarrants will be significantly influenced by the consolidated balance sheet was approximately $0fair value of the Company’s stock price, stock price volatility, changes in interest rates and $316,000 asmanagement’s assumptions related to the estimated date and price of September 30, 2020 and December 31, 2019, respectively.a Qualified Financing.

In conjunction with the Series D Preferred financing (See Note 14)(see note 12), 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$75,000 for 403,125 shares of common stock with a fair value of approximately $73,000.$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.

19

 

Redemption Put Liability

As described in Note 14,12, the redemption put provision embedded in the Series D financing required bifurcation and measurement at fair value as a derivative. If the redemption put provision is triggered, it allows either payment in cash or the issuance of “Trigger Event Warrants”. Accordingly, the fair value of the Redemption put liability considered management’s estimate of the probability of cash payment versus payment in Trigger Event Warrants and was valued using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision waswill 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. On July 28, 2020, the Series D Preferred Stock was converted into Common Stock, at which time the redemption put was no longer applicable andThe Company estimated the fair value of the Trigger Event Warrant portion of the redemption put was adjusted to zero.liability using the following assumptions on June 30, 2020:

SCHEDULE OF ASSUMPTIONS FOR WARRANTS

  June 30, 2020 
    
Fair value of underlying stock $0.05 
Exercise price $0.20409 
Risk free rate  0.66%
Expected term (in years)  9.5 
Stock price volatility  107%
Expected dividend yield  0 

The fair market value of the redemption put liability at inception was approximately $614,000 $614,000 which washas 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 $98,000($19,000) and $273,000 $175,000 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three and ninesix months ended SeptemberJune 30, 2020, respectively.

The change inCompany did not have any assets or liabilities measured at fair value using Level 1 or 2 of approximately $0the fair value hierarchy as of December 31, 2020 (see Note 12-“Derivative Liability-Warrants and $0 has been recorded as a component of other income (expense)Redemption Put” to the consolidated financial statements in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2019, respectively. The fair value of the redemption put liability included2020 Annual Report on the consolidated balance sheet was approximately $0 and $267,000 as of September 30, 2020 and December 31, 2019, respectively.Form 10-K).

Note 1311 - Common Stock Warrants

A summary of the Company’s warrant issuance activity and related information for the quartersperiod ended SeptemberJune 30, 2021 and 2020 and September 30, 2019:is as follows:

SUMMARY OF WARRANT ACTIVITY

   Shares  Weighted Average Exercise Price  Weighted Average Remaining Contractual Life 
Outstanding and exercisable at December 31, 2019  44,806,076  $0.78   4.59 
Issued  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(1)  354,836,286   0.014   9.79 
Total outstanding at June 30, 2020  404,821,082   0.104   9.16 
             
Outstanding and exercisable at December 31, 2020  413,423,972  $0.015   10.30 
Expired  (3,366,520) $0.32   — 
Issued  0   0   — 
Total outstanding and exercisable at June 30, 2021  410,057,452  $0.63   8.63 

(1)The Company had estimated on June 30, 2020 that the number of warrants to be granted for the bridge financing would be 354,836,286. The bridge financing closed on September 11, 2020 in which an additional 9,602,890 warrants were issued above the original estimate for a total of 364,439,176. The fair market value associated with the additional warrants issued was recorded to the change in fair value of derivative liability – warrants prior to being reclassed to equity. Upon closing of the Rights Offering on September 11, 2020, the Company issued warrants to one of the Series B Preferred shareholders of 1,292,411 due to an antidilution feature embedded in the Series B Warrant.

20

 

  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 September 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  368,325,486   0.015   10.30 
Total outstanding at September 30, 2020  413,131,562   0.09   9.79 

The fair value of all warrants issued are determined by using the Black-Scholes valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued. The inputs used in the Black-Scholes valuation technique to value each of the warrants as of their respective issue dates are as follows:

SCHEDULE OF ASSUMPTIONS FOR WARRANTS

Event Description Date Number of Warrants  H-CYTE Stock Price  Exercise Price of Warrant  Grant Date Fair Value  Life of Warrant  Risk Free Rate of Return (%)  Annualized Volatility Rate (%) 
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 1/18/2019  6,000,000  $0.40  $0.75  $0.23   3 years   2.60   114.07 
Private placement 1/25/2019  1,250,000  $0.59  $0.75  $0.38   3 years   2.43   113.72 
Private placement 1/31/2019  437,500  $0.54  $0.75  $0.34   3 years   2.43   113.47 
Private placement 2/7/2019  750,000  $0.57  $0.75  $0.36   3 years   2.46   113.23 
Private placement 2/22/2019  375,000  $0.49  $0.75  $0.30   3 years   2.46   113.34 
Private placement 3/1/2019  125,000  $0.52  $0.75  $0.33   3 years   2.54   113.42 
Private placement 3/8/2019  150,000  $0.59  $0.75  $0.38   3 years   2.43   113.53 
Private placement 3/11/2019  2,475,000  $0.61  $0.75  $0.40   3 years   2.45   113.62 
Private placement 3/26/2019  500,000  $0.51  $0.75  $0.32   3 years   2.18   113.12 
Private placement 3/28/2019  375,000  $0.51  $0.75  $0.31   3 years   2.18   112.79 
Private placement 3/29/2019  62,500  $0.51  $0.75  $0.31   3 years   2.21   112.79 
Private placement 4/4/2019  500,000  $0.48  $0.75  $0.29   3 years   2.29   112.77 
Private placement 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(2) 9/11/2020  363,146,765  $0.05  $0.014  $0.017   10 years   0.65   96.97 
Event Description Date  Number of Warrants  H-CYTE Stock Price  Exercise Price of Warrant  Grant Date Fair Value  Life of Warrant  Risk Free Rate of Return (%)  Annualized Volatility Rate (%) 
Short-term note, related party 1/13/2020   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   144.30 
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   100.64 
Granted for bridge financing 9/11/2020   364,439,176  $0.05  $0.014  $0.017   10 years   0.65   96.97 

(1) The Company had warrants that triggered the required issuance of an additional 2,023,438 warrants as a result of the Company’s capital raise that gave those new investors a $0.40 per share investment price which required the old warrant holders to receive additional warrants since their price was $0.75 per share.

(2) The Company had estimated on April 17, 2020 that the number of warrants to be granted for the bridge financing would be 354,836,286. The bridge financing closed on September 11, 2020 in which an additional 8,310,479 warrants were issued above the original estimate for a total of 363,146,765. The fair market value associated with the additional warrants issued was recorded to the change in fair value of derivative liability – warrants prior to being reclassed to equity.

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 12 - 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$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$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,Holdings, LLC (“FWHC”) an accredited investor for the purchase of 146,998 shares of Series D Convertible Preferred Stock, par value $0.001 $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; see note 14-“Mezzanine Equity and Series D Convertible Preferred Stock” onto the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K for the year-ended December 31, 2019.10-K).

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. On July 28, 2020, the Series D Shares were converted into shares of the Company’s common stock, at which time the redemption put liability was no longer applicable and its fair value was adjusted to zero.

The redemption put liability as of September 30, 2020 and December 31, 2019, was approximately $0 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.

Based upon the above accounting conclusions and the 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 Series 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 the 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 convertible 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.

For the ninesix months ended SeptemberJune 30, 2021 and 2020, the Company recorded $277,719 $0 and $278,476, respectively, in deemed dividends on the Series D Convertible Preferred Stock in accordance with the 8%8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,401,762.$6,281,433 at June 30, 2020. All outstanding shares of Series D Convertible Preferred Stock were converted into 15,773,363 shares of Common Stock on July 28, 2020. The conversion was pursuant to a mandatory conversion triggered by the majority holder of the Series D Convertible Preferred Stock as set forth in the Certificate of Designations.

As of December 31, 2020, the Company does not have any Series D CONVERTIBLEConvertible Preferred Stock Preferencesoutstanding (see Note 9-“Equity Transactions” to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K).

Voting RightsNote 13 – Income Taxes

HoldersThe Company utilizes the liability method of our Series D Preferred Stock (“Series D Holders”) haveaccounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”. Under the rightliability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to receive noticebe in effect during the years in which the difference turns around. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowance is recorded when it is more likely than not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of any meetingtax planning strategies.

From inception to June 30, 2021, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses is fully offset by a valuation allowance as of holders of common stock or Series D Preferred StockJune 30, 2021 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. As of September 30, 2020, there are no shares of Series D Preferred Stock outstanding.

Liquidation

Upon the liquidation, dissolution or winding upDecember 31, 2020. Management of the Company whether voluntary or involuntary, each Series D Holder shall be entitled to receive, for each share thereof, outevaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and determined that it is more likely than not that the Company will not recognize the full benefits of the deferred tax assets.

The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. There are 0 uncertain tax positions at June 30, 2021 and December 31, 2020. The Company legally available therefore, a preferential amount in cash equal tohas not undergone any tax examinations since inception.

Note 14 - Subsequent Events

Effective July 13, 2021, Tanya Rhodes, the 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 assetsCompany’s Chief Technology Officer, was designated as an Executive Officer of the Company’s to the holders of the Company’s Series B and common stock. The Company accrues these dividends as they are earned each period.Company.

Note 15 - Subsequent Events

As of the date of filing,August 11, 2021, an additional 3,633,900 Series A Preferred Stock shareholderswas converted 2,276,733into Common Stock at the request of certain Series A Preferred StockStockholders.

The Company has evaluated subsequent events through August 13, 2021 and has determined that there have been no events that would require adjustments to Common Stock.or disclosure in the June 30, 2021 interim Consolidated Financial Statements other than those disclosed in this Form 10-Q.

21

ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.

Overview

H-CYTE, Inc (“the Company”) is a hybrid-biopharmaceutical company dedicated to developing and delivering new treatments for patients with chronic respiratory and pulmonary disorders. During the last two years, the Company has evolved into two separate divisions with its entrance into the biologics development space (“Biologics Division”). This new division is complementary to the Company’s current Lung Health Institute (LHI) autologous infusion therapy business (“Infusion Division”) and is focused on underserved disease states.

 

OverviewThe consolidated results for H-CYTE include the following wholly owned subsidiaries: H-CYTE Management, LLC, Medovex Corp, Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC and the results include Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”). Additionally, H-CYTE Management, LLC is the operator and manager of the various Lung Health Institute (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary closure of all LI clinics due to COVID-19. These two clinics will remain permanently closed.

 

On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase AgreementSeptember 11, 2020, 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 treatedRights Offering, FWHC, LLC, FWHC Bridge, LLC, and FWHC Bridge Friends, LLC (collectively known as a reverse acquisition whereby“FWHC”) gained control of the Company is deemedby subsequently owning approximately 61% of the fully diluted shares of the Company (for further discussion, see Notes 8 and 9-“Equity Transactions” to have been acquired by RMS and the historicalconsolidated financial statements priorin the Company’s 2020 Annual Report on Form 10-K).

Autologous Infusion Therapy (“Infusion Division”)

The Infusion Division develops and implements innovative treatment options in autologous cellular therapy (PRP-PBMC) to treat chronic lung disorders. Committed to an individualized patient-centric approach, this division provides oversight and management of the highest quality to the acquisition date of January 8, 2019 now reflectLHI clinics, while producing positive medical outcomes following the historical financial statements of RMS.strictest Centers for Disease Control and Prevention (the “CDC”) guidelines.

 

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Biotech Development (“Biologics Division”)

On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute (post U.S. Food & Drug Administration, the “FDA”, approval) a FDA approved therapy (known as L-CYTE-01)biologic combining its PRP-PBMC technology with Rion’s exosomes (“EV”) technology for the treatment of chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel EV technology to harness the healing power of the body. Rion’s innovative 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-year10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop combined proprietary biologics. The Company is currently evaluating the potential of a combined biologic and the utilization of this agreement.

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01)biologic and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01.this biologic as necessary. Rion has also agreesagreed 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.its efforts.

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 facilitateAfter conducting the clinical trial investigation. After conducting joint research and developmentefficacy trials of these biologics, H-CYTEthis biologic, the Company intends to pursue submission of an investigational new drug (IND) applicationa Biologics License Application (“BLA”) for review by the FDA for treatment of COPD.COPD or similar lung disorders.

The corona virus outbreak (COVID-19) has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020,On April 2, 2021, the Company took stepsentered into a series of agreements with Medovex, LLC 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.pursue a joint venture regarding the continued development and commercialization of the DenerveX device for business outside of the U.S. The Company also madehas determined that the decision in late March, to layoff approximately 40%transactions resulting from the series of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics located in Tampa, Scottsdale, Pittsburgh, Nashville, and Dallas.agreements with Medovex, LLC are immaterial. The Company resumed operations in July atwill assess the Tampa and Nashville clinics, in August atprogress of the Scottsdale clinic, and in September at the Pittsburgh clinic. The Pittsburgh clinic re-opening was temporary in September as it ceased operations permanently at the end of October 2020. The Dallas clinic did not re-open and will be closed permanently.joint venture on a quarterly basis for materiality.

With the Company’s revenue-generating activities resuming during the third quarter at a significantly reduced volume, and the uncertainty around the COVID-19 outbreak, the Company will need to raise cash from debt and/or equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.

Critical Accounting Policies and Estimates

OurThe Company’s discussion and analysis of ourits financial condition and results of operations are based on ourits consolidated financial statements, which we have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On a continual basis, we evaluate ourthe Company evaluates its estimates and judgments, including those described in greater detail below.

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

23

 

Our significant accounting policies are described in more detail in the notes to our consolidated financial statements for the fiscal year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K.

Results of Operations - NineSix months Ended Septemberended June 30, 20202021 and 20192020

Revenue, Cost of Sales and Gross Profit

The Company recorded revenue of approximately $450,000 and $827,000 for the three and ninesix months ended SeptemberJune 30, 2020 of approximately $650,000 and $1,686,000,2021, respectively. The Company recorded revenue of approximately $20,000 and $1,036,000, for the three and ninesix months ended SeptemberJune 30, 2019 of approximately $2,742,000 and $6,498,000,2020, respectively. The decreaseincrease in revenue for the three and nine months ended SeptemberJune 30, 2020,2021, as compared to the prior year is attributable to suspendingthe economic impact that COVID-19 has had on the Company due to its vulnerable patient base being unable or unwilling to travel due to the virus. The Company suspended operations of the Biosciences divisionInfusion Vertical due to COVID-19 effective March 23, 2020 and did not reopeningreopen until August and September 2020.2020 with limited capacity.

The Company recorded cost of sales of approximately $216,000 and $415,000 for the three and ninesix months ended SeptemberJune 30, 2020 of approximately $161,000 and $608,000,2021, respectively. The Company recorded cost of sales of approximately $70,000 and $447,000 for the three and ninesix months ended SeptemberJune 30, 2019 of approximately $550,000 and $1,539,000,2020, respectively. The decreaseincrease in cost of sales for the three and nine months ended SeptemberJune 30, 2020,2021, as compared to the prior year, is attributable to suspending operations of the Biosciences division due toeconomic impact that COVID-19 effective March 23, 2020.has had on the Company. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the Biosciences division.Infusion Vertical. 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 provided, during normal operations, can be handled adequately with the Company’s current level of personnel. The Company possesses the opportunity to increase the number of treatments performed without increasing personnel costs as it can leverage the current personnel’s availability until the Company’s treatment volume reaches critical mass. However, upon an increase in treatment volume beyond that capacity, the Company will need to hire additional personnel.

ForThe Company generated gross profit of approximately $234,000 and $412,000 for the three and ninesix months ended SeptemberJune 30, 2021, respectively. The Company generated gross profit of approximately ($51,000) and $589,000 for the three and six months ended June 30, 2020, the Company generated a gross profit totaling approximately $489,000 and $1,078,000, respectively. For the three months and nine months ended September 30, 2019, the Company generated a gross profit totaling approximately $2,192,000 and $4,959,000, respectively. The decreaseincrease in gross profit, was dueas compared to suspending operations of the Biosciences division dueprior year, is attributable to the economic impact that COVID-19 effective March 23, 2020 and not reopening until August and September 2020.has had on the Company.

Operating Expenses

Salaries and Related Costs

For the three and nine months ended September 30, 2020 theThe Company incurred approximately $606,000 and $2,425,000 in salaries and related costs respectively. Forof approximately $586,000 and $1,248,000 for the three and ninesix months ended SeptemberJune 30, 2019 the2021, respectively. The Company incurred approximately $1,914,000 and $7,079,000 in salaries and related costs respectively. The decrease in salariesof approximately $594,000 and related costs$1,819,000 for the three and six months ended SeptemberJune 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.respectively.

Other General and Administrative

For the three and nine months ended September 30, 2020, theThe Company incurred approximately, $863,000, and $3,128,000 in other general and administrative costs respectively. Forof approximately $610,000 and $1,440,000 for the three and ninesix months ended SeptemberJune 30, 2019, the2021, respectively. The Company incurred approximately, $2,026,000, and $5,310,000 in other general and administrative costs of approximately $1,035,000 and $2,265,000 for the three and six months ended June 30, 2020, respectively. The decrease, as compared to the prior year, is primarily attributable to reduction in operating activities in the DenerveX division.economic impact that COVID-19 has had on the Company.

Of the total other general and administrative costs, approximately $161,000 and $481,000 were related to professional fees for the three and ninesix months ended SeptemberJune 30, 2020, professional2021. Professional fees were approximately $393,000$510,000 and $1,179,000, respectively. Total other general and administrative costs,$826,000 for the three and ninesix months ended SeptemberJune 30, 2019, professional fees were approximately $523,000 and $1,379,000, respectively.2020. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs. 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.

Research and Development

For the three and nine months ended September 30, 2020, theThe Company incurred approximately $200,000 and $1,150,000 in research and development expenses respectively. Forof $0 for the three and ninesix months ended SeptemberJune 30, 2019,2021. The Company incurred research in development expenses of approximately $200,000 and $950,000 for the Company did not incur researchthree and development expenses.six months ended June 30, 2020, respectively. The $1,150,000$950,000 expense in 2020 was in connection with the Rion services agreement. An additional $350,000 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.agreements.

24

 

Advertising

Advertising

For the three and nine months ended September 30, 2020, the Company had approximately $52,000 and $222,000 respectively, in advertising costs. For the three and nine months ended September 30, 2019, the Company had approximately $1,468,000 and $4,188,000 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 expectsincurred advertising costs to increase back to first quarter 2020 levels over the remainder of the year as the Company begins to advertise again now that the LHI clinics are back in operation.

Depreciationapproximately $88,000 and Amortization

For the three and nine months ended September 30, 2020 the Company recognized approximately $30,000 and $69,000 respectively, in depreciation and amortization expense. For the three and nine months ended September 30, 2019 the Company recognized approximately $212,000 and $632,000 respectively, in depreciation and amortization expense. The decrease is mainly attributable to amortization expense declining from $368,000 and $552,000 in the three and nine months ended September 30, 2019, respectively to $0 in$165,000 for the three months and ninesix months ended SeptemberJune 30, 2020 due to the complete write-off2021, respectively. The Company incurred advertising costs of intangibles at fiscal year-end 2019.

Other Income (Expense)

Interest expenseapproximately $26,000 and $171,000 for the three months and ninesix months ended SeptemberJune 30, 2020, was approximately $1,039,000 and $1,459,000, respectively. Interest expense for the three and nine months ended September 30, 2019 was approximately $80,000 and $259,000, respectively. The increase, as compared to the prior year, is attributable to the bridge loan financingeconomic impact that COVID-19 had on the Company received in April 2020 which converted to Series A Preferred Stock.

The change in fair value of redemption put liability foras the clinics were temporarily closed during the three and nine months ended SeptemberJune 30, 2020, was $98,000 and $273,000, respectively. There was no changeresulting in fair value of redemption put liability fora reduction in marketing spend during the three and nine months ended September 30, 2019. The change in fair value of the derivative liability - warrants for the three and nine months ended September 30, 2020 was approximately $5,869,000 and $2,986,000, respectively. The change in fair value of the derivative liability - warrants for the three and nine months ended September 30, 2019 was approximately $884,000 and $884,000, respectively. The redemption put liability is related to the Series D Convertible Preferred Stock financing in the fourth quarter 2019. The Series B Convertible Preferred Stock’s derivative liability-warrants was recorded as a measurement period adjustment to the purchase price allocation related to the Merger in the third quarter of 2019.temporary closure.

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

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

On May 7, 2020,January 12, 2021, Mr. William Horne the Company’s CEO and Chairman tendered his resignation as CEO effective when the Company finds a suitable replacement with more FDA experience. Until such successor is retained, Mr. Horne will remain as the CEO. Mr. Horne’s resignation does not pertain to his positionstepped down as Chairman of the Board or asof directors (the “Board”) of the Company. Mr. Horne will remain a Director. The resignationmember of the Board.

On January 12, 2021, Mr. Ray Monteleone was not asappointed the new Chairman of the Board. Mr. Monteleone is a resultcurrent member of any disagreement with the Company or its policies and practices.Board.

On September 28, 2020, the Company appointed Robert Greif as its Chief Executive officer and President. Mr. Greif is 55 years old. Prior to joining the Company, Mr. Greif was the Chief Commercial Officer and business development Leader at Atox Bio, Inc. from February 2019 to November 2019. At Atox, Mr. Greif built the North American commercial organization in preparation for the launch of a first-in-class immunomodulatory. Prior to joining Atox, Mr. Greif led the commercial operations of rEvo Biologics, Inc., an orphan disease biotechnology company from May 2011 to February 2019. He also held a variety of business unit and commercial leadership roles at United Health Group Incorporated, Boehringer Ingelheim Group and Sanofi SA. The Company believes that Mr. Greif’s strong track record leading high-growth pharmaceutical and biotech businesses makes him qualified to serve in his role with the Company.

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

On September 29, 2020, Mr. William Horne resigned as the Company’s Chief Executive Officer and President.

Funding Requirements

The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s generating activities are temporarily suspended and as the Company implements its business plan to focus on taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases.Biologics Division. The Company will need to raise cash from debt and equity offerings to continue its operations. There can be no assurance that the Company will be successful in doing so.

Going Concern

The Company reported a net income of approximately $3,950,000 and a net loss of approximately $4,899,000 for the three and nine months ended September 30, 2020, respectively. The Company incurred net losses of approximately $2,624,000$2,058,000 and $11,616,000$3,466,000 for the three months and ninesix months ended SeptemberJune 30, 2019,2021, respectively. The Company reported net losses of approximately $6,432,000 and $8,849,000 for the three months and six months ended June 30, 2020, respectively.

The Company’s independent registered public accounting firm 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, 2019.2020. The presence of the going concern explanatory paragraph suggests that the Company may not have sufficient liquidity or minimum cash levels to operate the business. Since its inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until its products can generate enough revenue to offset its operating expenses. The present level of cash is insufficient to satisfy our current operating requirements.requirements and Biologics Division business model.

There can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. If the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings, or raising equity capital, the Company may be forced to discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

In the event the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the Company may be forced to reduce our expenses, or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Liquidity and Sources of Liquidity

With the Company historically having experienced losses, the primary source of liquidity has been raising capital through debt and equity offerings, as described below.

25

 

Debt

Debt

On April 17, 2020, and in subsequent April closings, the Company entered into the April SPAa Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with the Purchasersthirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale to the Purchasers of the April Secured Convertible Promissory Notes (the “April Secured Notes”) and April Warrantswarrants (the “April Warrants”) to purchase shares of common stock of the 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 “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 $2,842,695. As part$3,842,695. This sum included the issuance by the Company to FWHC Bridge, LLC (the “Investor) of an April Secured Note in the April Offering,amount of $1,000,000 to amend and supersede the A&R Note (see below “Short-term Notes, Related Parties”) previously issued by the Company to the Investor on March 27, 2020 and April 9, 2020 were amended and superseded by2020. The Investor is an April Secured Noteaffiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the amount of $1,000,000 issued to the Investor.Company’s recent Series D Convertible Preferred Stock Offering. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Notes”Note”). The Hawes Notes had a principal balanceamount of $424,615 as of March 31, 2020 and December 31, 2019.2020. The amendment to the Hawes Notes among other things, eliminatesNote eliminated the requirement that the Company make monthly payments of accrued interest.

As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.

The short-term notes, related parties, as of March 31, 2020 totaling $2,135,000 is comprised of loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne aggregating $1,635,000 and a Note in the amount of $500,000 from the Investor. On April 17, 2020, Mr. Horne agreed to convert the notes plus accrued interest owed to Horne Management, LLC, at the time of the Qualified Offering, into 4,368,278 shares of common stock and a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock.

On September 11, 2020, the right to participate in the the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at athe Qualified Offering price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.$0.014.

In addition, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stock to the holders of outstanding promissory notes in the aggregate principal amount and accrued interest of $4,483,618. The notes were converted pursuant to a mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act.

Equity

On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.

In addition, on September 24, 2020, the Company issued an aggregate of 323,844,416 shares of its Series A preferred stock to the holders of outstanding promissory notes in the aggregate principal amount and accrued interest of $4,483,617. The notes were converted pursuant to a mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act.

On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase Agreement”) with five (5) investors (the “Holders”). Pursuant to the terms of the April 2021 Note Purchase Agreement, the Company sold promissory notes in the aggregate principal amount of $2,575,000 maturing on March 31, 2022 with an annual interest rate of 8%. The Notes are convertible into shares of Common Stock at a discount of 20% to the price paid for such New Securities in the next round of financing that meets the definition of Qualified Financing as defined in the April 2021 Note Purchase Agreement. The Notes are secured by the assets of the Company under a security agreement with the Holders. The lead investor of the April 2021 Note Purchase Agreement, FWHC Bridge, LLC, provided $1,500,000 of the total amount to the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a principal stockholder and related party of the Company. An additional affiliate of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note Purchase Agreement.

 

Interest expense is being amortized over the remaining term using the effective interest method.  For the three months ended June 30, 2021, the Company recorded interest expense of $29,220 and $20,118 for convertible notes payable, related parties and convertible notes payable, respectively.

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Equity

On September 11, 2020, the right to participate in the registered rights offering (Registration No. 333-239629) of the Company expired. Pursuant to the rights offering, on September 24, 2020, the Company issued (i) 15,235,381 shares of its Series A preferred stock at a price of $0.014 per share to holders of its common stock who validly exercised their subscription rights prior to the expiration time and (ii) 203,049,643 shares of its Series A preferred stock to the standby purchasers as part of the standby commitment. The rights offering, including the standby component, resulted in gross proceeds to the Company of $3,055,985. While the rights offering expired on September 11, 2020, it was not consummated until September 24, 2020 while logistical closing conditions including the calculation and clearance of funds were being processed.

On September 24, 2020, the Company issued an aggregate of 323,844,416 Preferred A shares to holders of outstanding promissory notes in the aggregate principal amount, accrued interest, and conversion of certain warrants totaling $5,487,869.$4,483,617. The notes were converted pursuant to mandatory conversion triggered by the completion of the rights offering. Such shares were issued under an exemption from registration in reliance on Section 3(a)(9) of the Securities Act. The original notes were issued in reliance on Section 4(a)(2) of the Securities Act. As a result of their participation in the backstop portion of the rights offering and the conversion of their promissory notes, FWHC Holdings, LLC became beneficial owners of approximately 65%61% of the Company’s outstanding common stock. This percentage includes that shares owned by FWHC Bridge, LLC and FWHC Bridge Friends, LLC who have indicated that they are part of a group with FWHC Holdings, LLC.

Working Capital Deficit

Cash activity for the nine months ended SeptemberWorking capital as of June 30, 20202021 and 2019December 31, 2020 is summarized as follows:

  

Working Capital Surplus/ (Deficit)

  As Of 
  June 30, 2021  December 31, 2020 
Current Assets $1,697,341  $1,757,202 
Current Liabilities  5,522,974   2,892,686 
Working Capital Deficit $(3,825,633) $(1,135,484)

  As Of 
  September 30, 2020  December 31, 2019 
Current Assets $3,556,000  $2,275,000 
Current Liabilities  3,025,000   5,774,000 
Working Capital Deficit $3,531,000  $(3,499,000)

Cash Flows

Cash activity for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized as follows:

  Six Months Ended June 30, 
  2021  2020 
Cash used in operating activities $(2,740,629) $(4,335,204)
Cash used in investing activities  (7,832)  — 
Cash provided by financing activities  2,624,338   4,740,840 
Net (decrease)/ increase in cash $(124,123) $405,816 

  Nine months Ended September 30, 
  2020  2019 
Cash used in operating activities $(5,461,140) $(7,906,764)
Cash used in investing activities  (2,285)  (389,577)
Cash provided by financing activities  7,476,576   8,594,590 
Net increase in cash $2,013,151  $298,249 

As of SeptemberJune 30, 2020,2021, the Company had approximately $3,437,000$1,517,000 of cash on hand.

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Off-Balance Sheet Arrangements

We doThe Company does not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

Contractual Obligations and Commercial Commitments

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 Company finalized an eighteen-month extension to March 1, 2021. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 at September 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding disclosure.

OurThe Company’s Chief Executive Officer (our “CEO”(“CEO”) and our Chief Financial Officer (our “CFO”(“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 SeptemberJune 30, 2020.2021. In designing and evaluating the Company’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and the Company necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Based on such evaluation, ourthe Chief Executive Officer and Chief Financial Officer have concluded that, as of SeptemberJune 30, 2020,2021, the Company’s disclosure controls and procedures were not as effective as desired because of the prior year material weakness in ourits internal control over financial reporting as discussed below, and as a result, the Company engaged consultants to help mitigate this material weakness.below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of ourthe Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In ourits assessment of the effectiveness of internal control over financial reporting as of SeptemberJune 30, 2020, we2021, the Company determined that internal control deficiencies relating to a lack of segregation of duties still exist that constituteexist. Management believes these deficiencies mainly relate to the Company employing a limited number of accounting and finance personnel. The aggregation of these deficiencies is considered to be a material weaknesses:weakness in internal control over financial reporting.

In light of the conclusion that ourthe Company’s internal disclosure controls were ineffective as of SeptemberJune 30, 2020, we have2021, it has applied additional procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this quarterly report. Accordingly, the Company believes, based on its knowledge, that: (i) this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this quarterly report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.

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Changes in Internal Control Over Financial Reporting

During the ninesix months ended SeptemberJune 30, 2020, there were no changes in2021, the Company’sCompany has adopted and began to implement a written remediation plan which includes continuing to use external consultants for technical accounting matters, incremental formal education for the accounting and finance group, implementing a number of new entity and process level controls and installing a new accounting software system. Management believes these actions will help remediate internal control overdeficiencies related to the Company’s 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..

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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 orlawsuit with Sinclair Broadcast Group, Inc. (Sinclair) which was filed on March 25, 2021 in the Circuit Court for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. Sinclair has a materialfiled suit alleging breach of contract for advertising services in the amount of approximately $75,000 plus interest adverse toand costs. The Company has retained legal counsel for its defense against the Company’s business.suit.

ITEM 1A. RISK FACTORS.

We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the nine months ended September 30, 2020, the Company received proceeds of $100,000 and issued 2,449 of preferred stock at a price of $40.617 per share, and a ten-year warrant to purchase 244,996 shares of common stock at an exercise price of $0.75 per share.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

Not applicable.

ITEM 6. EXHIBITS.

The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.

SIGNATURES

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: NovemberAugust 13, 20202021

H-CYTE, INC
By:/s/ Robert S. Greif
Robert S. Greif

Chief Executive Officer

(Principal Executive Officer)

By:/s/ Jeremy Daniel
Jeremy Daniel

Chief Financial Officer

(Principal Financial Officer and

Principal Accounting Officer)

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EXHIBIT INDEX

31.1Section 302 Certification of Principal Executive Officer*
31.2Section 302 Certification of Principal Financial Officer*
32.1Section 906 Certification of Principal Executive Officer and Principal Financial Officer***
101.INSXBRL Instance Document **– the instance document does not appear in the Interactive Data File because its XBRL tags are imbedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document **
101.CALXBRL Taxonomy Extension Calculation Linkbase Document **
101.LABXBRL Taxonomy Extension Labels Linkbase Document **
101.PREXBRL Taxonomy Extension Presentation Linkbase Document **
101.DEFXBRL Taxonomy Extension Definition Linkbase Document **

*Filed herewith.
**Pursuant to Rule 406T of Regulation S-T adopted by the SEC, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.
***This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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