As filed with the Securities and Exchange Commission on September 8, 2014
Registration No. 333- ___________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
(Amendment No. 1)
REGISTRATION STATEMENT
H-CYTE, INC.
(Exact name of registrant as specified in its charter)
Nevada | 3841 | 46-3312262 | ||
(State or other jurisdiction | (Primary Standard Industrial | (I.R.S. Employer | ||
of incorporation or organization) | Classification Code Number) | Identification |
201 E Kennedy Blvd., Suite 700
Tampa, FL 33602
(844) 633-6839
(Address, including zip code, and telephone number, including area code, of registrant'sregistrant’s principal executive offices)
William Horne
Chief FinancialExecutive Officer
201 E Kennedy Blvd., Ste 215-113
Tampa, FL 33602
(844) 633-6839
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With a copy to:
Arthur S. Marcus, Esq.
Sichenzia Ross Ference LLP
1185 Avenue of Americas, 37th Floor
New York, NY 10036
(212) 930-9700
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following boxbox: [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offeringoffering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offeringoffering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offeringoffering. [ ]
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“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. [ ]
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 7(a)(2)(B) of the Securities Act. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered(1) | Amount to Be Registered | Proposed Maximum Aggregate Offering Price per Share | Proposed Maximum Aggregate Offering Price(2) $ | Amount of Registration Fee(5) $ | ||||||||
Subscription Right to Purchase Series A Preferred Stock, par value $0.001 per share(3) | — | $ | — | $ | — | $ | — | |||||
Series A Preferred Stock issuable upon exercise of Subscription Rights, par value $0.001 per share (2) | 366,418,296 shares | $ | 0.014 | $ | 5,129,856 | $ | 665.86 | |||||
Common Stock issuable upon conversion of Series A Preferred Stock, par value $0.001 per share (4) | — | $ | — | $ | — | $ | — | |||||
Total | 366,418,296 shares | $ | 0.014 | $ | 5,129,856 | $ | 665.86 |
(1) This registration statement on Form S-1 relates to the offering described herein of: (a) subscription rights to purchase Series A Preferred Shares, par value $0.001 per share; (b) the Series A Preferred Shares deliverable upon exercise of the subscription rights; and (c) shares of common stock deliverable upon conversion of the Series A Preferred Shares.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”), based on the proposed maximum aggregate offering price.
(3) The subscription rights are being issued without consideration. Pursuant to Rule 457(g), no separate registration fee is payable with respect to the subscription rights being offered hereby.
(4) No additional consideration will be paid in connection with the issuance of the shares of common stock upon conversion of the Series A Preferred Shares. Accordingly, pursuant to Rule 457(i), no separate registration fee is payable with respect to the common stock shares being offered hereby. Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(5) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, based on an estimated proposed maximum aggregate offering of $5,129,856 . The registration fee has been paid.
Title of each class of securities to be registered | Amount to be registered | Proposed maximum offering price per Share (1) | Proposed maximum aggregate offering price (1) | Amount of registration fee (2) | ||||||||||
Units, Each Consisting of One Share of Common Stock, $0.001 Par Value Per Share and One Series A Warrant | 1,552,500 units | $ | 6.50 | $ | 10,091,250 | $ | 1,299.75 | |||||||
Shares of Common Stock Included as Part of the Units (3) | 1,350,000 shares | (4 | ) | (4 | ) | - | ||||||||
Series A Warrants Included as Part of the Units | 1,350,000 warrants | (4 | ) | (4 | ) | - | ||||||||
Shares of Common Stock Underlying the Series A Warrants Included in the Units (3)(5) | 1,350,000 shares | $ | 7.80 | $ | 10,530,000 | $ | 1,356.26 | |||||||
Series B Warrants | 1,350,000 warrants | (4 | ) | (4 | ) | - | ||||||||
Shares of Common Stock Underlying the Series B Warrants (3)(5) | 1,350,000 shares | $ | 7.80 | $ | 10,530,000 | $ | 1,356.26 | |||||||
Units underlying the Representative’s Unit Warrant (“Representative’s Units”) (6) | 205,500 units | (4 | ) | (4 | ) | - | ||||||||
Shares of Common Stock underlying the Representative’s Units (3) | 202,500 shares | $ | 6.50 | $ | 1,316,250 | $ | 169.53 | |||||||
Series A Warrants Included as Part of the Representative’s Units | 202,500 warrants | (4 | ) | (4 | ) | - | ||||||||
Shares of Common Stock Underlying the Series A Warrants included in the Representative’s Units (3)(5) | 202,500 shares | $ | 7.80 | $ | 1,579,500 | $ | 203.44 | |||||||
Series B Warrants Included as Part of the Representative’s Units | 202,500 warrants | (4 | ) | (4 | ) | - | ||||||||
Shares of Common Stock Underlying the Series B Warrants included in the Representative’s Units (3)(5) | 202,500 shares | $ | 7.80 | $ | 1,579,500 | $ | 203.44 | |||||||
Total | $ | 35,626,500 | $ | 4,588.68 |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. | ||
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED |
Non-transferable Rights Offering to Purchase
Convertible into Common Stock
H-CYTE Inc. (the “Company” or “we”) is distributing to Purchase Oneholders of our common stock, at no charge, non-transferable subscription rights to subscribe for three (3) shares of our Series A Preferred Stock for each share of common stock held at 5:00 p.m., New York City time, on July 28, 2020, the record date for the rights offering (the “Record Date”). Each whole subscription right entitles a holder to subscribe for three shares of Series A preferred stock (“Series A Preferred Shares”) at a subscription price (the “Subscription Price”) of $0.014 per Series A Preferred Share. Each Series A Preferred Share of Common Stock
As of the Record Date for the rights offering, 122,139,432 shares of our common stock and no shares of our Series A Warrant.preferred stock were outstanding. Holders of these shares on the Record Date are eligible to receive the subscription rights. We will not issue any fractional Series A Preferred Shares in this offering, and therefore you will need to hold at least one (1) subscription right in order to be eligible to subscribe for our new Series A Preferred Shares. We believe the rights offering will provide every stockholder on the Record Date the right to subscribe for and purchase Series A Preferred Shares on the same terms.
In connection with the rights offering, certain creditors (the “Standby Purchasers”) who purchased secured convertible notes and warrants in the aggregate principal amount of $3,842,695 pursuant to a note purchase agreement dated April 17, 2020 agreed (a) not to exercise any subscription rights they may receive as stockholders of the Company and (b) instead to purchase any Series A Preferred Shares corresponding to the unexercised rights in the rights offering up to an aggregate amount of $2,842,695 (the “Standby Commitment Amount”) at the same Subscription Price. We refer to such agreement as the “Standby Commitment.” However, if the aggregate gross proceeds from the exercise of subscription rights in this rights offering exceeds the Standby Commitment Amount, the Standby Commitment Amount that the Standby Purchasers will be required to invest in us will be reduced on a proportional basis by the number of Series A Preferred Shares purchased by subscription rights holders in this rights offering. See “Description of the Rights Offering— Standby Commitments.”
The aggregate dollar amount of Series A Preferred Shares purchased in this rights offering, when aggregated with the purchase of Series A Preferred Shares by the Standby Purchasers under the Standby Commitment, will be at least $2,842,695. If all of the rights offered hereby are exercised, the aggregate offering amount in the rights offering would be $5,129,856 . In addition, holders of promissory notes in the holderaggregate amount of each unit$4,829,856 (based on accrued interest through July 27, 2020) are expected to convert such debt into Series A Preferred Shares on terms substantially similar to the terms of this offering provided certain conditions are met.
The subscription rights will receive one Series B Warrantexpire if they are not exercised by 5:00 p.m., New York City time, on [_________], unless the time for exercise is extended. We refer to purchase one sharethis deadline, as extended (if applicable), as the “Expiration Time.” We reserve the right, in our sole discretion, to cancel, extend or otherwise amend the terms of this rights offering for any reason prior to the Expiration Time. Subscription rights that are not exercised by the Expiration Time of this rights offering will expire and will have no value. You should carefully consider whether or not to exercise your subscription rights before the Expiration Time for this rights offering, and in doing so you should consider all of the information about us and this rights offering contained or incorporated by reference in this prospectus, including the risk factors set forth herein.
The rights offering will dilute the ownership interest and voting power of the common stock per unit purchased, but such Series B Warrants willowned by stockholders who do not be transferable. No public market currently existsfully exercise their subscription rights. Stockholders who do not fully exercise their subscription rights should expect, upon completion of the rights offering, to own a smaller proportional interest of our common stock than before the rights offering.
Our common stock is quoted on the OTCQB under the symbol “HCYT.” On July 29, 2020, the last reported sale price for our common stock or warrants. We are offering all ofon the shares of common stock offered by this prospectus. We expectOTCQB was $0.069 per share.
There is no established trading market for the public offering price to be between $5.50 and $6.50 per unit, including the Series B Warrant. The units will not be certificated and the shares of common stocksubscription rights and Series A Warrants will trade initially as a unit,preferred stock and will trade separatelywe do not later than 90 days fromexpect an active trading market to develop. We do not intend to list or quote the date hereof,subscription rights or earlier with the underwriter’s consent.
Our business and an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Unit and Series B Warrant | Total | |||||||
Initial public offering price | $ | 6.00 | $ | 8,100,000 | ||||
Underwriting discounts and commissions (1) | $ | 0.54 | $ | 729,000 | ||||
Proceeds to us, before expenses | $ | 5.46 | $ | 7,371,000 | ||||
The date of compensation payable to the underwriters.
TABLE OF CONTENTS
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30 | |
31 | |
32 | |
Capitalization | |
33 | |
34 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
65 | |
70 | |
74 | |
Shares Eligible for Future Sale | 74 |
F-1 |
You should rely only on the underwritersinformation contained in this prospectus. We have not authorized anyone to provide you with any information that is different fromother than that contained in this prospectus. We take no responsibility for and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus or in any free writing prospectus we may authorizeonly be used where it is legal to be delivered or made available to you. When you make a decision about whether to invest inoffer and sell our common stock, you should not rely upon any information other than thesecurities. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date. We are not, and the placement agent is not, making an offer of these securities in any free writing prospectus that we may authorize to be delivered or made available to you. This prospectusjurisdiction where the offer is not an offer to sellpermitted.
For investors outside the United States: We have not done anything that would permit this offering or the solicitationpossession or distribution of an offer to buy the shares of common stockthis prospectus in any circumstances under whichjurisdiction where action for that purpose is required, other than in the offer or solicitation is unlawful.
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This summary highlights information contained elsewhere in this prospectus. This summaryprospectus and does not contain all of the information that you should consider beforein making your investment decision. Before investing in our common stock. Yousecurities, you should carefully read this entire prospectus, carefully, especially the "Risk Factors" section of this prospectus andincluding our financial statements and the related notes appearing atand the endinformation set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of this prospectus, before making an investment decision.
Unless the context otherwise requires, references to Medovex we, us, our, our company refer to MEDOVEX Corp. “we,” “our,” “us,” “H-CYTE” or the “Company” in this prospectus mean collectively, H-CYTE, Inc. and its wholly-owned subsidiary, Debride,subsidiaries.
H-CYTE, INC.
Overview
On July 11, 2019, MedoveX Corp. (“MedoveX”) changed its named to H-CYTE, Inc. All share numbers give effect to(“H-CYTE,” the “Company,” or “we”) by filing a 2:1 reverse stock split effected in March, 2014.
On October 18, 2018, H-CYTE entered into an Asset Purchase Agreement, as amended by the amendment to Asset Purchase Agreement dated January 8, 2019 (as amended, the “APA”) with Regenerative Medicine Solutions, LLC (“RMS”), RMS Shareholder, LLC (“RMS Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and changed its nameCognitive Health Institute Tampa, LLC (“CHIT,” and collectively with RMS, RMS Shareholder, LI, RMS LI Management, “RMS Group”), pursuant to MEDOVEX Corp.which it acquired certain assets and assumed certain liabilities of RMS Group, as reported in the 8-K/A filed in March of 2019 (the “RMS Transaction”). Based on March 20, 2014. MEDOVEX is the parent company of Debride, which was incorporated under the laws of Florida on October 1, 2012. MEDOVEX acquired allterms of the issued and outstanding capital stock of Debride pursuant to an agreement and plan of merger, dated September 13, 2013.
Prior to the completion of the RMS Transaction, the consolidated results for H-CYTE included the financial activities of RMS, LI, RMS Nashville, LLC (“RMS Nashville”), RMS Pittsburgh, LLC (“RMS Pittsburgh”), RMS Scottsdale, LLC (“RMS Scottsdale”), RMS Dallas, LLC (“RMS Dallas”), State, LLC (“RMS State”), CHIT, RMS LI Management, and RMS Shareholder. H-CYTE included Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”).
Beginning with the completion of the RMS Transaction, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), MedoveX Corp. (not to be an emerging growth companyconfused with the Company under its prior toname), CHIT, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the end of such five-year period.
The Company has two divisions: the extended transition period provided in Section 7(a)(2)(B) ofmedical biosciences division (“Biosciences division”) and the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise applyDenerveX medical device division (“DenerveX division”). The Company has decided to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standardsfocus its available resources on the relevant dates on which adoption ofBiosciences division as it believes that it represents a significantly greater opportunity than the DenerveX division as explained below in the section titled “Business.” The Company is no longer manufacturing or selling the DenerveX device and continues to explore possible opportunities to monetize such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies is irrevocable.
Biosciences Division
The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicine to treat chronic lung disease. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality care to the LHI clinics located in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas, while producing positive medical outcomes.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a therapy approved by the U.S. Food and Drug Administration (“FDA”) (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. While the current LHI cellular therapy for chronic lung disease does not require FDA approval due to its biologic nature, the L-CYTE-01 therapy will need to be approved or cleared by the FDA before it is marketed in the U.S. Rion also agreed to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
With these agreements, Rion serves as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE controls the commercial development and facilitates the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug application for review by the FDA for treatment of COPD.
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Summary of the Offering
The rights offering: | We are distributing to you, at no charge, one or more non-transferable subscription rights (as described below) with respect to shares of our common stock that you owned on the Record Date, either as a holder of record or, in the case of shares held of record by brokers, banks or other nominees on your behalf, as a beneficial owner of these shares, subject to adjustments to eliminate fractional rights. |
Subscription rights: | Each whole right entitles each holder as of the Record Date to purchase three shares of Series A preferred stock, par value $0.001 per share; provided that in no event will fractional shares be issued. Each share of Series A preferred stock (a “Series A Preferred Share”) will initially be convertible into shares of our common stock at a conversion rate of one share of common stock |
Record date: | 5:00 p.m., New York City time, on July 28, 2020. |
Expiration Time: | 5:00 p.m., New York City time, on [________], 2020, unless extended by us, in our sole discretion. Any rights not exercised at or before that time will expire without any payment to |
Subscription Price: | The Subscription Price is $0.014 per share of |
Use of proceeds: | The cash proceeds from the rights offering are expected to be up to $5,129,856 if all of the subscription rights are exercised, and $2,842,695 if none of the subscription rights are exercised and, as a result, the Standby Commitment is exercised in full, in each case before deducting estimated expenses of approximately $300,000 relating to the rights offering. The proceeds from the rights offering will be used for working capital purposes and general corporate purposes, including development and enhancement of our products, capital expenditures and expansion of our operations, and new product development. The precise amount and timing of the application of such proceeds will depend upon our funding requirements and the availability and cost of other funds. In addition, |
Non-transferability of rights: | The subscription rights may not be |
No right of oversubscription: | Although we do not expect all of our stockholders to exercise all of their subscription rights, there will be no automatic right of oversubscription for |
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No board recommendation: | Our board of directors makes no recommendation to you about whether you should exercise any subscription rights. You are urged to make an independent investment decision about whether to exercise your rights based on your own assessment of our business and the rights offering. Please see the section of this prospectus entitled “Risk Factors” for a discussion of some of the risks involved in investing in our preferred stock and common stock. |
No revocation: | All exercises of subscription rights are |
U.S. federal income tax considerations: | A holder should not recognize income or loss for United States federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering. You should consult your tax advisor as to the particular consequences to you of the |
Extension, cancellation, and amendment: | Our board of directors may extend the period for exercising your subscription rights, although it does not presently intend to do so. Our board of directors may cancel or terminate the rights offering in its sole discretion at any time on or before the expiration of the rights offering for any reason (including, without limitation, a change in the market price of |
Procedure for exercising rights: | If you are the record holder of |
Minimum Subscription Requirement: | There is no minimum subscription requirement. We may consummate the rights offering regardless of the amount raised from the exercise of subscription rights by the expiration date. |
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Shares outstanding before the rights offering: | 122,139,432 shares of common stock |
● | warrants to purchase 49,984,796 shares of common stock at a weighted average exercise price of $0.78 per share (such price is subject to adjustment based on various adjustment features in such warrants that will be triggered by the rights offering), and | ||
● | options to purchase 425,000 shares of common stock at a weighted average exercise price of $1.39 per share. |
Shares outstanding after completion of the rights offering: | Assuming that the rights offering is fully subscribed, immediately after completion of the rights offering, based on security ownership as of the Record Date: |
● | |||
● | 680,625,010 shares of Series A Preferred Stock, convertible into 680,625,010 shares of common stock at the initial conversion price, representing: | ||
- | 366,418,296 shares of Series A Preferred Stock issued in the rights offering and | |
- | 314,206,714 shares of Series A Preferred Stock issued upon conversion of promissory notes expected to be converted on terms substantially similar to the terms of this rights offering (using July 27, 2020 for the calculation of accrued interest). | |
will be outstanding, which excludes | |||||
● | warrants to purchase 49,984,796 shares of |
● |
Issuance of Series A Preferred Stock: | If you purchase shares of Series A Preferred Stock through the rights offering, we will issue a Direct Registration System book-entry statement representing the shares of Series A Preferred Stock to you or DTC on your behalf, as the case may be, promptly after the completion of the rights offering and after all pro rata allocations and adjustments have been |
Fees and Expenses: | We are not charging any fee or sales commission to issue subscription rights to you or to issue shares to you if you exercise your subscription rights (other than the Subscription Price). If you exercise your subscription rights through a custodian bank, broker, dealer or other nominee, you are responsible for paying any fees your nominee may charge you. |
Market for Series A Preferred Stock: | We will not list the subscription rights or any Series A Preferred Shares issued pursuant to the rights offering on any stock exchange, nor do we expect that they be trading in any over-the-counter market. |
Risk Factors: | Exercising the subscription rights and investing in our securities involve a high degree of risk. We urge you to carefully read the section entitled “Risk Factors” beginning on page 9 of this prospectus. You should carefully read and consider these risk factors together with all of the other information included in or incorporated by reference into this prospectus before you decide to exercise your subscription rights. |
Questions: | Questions regarding the rights offering should be directed to Jeremy Daniel, the Chief Financial Officer of H-Cyte by email at |
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Period from Inception at February 1, 2013 to December 31, 2013 | Six Months Ended June 30, 2014 (unaudited) | ||||||
(in thousands, except per share data) | (in thousands, except per share data) | ||||||
Consolidated Statement of Operations Data: | |||||||
Operating expenses: | |||||||
General and administrative | $ | 583 | $ | 910 | |||
Research and development | 90 | 347 | |||||
Total operating expenses | 673 | 1,257 | |||||
Loss from operations | (673 | ) | (1,257 | ) | |||
Net loss attributable to common stockholders | $ | (673 | ) | $ | (1,257 | ) | |
Net loss per share- basic and diluted (1) | $ | (0.15 | ) | $ | (0.16 | ) | |
Weighted average shares- basic and diluted | 4,469 | 7,781 |
As of June 30, 2014 | (As Adjusted(2)) | ||||||
(in thousands) | (unaudited) | ||||||
Consolidated Balance Sheet Data: | (Actual) | ||||||
Cash | $ | 1,451 | 8,451 | ||||
Working capital | 1,277 | 8,277 | |||||
Total assets | 1,612 | 8,612 | |||||
Total stockholders’ equity | 1,437 | 8,437 |
Any investment in our common stocksecurities involves a high degree of risk. YouInvestors should carefully consider the risks and uncertainties described below together withand all of the other information contained in this prospectus including our financial statements and the related notes appearing at the end of this prospectus, before deciding whether to invest inpurchase our securities. If any of the following risks actually occur, ourOur business, prospects, operating results and financial condition and results of operations could sufferbe materially adversely affected by these risks. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the trading price of our securities could declinerisks we face as described below and you could lose all or part of your investment.
Risks Related to Our Financial PositionCondition
We will be required to raise additional funds to finance our operations and Capital Requirements
Our operations to date have consumed substantial amounts of cash and we have sustained negative cash flows from our operations for the last several years. We will require future additional capital infusions including public or private financing, strategic partnerships or other arrangements with organizations that have capabilities and/or products that are acomplementary to our own capabilities and/or products, in order to continue the development stage company and face uncertainties associated with being an early stage venture.
We have a history of losses, will incur additional losses, and may never achieve profitability.
Historically, we have been a clinical development company with a limited line of medical services and products in the markets. We offer two types of cellular therapy treatments to our patients and collect payments for commercialization.
To date, we have not been profitable and our accumulated deficit was approximately $39.8 million and $37.4 million at March 31, 2020 and December 31, 2019, respectively. Our losses have resulted principally from costs incurred in research and testing in the fields of usedevelopment, including clinical trials, and from general and administrative costs associated with our operations and being a public company. In order to commercialize our assets, we are presently intendingwill need to exploreconduct substantial additional research, development and to commercialize.clinical trials. We will have to continue to go through extensive research and testing to develop the initial product and any additional products and to determine or demonstrate the safety and effectiveness of their proposed use. Our products and our proposed testing of those products will require various regulatory approvals and clearances. Accordingly, the products we intend to pursue are not presently marketable in the fields of use for which we hope to develop them, and it is possible that some or all of them may never become legally and commercially marketable. The development and testing of medical devices and related treatments and therapies is difficult, time-consuming and expensive, and the successful development of any products based on innovative technologies is subject to inherent uncertainties and risks of failure. These risks include the possibilities that any or all of the proposed products or procedures may be found to be ineffective, or may otherwise failalso need to receive necessary regulatory clearances; thatclearances in the proposed productsUnited States and obtain meaningful patent protection for and establish freedom to commercialize each of our product candidates. We must also complete further clinical trials and seek regulatory approvals for any new product candidates we discover, in-license, or procedures mayacquire. We cannot be uneconomical to producesure whether and when we will obtain required regulatory approvals, or successfully research, develop, commercialize, manufacture and market or may never achieve broad market acceptance;any other product candidates. We expect that third parties may hold proprietary rights that preclude the Company from marketing its intended products or procedures; or that third parties may developthese activities, together with future general and market superior or equivalent products and procedures. We are unable to predict whether our research and development or acquisitionadministrative activities, will result in any commercially viable products or procedures. Furthermore, due to the extended testing and regulatory review process required before marketing clearances can be obtained, the time frames for commercialization of any products or procedures are long and uncertain.
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Our research and development and commercialization efforts may depend on entering into agreements with corporate collaborators.
Because we have limited resources, we have sought to enter into collaboration agreements with other companies that will assist us in developing, testing, obtaining governmental approval for and commercializing products. We may be unable to achieve commercialization of Contentsany of our product candidates until we obtain a large partner to assist us in such commercialization efforts. In November 2019, we entered into a long-term service agreement with Rion, pursuant to which Rion conducts process development research and development for L-CYTE-01 to further our treatment of chronic obstructive pulmonary disease (“COPD”). Because of our reliance on Rion as the sole research contractor for L-CYTE-01 at this stage, any delay in or failure of Rion’s research services will substantially and adversely affect our development of L-CYTE-01.
Moving forward, we intend to seek out additional collaborations in order to commercialize our products. We will continue to seek research collaborations, co-development and marketing agreements, and licensing deals for our products in development, however, there is no guarantee that we will be successful in our efforts.
Any collaborator with whom we may enter into such collaboration agreements may not support fully our research and commercial interests since our program may compete for time, attention and resources with such collaborator’s internal programs. Therefore, these future collaborators may not commit sufficient resources to our program to move it forward effectively, or that the program will advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions.
Effective internal controls are necessary for us to provide reasonable assurance with respect to our abilityfinancial reports and to continue as a going concern in its report on our consolidated financial statements for the period ended December 31, 2013.
At March 31, 2020, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of a variety of factors, many of which are outsidethe design and operation of our control, which could cause fluctuationsdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the priceSecurities Exchange Act of our securities.
We believe we have taken appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, however we cannot be certain that our remediation efforts will ensure that our management designs, implements and maintains adequate controls over our financial processes and reporting in the future or that the changes made will be sufficient to address and eliminate the material weaknesses previously identified. The audit committee has requested a plan be prepared with the steps necessary to remedy such deficiencies and is waiting the preparation of such plan. Our inability to remedy any additional deficiencies or material weaknesses that may negatively affect our operating results:
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Risks Related to Our Business
We have reorganized our business model to transform us from a medical device manufacturer to an investigational drug research and development biotechnology company. There is no guarantee that this business transformation will be successful.
Our management switched the primary business focus from a medical device manufacturing company to a cellular therapy provider for the treatment of COPD in January 2019. We ceased carrying our medical device DenerveX at the end of 2019, which was the primary source of revenue prior to the foregoing factors,change of business. In the fiscal year ended December 31, 2019 and the first quarter ended March 31, 2020, we generated revenue primarily from providing cellular therapy to COPD patients. During 2019, the Company partnered with Rion to begin the research and development of an investigational new drug for COPD, known as L-CYTE-01. This lack of historical revenue may make it more difficult for you to evaluate our quarterlybusiness, financial condition and prospects. As of the date of this prospectus, we were still in the process of switching to the new business model in various aspects, such as information infrastructure, pharmacies and laboratories, qualified personnel and physicians, collaborative contractors and other ancillary health service providers. There are a number of risks associated with an investigational drug development business model, and there is no guarantee that the new model will deliver the expected revenues and operating results are difficult to forecast.
As we seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities, orand may need to further contract with third parties to provide these capabilitiescapabilities. As our operations expand, we likely will need to manage additional relationships with such third parties, as well as additional collaborators, distributors, marketers, and suppliers.
Maintaining third party relationships for us.these purposes will impose significant added responsibilities on members of our management and other personnel. We anticipate thatmust be able to: manage our development efforts effectively; recruit and train sales and marketing personnel; manage our participation in the clinical trials in which our product candidates are involved effectively; and improve our managerial, development, operational and finance systems, all of which may impose a period of significant expansion will be required to address potential growth and to handle licensing and research activities. This expansion will place a significant strain on our management, operational and financial resources. To manage the expected growth of our operations and personnel, we must establish appropriate and scalable operational and financial systems, procedures and controls and must establish a qualified finance, administrative and operations staff. As a public company, we will have to implement internal controls to comply with government mandated regulations. Our management may be unable to hire, train, retain, motivate and manage the necessary personnel or to identify, manage and exploit potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition.
If we enter into arrangements with third parties to perform sales, marketing, andor distribution services, for our products, the resultingany product revenues that we receive, or the profitability fromof these product revenues to us, are likely to be lower than if we had sold, marketedwere to market and distributed oursell any products ourselves.that we develop without the involvement of these third parties. In addition, we may not be successful in entering into arrangements with third parties to sell market and distributemarket our products or may be unable to doin doing so on terms that are favorable to us. We likely will have limitedlittle control over such third parties, and any of these third partiesthem may fail to devote the necessary resources and attention to sell market and distributemarket our products effectively.
Regulatory actions may affect our ability to operate.
Our Dependence on Third Parties
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We have no history in obtaining regulatory approval for, or commercializing, any new therapy candidate.
With limited operating history, we have never obtained regulatory approval for, or commercialized, any new therapy candidate. It is possible that the FDA may refuse to accept our investigational new drug (“IND”) application for substantive review, or may conclude after review of our data that our application is insufficient to obtain regulatory approval of the new therapy candidate. If the FDA does not accept or approve our IND for phase I clinical trials and such research activities are, to a certain extent, beyond our control.
If the statutes and regulations in our industry change, our business could be adversely affected.
The U.S. healthcare industry has undergone significant changes designed to improve patient safety, improve clinical outcomes, and increase access to medical care. These changes include enactments and repeals of various healthcare related laws and regulation. Our operations and economic viability may be adversely affected by the changes in such regulations, including: (i) federal and state fraud and abuse laws; (ii) federal and state anti-kickback statutes; (iii) federal and state false claims laws; (iv) federal and state self-referral laws; (v) state restrictions on fee splitting; (vi) laws regarding the privacy and confidentiality of patient information; and (vii) other laws and government regulations.
If there are changes in laws, regulations, or administrative or judicial interpretations, we may have to change our business practices, or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition, and results of operations.
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We may encounter difficulties in managing our growth, and the nature of our business and rapid changes in the healthcare industry makes it difficult to reliably predict future growth and operating results.
We may not be able to successfully grow and expand. Successful implementation of our business plan will require management of growth, including potentially rapid and substantial growth, which could result in an increase in the level of responsibility for management personnel and strain on our human and capital resources. To manage growth effectively, we will be required, among other things, to continue to implement and improve our operating and financial systems, procedures and controls and to expand, train and manage our employee base. If we are unable to implement and scale improvements to our existing systems and controls in an efficient and timely manner or if we encounter deficiencies, we will not be able to successfully execute our business plans.
Failure to attract and retain sufficient numbers of qualified personnel could also impede our growth.
If we are unable to manage our growth effectively, it will have a material adverse effect on our business, results of operations and financial condition. The evolving nature of our business and rapid changes in the healthcare industry make it difficult to anticipate the nature and amount of medical reimbursements, third-party private payments, and participation in certain government programs and thus to reliably predict our future growth and operating results. Our growth strategy may incur significant costs, which could adversely affect our financial condition. Our growth by strategic transactions strategy involves significant costs, including financial advisory, legal and accounting fees, and may include additional costs for items such as fairness opinions and severance payments. These costs could put a strain on our cash flows, which in turn could adversely affect our overall financial condition.
Our majority stockholders may take actions that conflict with our public stockholders’ best interests.
As of the date of this prospectus, RMS Shareholder and FWHC Holdings, LLC (“FWHC”) collectively owned approximately 56% of the outstanding voting power of the Company. The ownership interest and voting power in the Company held by FWHC, its affiliates, and its Section 13(d) group members (collectively, the “FWHC Group”) will increase substantially as a result of this offering and the Standby Commitment, as convertible notes held by the Standby Purchasers, some of whom are members of the FWHC Group, will be converted into Series A Preferred Shares and the Standby Purchasers may acquire additional Series A Preferred Shares as part of the Standby Commitment. Based on security ownership as of the Record Date and assuming the Standby Commitment is utilized in full, the FWHC Group will have beneficial ownership (as calculated under Rule 13d-3 under the Exchange Act) of approximately 70% of the voting power of the Company immediately after the completion of the rights offering which also assumes the conversion of all outstanding promissory notes, including the ones held by the FWHC Group, into Series A Preferred Shares and the exercise of all FWHC’s warrants. The members of the FWHC Group may own or operate companies that may conflict with those of the Company. We cannot assure you that our large stockholders will not take any actions that impair our ability to conduct our business competitively or conflict with the best interests of our other stockholders.
We are regulated by federal Anti-Kickback Statutes.
The federal Anti-Kickback Statute is a provision of the Social Security Act of 1972 that prohibits as a felony offense the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (1) the referral of a patient for items or services for which payment may be made in whole or part under Medicare, Medicaid, or other federal healthcare programs, (2) the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid, or other federal healthcare programs or (3) the purchase, lease, or order or arranging or recommending the purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The Patient Protection and Affordable Care Act (“ACA”) amended section 1128B of the Social Security Act to make it clear that a person need not have actual knowledge of the statute, or specific intent to violate the statute, as a predicate for a violation. The OIG, which has the authority to impose administrative sanctions for violation of the statute, has adopted as its standard for review a judicial interpretation which concludes that the statute prohibits any arrangement where even one purpose of the remuneration is to induce or reward referrals. A violation of the Anti-Kickback Statute is a felony punishable by imprisonment, criminal fines of up to $25,000, civil fines of up to $50,000 per violation, and three times the amount of the unlawful remuneration. A violation also can result in exclusion from Medicare, Medicaid or other federal healthcare programs. In addition, pursuant to the changes of the ACA, a claim that includes items or services resulting from a violation of the Anti-Kickback Statute is a false claim for purposes of the False Claims Act.
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We cannot assure that the applicable regulatory authorities will not determine that some of our arrangements with physicians violate the federal Anti-Kickback Statute or other applicable laws. An adverse determination could subject us to different liabilities, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other health care programs, any of which could have a material adverse effect on our business, financial condition or results of operations.
We are regulated by the federal Stark Law.
The federal Stark Law, 42 U.S.C. 1395nn, also known as the physician self-referral law, generally prohibits a physician from referring Medicare and Medicaid patients to an entity (including hospitals) providing ‘‘designated health services,’’ if the physician or a member of the physician’s immediate family has a ‘‘financial relationship’’ with the entity, unless a specific exception applies. Designated health services include, among other services, inpatient hospital services, outpatient prescription drug services, clinical laboratory services, certain imaging services (e.g., MRI, CT, ultrasound), and other services that our affiliated physicians may order for their patients. The prohibition applies regardless of the reasons for the financial relationship and the referral; and therefore, unlike the federal Anti-Kickback Statute, intent to violate the law is not required. Like the Anti-Kickback Statute, the Stark Law contains statutory and regulatory exceptions intended to protect certain types of transactions and arrangements. Unlike safe harbors under the Anti-Kickback Statute with which compliance is voluntary, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.
Because the Stark Law and implementing regulations continue to evolve and are detailed and complex, while we attempt to structure its relationships to meet an exception to the Stark Law, there can be no assurance that the arrangements entered into by us with affiliated physicians and facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted. The penalties for violating the Stark Law can include the denial of payment for services ordered in violation of the statute, mandatory refunds of any sums paid for such services, and civil penalties of up to $15,000 for each violation, double damages, and possible exclusion from future participation in the governmental healthcare programs. A person who engages in a scheme to circumvent the Stark Law’s prohibitions may be fined up to $100,000 for each applicable arrangement or scheme.
Some states have enacted statutes and regulations against self-referral arrangements similar to the federal Stark Law, but which may be applicable to the referral of patients regardless of their payor source and which may apply to different types of services. These state laws may contain statutory and regulatory exceptions that are different from those of the federal law and that may vary from state to state. An adverse determination under these state laws and/or the federal Stark Law could subject us to different liabilities, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other health care programs, any of which could have a material adverse effect on our business, financial condition or results of operations.
We must comply with Health Information Privacy and Security Standards
The privacy regulations Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended, contain detailed requirements concerning the use and disclosure of individually identifiable patient health information (“PHI”) by various healthcare providers, such as medical groups. HIPAA covered entities must implement certain administrative, physical, and technical security standards to protect the integrity, confidentiality and availability of certain electronic health information received, maintained, or transmitted. HIPAA also implemented standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including billing and claim collection activities. Violations of the HIPAA privacy and security rules may result in civil and criminal penalties, including a tiered system of civil money penalties that range from $100 to $50,000 per violation, with a cap of $1.5 million per year for identical violations. A HIPAA covered entity must also promptly notify affected individuals where a breach affects more than 500 individuals and report breaches affecting fewer than 500 individuals annually. State attorneys general may bring civil actions on behalf of state residents for violations of the HIPAA privacy and security rules, obtain damages on behalf of state residents, and enjoin further violations.
Many states also have laws that protect the privacy and security of confidential, personal information, which may be similar to or even more stringent than HIPAA. Some of these state laws may impose fines and penalties on violators and may afford private rights of action to individuals who believe their personal information has been misused. We expect increased federal and state privacy and security enforcement efforts.
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A cyber security incident could cause a violation of HIPAA, breach of customer and patient privacy, or other negative impacts.
We rely extensively on contract research organizations, independent clinical investigatorsour information technology (or IT) systems to manage scheduling and financial data, communicate with customers and their patients, vendors, and other third party service providersparties, and summarize and analyze operating results. In addition, we have made significant investments in technology, including the engagement of a third-party IT provider. A cyber-attack that bypasses our IT security systems could cause an IT security breach, a loss of protected health information, or other data subject to assist us with clinical testingprivacy laws, a loss of proprietary business information, or a material disruption of our IT business systems. This in turn could have a material adverse impact on our business and certainresult of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of public health information, other confidential data, or proprietary business information.
Computer malware, viruses, and hacking and phishing attacks by third parties have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As cyber-security threats develop and grow, it may be necessary to make significant further investments to protect data and infrastructure. If an actual or perceived breach of our security occurs, (i) we could suffer severe reputational damage adversely affecting customer or investor confidence, (ii) the market perception of the effectiveness of our security measures could be harmed, (iii) we could lose potential sales and existing customers, our ability to deliver our services or operate our business may be impaired, (iv) we may be subject to litigation or regulatory investigations or orders, and (v) we may incur significant liabilities. Our insurance coverage may not be adequate to cover the potentially significant losses that may result from security breaches. We are currently reviewing our needs for cybersecurity policy as we continue our research and development activities. Our success is dependent uponon L-CYTE-01 and medical services for COPD patients.
We must comply with Environmental and Occupational Safety and Health Administration Regulations
We are subject to federal, state and local regulations governing the successstorage, use and disposal of these outside parties in performing their responsibilities.waste materials and products. Although we believe that our contractors are economically motivated to perform on their contractual obligations,safety procedures for storing, handling and disposing of these materials and products comply with the standards prescribed by law and regulation, we cannot directly controleliminate the adequacyrisk of accidental contamination or injury from those hazardous materials. In the event of an accident, we could be held liable for any damages that result and timeliness ofany liability could exceed the resources and expertise applied to these activities by our contractors. If our contractors do not perform their activities in an adequatelimits or timely manner,fall outside the development and commercializationcoverage of our products could be delayed.
Risks associated with the variable interest entity (the “VIE”) structure.
Upon consummation of the RMS Transaction, the consolidated results for H-CYTE included the financial activities of LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, all of which maintain a group of variable interest entity agreements with H-CYTE and/or its wholly-owned subsidiaries. LI Dallas, LI Nashville, LI Pittsburgh and LI Scottsdale are collectively referred to as variable interest entities or VIEs.
We believe that the VIE contractual arrangements with VIEs and their respective shareholders are in compliance with the U.S. federal and state laws and regulations and are legally enforceable. However, uncertainties in the legal system could limit our ability to enforce the VIE contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of the federal or state laws and regulations, the related regulatory agencies could:
● revoke the business and operating licenses of any or all of the VIEs;
● discontinue or restrict the operations of any related-party transactions between any of the VIEs and H-CYTE or its affiliates;
● impose fines or other requirements which may adversely affect the operations of the VIEs; or
● require the Company and any or all of its VIEs to restructure the relevant ownership structure or operations.
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Our ability to conduct our business through the VIE structure may be negatively affected if the federal or state government were to carry out of any of the aforementioned actions. In such event, H-CYTE may not be able to consolidate any or all of the VIEs in its consolidated financial statements as it may lose the ability to exert effective control over any or all of the VIEs and their respective shareholders and it may lose the ability to receive economic benefits from its VIE structure.
We must comply with a range of other Federal and State Healthcare Laws.
We are also subject to other federal and state healthcare laws that could have a material adverse effect on our business, financial condition or results of operations. The Health Care Fraud Statute prohibits any person from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, which can be either a government or private payor plan. Violation of this statute, even in the absence of actual knowledge of or specific intent to violate the statute, may be charged as a felony offense and may result in fines, imprisonment, or both. The Health Care False Statement Statute prohibits, in any matter involving a federal health care program, anyone from knowingly and willfully falsifying, concealing or covering up, by any trick, scheme or device, a material fact, or making any materially false, fictitious or fraudulent statement or representation, or making or using any materially false writing or document knowing that it contains a materially false or fraudulent statement. A violation of this statute may be charged as a felony offense and may result in fines, imprisonment or both. Under the Civil Monetary Penalties Law of the Social Security Act, a person (including an organization) is prohibited from knowingly presenting or causing to be presented to any United States officer, employee, agent, or department, or any state agency, a claim for payment for medical or other items or services where the person knows or should know (a) the items or services were not provided as described in the coding of the claim, (b) the claim is a false or fraudulent claim, (c) the claim is for a service furnished by an unlicensed physician, (d) the claim is for medical or other items or service furnished by a person or an entity that is in a period of exclusion from the program, or (e) the items or services are medically unnecessary items or services. Violations of the law may result in penalties of up to $10,000 per claim, treble damages, and exclusion from federal healthcare programs.
In addition, the office of inspector general (“OIG”) may impose civil monetary penalties against any physician who knowingly accepts payment from a hospital (as well as against the hospital making the payment) as an inducement to reduce or limit medically necessary services provided to Medicare or Medicaid program beneficiaries. Further, except as permitted under the Civil Monetary Penalties Law, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider of Medicare or Medicaid payable items or services may be liable for civil money penalties of up to $10,000 for each wrongful act.
In addition to the state laws previously described, we may also be subject to other state fraud and abuse statutes and regulations if we expand our operations nationally. Many states have adopted a form of anti-kickback law, self-referral prohibition, and false claims and insurance fraud prohibition. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Generally, state laws reach to all healthcare services and not just those covered under a governmental healthcare program. A determination of liability under any of these laws could result in fines and penalties and restrictions on our ability to operate in these states. We cannot assure that our arrangements or business practices will not be subject to government scrutiny or be found to violate applicable fraud and abuse laws.
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Changes in healthcare laws could create an uncertain environment and materially impact us.
We cannot predict the effect that the ACA (also known as Obamacare) and its implementation, amendment, or repeal and replacement, may have on our business, results of operations or financial condition. Any changes in healthcare laws or regulations that reduce, curtail or eliminate payments, government-subsidized programs, government-sponsored programs, and/or the expansion of Medicare or Medicaid, among other actions, could have a material adverse effect on our business, results of operations and financial condition. For example, the ACA dramatically changed how healthcare services are covered, delivered, and reimbursed. The ACA requires insurers to accept all applicants, regardless of pre-existing conditions, cover an extensive list of conditions and treatments, and charge the same rates, regardless of pre-existing condition or gender.
The ACA and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Care Reform Acts”) also mandated changes specific to home health and hospice benefits under Medicare. In 2012, the U.S. Supreme Court upheld the constitutionality of the ACA, including the “individual mandate” provisions of the ACA that generally require all individuals to obtain healthcare insurance or pay a penalty. However, the U.S. Supreme Court also held that the provision of the ACA that authorized the Secretary of the U.S. Department of Health and Human Services to penalize states that choose not to participate in the expansion of the Medicaid program by removing all of its existing Medicaid funding was unconstitutional. In response to the ruling, a number of state governors opposed its state’s participation in the expanded Medicaid program, which resulted in the ACA not providing coverage to some low-income persons in those states. In addition, several bills have been, and are continuing to be, introduced in U.S. Congress to amend all or significant provisions of the ACA, or repeal and replace the ACA with another law. In December 2017, the individual mandate was repealed via the Tax Cuts and Jobs Act of 2017. Afterwards, legal and political challenges as to the constitutionality of the remaining provisions of the ACA resumed.
Our operations are subject to the nation’s healthcare laws, as amended, repealed, or replaced from time to time.
The net effect of the ACA on our business is subject to numerous variables, including the law’s complexity, lack of complete implementing regulations and interpretive guidance, gradual and potentially delayed implementation or possible amendment, as well as the uncertainty as to the extent to which states will choose to participate in the expanded Medicaid program. The continued implementation of provisions of the ACA, the adoption of new regulations thereunder and ongoing challenges thereto, also added uncertainty about the current state of U.S. healthcare laws and could negatively impact our business, results of operations and financial condition. Healthcare providers could be subject to federal and state investigations and payor audits.
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Due to our and our affiliates’ participation in government and private healthcare programs, we are from time to time involved in inquiries, reviews, audits, and investigations by governmental agencies and private payors of our business practices, including assessments of our compliance with coding, billing and documentation requirements. Federal and state government agencies have active civil and criminal enforcement efforts against healthcare companies, and their executives and managers. The Deficit Reduction Act, which provides a financial incentive to states to enact their own false claims acts, and similar laws encourage investigations against healthcare companies by different agencies. These investigations could also be initiated by private whistleblowers.
Responding to audit and investigative activities are costly and disruptive to our business operations, even when the allegations are without merit. If we are subject to an audit or investigation, a finding could be made that we or our affiliates erroneously billed or were incorrectly reimbursed, and we may be required to repay such agencies or payors, may be subjected to pre-payment reviews, which can be time-consuming and result in non-payment or delayed payments for the services we or our affiliates provide, and may be subject to financial sanctions or required to modify our operations.
Product pricing may be subject to regulatory control.
The pricing and profitability of the products we sell may be subject to control by third-party payors. As of the date of this prospectus, we do not receive reimbursements from insurance companies for our therapeutic products but we may in the future. In that case, the continuing efforts of governmental and other third-party payors to contain or reduce the cost of healthcare through various means may adversely affect our ability to successfully commercialize our products. We anticipate that there will continue to be federal and state proposals to implement similar governmental control, although it is unclear which proposals will ultimately become law, if any. Direct or indirect changes in prices, including any mandated pricing, could impact our revenues, profitability, and financial performance in the future if and when we receive reimbursements from third party payors.
Our revenues may depend on our customers’ receipt of adequate reimbursement from private insurers and government sponsored healthcare programs.
Political, economic, and regulatory influences continue to change the healthcare industry in the United States. If and when we start receiving reimbursements from third parties, the ability of hospitals to pay fees for our products will partially depend on the extent to which reimbursement for the costs of such materials and related treatments will continue to be available from private health coverage insurers and other similar organizations. We may have difficulty gaining market acceptance for the products we sell if third-party payors do not provide adequate coverage and reimbursement to hospitals.
Major third-party payors of hospitals, such as private healthcare insurers, periodically revise their payment methodologies based, in part, upon changes in government sponsored healthcare programs. We cannot predict these periodic revisions with certainty, and such revisions may result in stricter standards for reimbursement of hospital charges for certain specified products, potentially adversely impacting our business, results of operations, and financial conditions when we start receiving reimbursement from third party payors.
When we start receiving reimbursement from third party payors, the sales of our therapies will depend in part on the availability of reimbursement by third-party payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors often challenge the price and cost-effectiveness of medical treatments and services. Governmental approval of health care products does not guarantee that these third-party payers will pay for the products. Even if third-party payers do accept our therapeutic treatments, the amounts they pay may not be adequate to enable us to realize a profit. Legislation and regulations affecting the pricing of therapies may change before our products and services are approved for marketing, and any such changes could further limit reimbursement, if any.
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Future regulatory action remains uncertain.
We operate in a highly regulated and evolving environment with rigorous regulatory enforcement. Any legal or regulatory action could be time-consuming and costly. If we or the manufacturers or distributors that supply our products fail to comply with all applicable laws, standards, and regulations, action by the FDA or other regulatory agencies could result in significant restrictions, including restrictions on the marketing or use of the products we sell or the withdrawal of the products we sell from the market. Any such restrictions or withdrawals could materially affect our reputation, business and operations.
Our product candidates will remain subject to ongoing regulatory review even after they receive marketing approval, and if we fail to comply with continuing regulations, we could lose these approvals and the sale of any of our approved commercial products could be suspended.
Even as we receive regulatory approval to market a particular product candidate, such as L-CYTE-01 therapy, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, and record keeping related to the product will remain subject to extensive regulatory requirements. If we fail to comply with the regulatory requirements of the FDA and other applicable domestic and foreign regulatory authorities or discover any previously unknown problems with any approved product, manufacturer, or manufacturing process, we could be subject to administrative or judicially imposed sanctions, including:
● | restrictions on the products, manufacturers, or manufacturing processes; | |
● | warning letters; | |
● | civil or criminal penalties; | |
● | fines; | |
● | injunctions; | |
● | product seizures or detentions; | |
● | pressure to initiate voluntary product recalls; | |
● | suspension or withdrawal of regulatory approvals; and | |
● | refusal to approve pending applications for marketing approval of new products or supplements to approved applications. |
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If physicians and patients do not accept our current and future products or if the market for indications for which any product candidate is approved is smaller than expected, we may be unable to generate significant revenue, if any.
Even when any of our product development.candidates obtain regulatory approval, they may not gain market acceptance among physicians, patients, and third-party payers. Physicians may decide not to recommend our treatments for a variety of reasons including:
● | timing of market introduction of competitive products; | |
● | demonstration of clinical safety and efficacy compared to other products; | |
● | cost-effectiveness; | |
● | limited or no coverage by third-party payers; | |
● | convenience and ease of administration; | |
● | prevalence and severity of adverse side effects; | |
● | restrictions in the label of the drug; | |
● | other potential advantages of alternative treatment methods; and | |
● | ineffective marketing and distribution support of its products. |
If any of our product candidates are approved, but fail to achieve market acceptance or such market is smaller than anticipated, we may not be able to generate significant revenue and our business would suffer.
Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling certain of our products.
The medical device and pharmaceutical industries are characterized by extensive intellectual property litigation and, from time to time, we may become the subject of claims of infringement or misappropriation. Regardless of outcome, such claims are expensive to defend and divert management and operating personnel from other business issues. A successful claim or claims of patent or other intellectual property infringement against us could result in payment of significant monetary damages and/or royalty payments or negatively impact our ability to sell current or future products in the affected category.
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We depend extensively on our patents and proprietary technology and the patents and proprietary technology we license from others, and we must protect those assets in order to preserve our business.
Although we expect to seek patent protection for any compounds, devices, biologics, systems, and processes we discover and/or for any specific use we discover for new or previously known compounds, devices, biologics, systems, or processes, any or all of which may not be subject to effective patent protection. In addition, our issued patents may be declared invalid or our competitors may find ways to avoid the claims in the patents.
Our success will depend, in part, on our ability to obtain patents, protect our trade secrets and proprietary knowledge and operate without infringing on the proprietary rights of others. We are the exclusive licensee, sole assignee or co-assignee of numerous granted United States patents, pending United States patent applications and international patents. The patent position of pharmaceutical and biotechnology firms like us are generally highly uncertain and involves complex legal and factual questions, resulting in both an apparent inconsistency regarding the breadth of claims allowed in United States patents and general uncertainty as to their legal interpretation and enforceability. Accordingly, patent applications assigned or exclusively licensed to us may not result in patents being issued, any issued patents assigned or exclusively licensed to us may not provide us with competitive protection or may be challenged by others, and the current or future granted patents of others may have an adverse effect on our ability to do business and achieve profitability.
Moreover, because some of the basic research relating to one or more of our patent applications and/or patents were performed at various universities and/or funded by grants, one or more universities, employees of such universities and/or grantors could assert that they have certain rights in such research and any resulting products. Further, others may independently develop similar products, may duplicate our products, or may design around our patent rights. In addition, as a result of the assertion of rights by a third-party or otherwise, we may be required to obtain licenses to patents or other proprietary rights of others in or outside of the United States. Any licenses required under any such patents or proprietary rights may not be made available on terms acceptable to us, if at all. If we do not obtain such licenses, we could encounter delays in product market introductions during our attempts to design around such patents or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. In addition, we could incur substantial costs in defending suits brought against us or in connection with patents to which we hold licenses or in bringing suit to protect our own patents against infringement.
We depend on license agreements with third-parties for certain intellectual property rights relating to our products and product candidates. In general, our license agreements require us to make payments and satisfy performance obligations in order to keep these agreements in effect and retain our rights under them. These payment obligations can include upfront fees, maintenance fees, milestones, royalties, patent prosecution expenses, and other fees. These performance obligations typically include diligence obligations. If we fail to pay, be diligent or otherwise perform as required under our license agreements, we could lose the rights under the patents and other intellectual property rights covered by these agreements. If disputes arise under any of our in-licenses, we could lose our rights under these agreements. Any such dispute may not be resolvable on favorable terms, or at all. Whether or not any disputes of this kind are favorably resolved, our management’s time and attention and our other resources could be consumed by the need to attend to these disputes and our business could be harmed by the emergence of such a dispute.
If we lose our rights under these agreements, we might not be able to develop any related product candidates further, or following regulatory approval, if any, we might be prohibited from marketing or commercializing these product candidates. In particular, patents previously licensed to us might, after termination of an agreement, be used to stop us from conducting these activities.
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Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other proprietary rights, we may not have meaningful protection from competition.
Our long-term success will substantially depend upon our ability to protect our proprietary technologies from infringement, misappropriation, discovery and duplication, and avoid infringing the proprietary rights of others. Our patent rights and the patent rights of biotechnology and pharmaceutical companies in general, are highly uncertain and include complex legal and factual issues. Because of this, our pending patent applications may not be granted. These uncertainties also mean that any patents that we own or will obtain in the future could be subject to challenge, and even if not challenged, may not provide us with meaningful protection from competition. Due to our financial uncertainties, we may not possess the financial resources necessary to enforce our patents. Patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us. Because a substantial number of patents have been issued in the field of cellular therapy and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subject to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Several of our currently issued patents have expired or will expire in the next twelve months.
Also, because of these legal and factual uncertainties, and because pending patent applications are held in secrecy for varying periods in the United States and other countries, even after reasonable investigation, we may not know with certainty whether any products that we (or a licensee) may develop will infringe upon any patent or other intellectual property right of a third party. For example, we are aware of certain patents owned by third parties that such parties could attempt to use in the future in efforts to affect our freedom to practice some of the patents that we own or have applied for. Based upon the science and scope of these third-party patents, we believe that the patents that we own or have applied for do not infringe any such third-party patents; however, we cannot know for certain whether we could successfully defend our position, if challenged. We may incur substantial costs if we are required to defend our intellectual property in patent suits brought by third parties. These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process. In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process.
We may not be able to compete with treatments now being marketed and developed, or which may be developed and marketed in the future by other companies.
Our products will compete with existing and new therapies and treatments for COPD. We are aware of a number of companies currently seeking to develop alternative therapies or treatment for COPD and other related chronic lung diseases at least in part. Numerous pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists, and nonprofit organizations are engaged in the development of alternatives to our technologies. Some of these companies have greater research and development capabilities, experience, manufacturing, marketing, financial, and managerial resources than we do. Collaborations or mergers between large pharmaceutical or biotechnology companies with competing treatment technologies could enhance our competitors’ financial, marketing, and other resources. Developments by other drug companies could make our products or technologies uncompetitive or obsolete. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we can.
Due in part to our limited financial resources, we may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable indications or therapeutic areas for our product candidates or those that are in-licensed, and/or we may be unable to pursue the clinical trials that we would like to pursue.
We have limited technical, managerial, and financial resources to determine the indications on which we should focus the development efforts related to our product candidates. Due to our limited available financial resources, we may have curtailed clinical development programs and activities that might otherwise have led to more rapid progress of our product candidates through the regulatory and development processes.
We may make incorrect determinations with regard to the indications and clinical trials on which to focus the available resources that we do have. Furthermore, we cannot assure you that we will be able to retain adequate staffing levels to run our operations and/or to accomplish all of the objectives that we otherwise would seek to accomplish. Our decisions to allocate our research, management, and financial resources toward particular indications or therapeutic areas for our product candidates may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also cause us to miss valuable opportunities.
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If the third parties on which we rely for the conduct of our clinical trials and results do not perform our clinical trial activities in accordance with good clinical practices and related regulatory requirements, we may be unable to obtain regulatory approval for or commercialize our product candidates.
We use independent clinical investigators and other third-party service providers to conduct and/or oversee the clinical trials of our product candidates, and expect to continue to do so for the foreseeable future. As of the date of this prospectus, we rely heavily on Rion for its successful execution of our research on L-CYTE-01 in preparation for the IND application to the FDA for the phase I study of L-CYTE-01. Nonetheless, we are responsible for confirming that each of our preclinical studies and clinical trials is conducted in accordance with the FDA’s requirements and our general investigational plan and protocol.
The FDA requires us and our clinical investigators to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate, and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the respective trial plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval, and commercialization of our product candidates or result in enforcement action against us.
Risks Related to Manufacturing & Distribution
We have limited manufacturing capacity and have relied on, and expect to continue to rely on, third-party contract manufacturers to produce our products and clinical development candidates.
We do not currently own or operate any manufacturing facilities for the production of clinical or commercial quantities of our products and candidates, and we currently lack sufficient internal staffthe resources and the capabilities to produce clinical and preclinical product supplies ourselves.build our own manufacturing facilities. As a result, we are working with acurrently rely, and expect to rely for the foreseeable future, on third-party contract manufacturermanufacturers to produce sufficient quantities ofsupply our products for futureand clinical trials, preclinical testing and commercialization.
● | reliance on third-parties for manufacturing process development, regulatory compliance and quality assurance; | |
● | limitations on supply availability resulting from capacity and scheduling constraints of third-parties; | |
● | the possible breach of manufacturing agreements by third-parties because of factors beyond our control; and | |
● | the possible termination or non-renewal of the manufacturing agreements by the third-party, at a time that is costly or inconvenient to us. |
If we do not maintain our key manufacturing relationships, we may fail to find replacement manufacturers or develop our own manufacturing capabilities, which could delay or impair our ability to obtain regulatory approval for our products and substantially increases our costs or deplete profit margins, if any. If we do find replacement manufacturers, we may not be able to enter into agreements with them on terms and conditions favorable to us, and there could be a substantial delay before new facilities could be qualified and registered with the third partyFDA and other foreign regulatory authorities.
The FDA and other foreign regulatory authorities require manufacturers to register manufacturing facilities. The FDA and corresponding foreign regulators also inspect these facilities to confirm compliance with current FDA Good Manufacturing Procedures (“cGMP”). Contract manufacturers may face manufacturing or quality control problems, leading to drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with the applicable cGMP requirements. Any failure to comply with cGMP requirements or other FDA, EMA, and comparable foreign regulatory requirements could adversely affect our clinical research activities and our ability to develop our product candidates and market our products following approval.
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Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop our product candidates and commercialize any products that receive regulatory compliance and quality assurance, the possibilityapproval on a timely basis.
Interruption of breach of the manufacturing agreement by the third party because of factors beyondoperations could adversely affect our control (includingbusiness.
Our suppliers have manufacturing facilities for certain product lines that may be concentrated in one (1) or more plants. Damage to these facilities or issues in our manufacturing arising from a failure to manufacture our products in accordance with our product specifications)follow specific internal protocols and procedures, compliance concerns relating to quality systems regulations, equipment breakdown or malfunction, among other factors, could adversely affect the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. We will be dependent on the ability of these third-party manufacturers to produce adequate supplies of medical products to support our clinical development programs and future commercializationavailability of our products. In addition, the FDA and other regulatory authorities require that ourevent of an interruption in manufacturing of certain products, we may be manufactured accordingunable to cGMP and similar foreign standards. Any failure by our third-party manufacturerquickly shift to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of products in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our products. In addition, such failure could be the basis for action by the FDA to withdraw approvals for products previously granted to us and for other regulatory action, including recall or seizure, fines, imposition of operating restrictions, total or partial suspensionalternate means of production to meet customer demand. In the event of a significant interruption, we may experience lengthy delays in resuming production of affected products due to the need for regulatory approvals. We may experience loss of market share, additional expense, or injunctions.
Additionally, we contract with a limited number of suppliers for certain capital equipment andthe raw materials that we use to manufacture ourproduce certain products. Such suppliers mayWhile we have not sell theseexperienced a shortage of raw materials in the past and believe that it is unlikely that there will be one in the future, if there were a shortage of raw materials, it could either increase the cost of production or prevent us from being able to our manufacturer at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our third party manufacturer. If our manufacturer or we are unable to purchase these materials after regulatory approval has been obtained for our products, the commercial launchproduce some of our products, wouldwhich could adversely affect future results of our operations and financial condition.
We may be delayedadversely affected by product liability claims, unfavorable court decisions or legal settlements.
We are exposed to potential product liability risks inherent in the design, manufacturing, and marketing of pharmaceuticals and medical devices, many of which are administered to or implanted in the human body for long periods of time or indefinitely. These matters are subject to many uncertainties and outcomes are not predictable. In addition, we may incur significant legal expenses regardless of whether we are found to be liable.
While we maintain product liability insurance, there wouldcan be a shortageno assurance that such coverage is sufficient to cover all product liabilities that we may incur. We are not currently subject to any product liability proceedings, and we have no reserves for product liability disbursements. However, we may incur material liabilities relating to product liability claims in supply, which would impair our ability to generate revenues from the salefuture, including product liability claims arising out of the usage and delivery of our products.
Because we may not be able to manufacture our products at a costobtain or in quantities or in a timely mannermaintain the necessary to develop and commercialize them. If we successfully commercialize the DenerVex or any ofregulatory approvals for our products, we may benot generate revenues in the amounts we expect, or in the amounts necessary to continue our business. Our existing products as well as our manufacturing facility must meet quality standards and are subject to inspection by a number of domestic regulatory and other governmental and non-governmental agencies.
Our primary product L-CYTE-01 is subject to regulation in the U.S. by the FDA and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. In particular, we are subject to strict governmental controls on the development, manufacturing, labeling, distribution, and marketing of our products. The process of obtaining required approvals or clearances varies according to the nature of, and uses for, a specific product. These processes can involve lengthy and detailed laboratory testing, human or animal clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for that product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country.
The time required to establishobtain approval or access large-scale commercial manufacturing capabilities. In addition, asclearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may determine to devote our development pipeline increasesresources to different products.
Changes in government regulations could increase our costs and matures,could require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all.
Changes in government regulations may adversely affect our financial condition and results of operations because we may have a greater need for clinical trialto incur additional expenses if we are required to change or implement new testing, manufacturing and commercial manufacturing capacity. To meetcontrol procedures. If we are required to devote resources to develop such new procedures, we may not have sufficient resources to devote to research and development, marketing, or other activities that are critical to our projected needs for commercial manufacturing the third party with whom we currently work will need to increase its scale of production or we will need to secure an alternate supplier.business.
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We may not be successful in establishinghave sufficient resources to effectively introduce and maintaining strategic partnerships,market our products, which could adversely affectmaterially harm our operating results.
Introducing and achieving market acceptance for our products will require substantial marketing efforts and will require us and/or our contract partners, sales agents, and/or distributors to make significant expenditures of time and money. In some instances, we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, sales agents, and/or distributors. If they do not have or commit the expertise and resources to effectively market the products that we manufacture, our operating results will be materially harmed.
In addition to the market success of our products, the success of our business depends on our ability to develop and commercialize products.
General Risks
The recent coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of a productoperations and we cannot provide any certainty when and whether our operations will reach the normal level prior to the COVID-19 pandemic.
The recent COVID-19 outbreak has adversely affected the Company’s financial condition and results of operations, and is delayed or salesexpected to continue affecting the Company’s financial condition and results of an approved product are disappointing.
With our revenue-generating activities suspended, we will need to raise cash from debt and equity offerings to continue with the laws ofefforts to take the United States, and we may encounter significant problems in protecting our proprietary rights in these countries.
General economic conditions may adversely affect demand for our products and services.
Poor or deteriorating economic conditions in the U.S. could adversely affect the demand for healthcare services and consequently, the demand for our products and services. Poor economic conditions also could lead our suppliers to offer less favorable terms of purchase, which would prevailnegatively affect our cash flows and profitability. These and other possible consequences of financial and economic decline could have material adverse effect on our business, results of operations, and financial condition.
We operate our business in regions subject to natural disasters and other catastrophic events, and any intellectual property litigation, even if the case against us is weak or flawed. If litigation leadsdisruption to an outcome unfavorableour business resulting from natural disasters would adversely affect our revenue and results of operations.
We operate our business in regions subject to us, we may be required to obtain a license from the patent owner, in order to continue our researchsevere weather and development programs or to market our product(s). It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. Thisnatural disasters, including hurricanes, floods, fires, earthquakes, and other catastrophic events. Any natural disaster could limit our research and development activities,adversely affect our ability to commercialize certainconduct business and provide products and services to our customers, and the insurance we maintain may not be adequate to cover our losses resulting from any business interruption resulting from a natural disaster or both.other catastrophic event.
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Although we have an ethics and anti-corruption policy in place, and have no knowledge or reason to know of any practices by our employees, agents, or distributors that could be construed as in violation of such policies, our business includes sales of products to countries where there is or may be widespread corruption.
We have a policy in place prohibiting employees, distributors and agents from engaging in corrupt business practices, including activities prohibited by the United States Foreign Corrupt Practices Act. Nevertheless, because we work through independent sales agents and distributors outside the United States, we do not have control over the day-to-day activities of such independent agents and distributors. In addition, in the donor-funded markets in Africa where we may sell our products, there is significant oversight from the President’s Emergency Plan for AIDS Relief, or PEPFAR, the Global Fund, and advisory committees comprised of technical experts concerning the development and establishment of national testing protocols. This is a process that includes an overall assessment of a product which includes extensive product performance evaluations including five active collaborations and manufacturer’s quality systems, as well as price and delivery.
We depend heavily on our executive officers, directors, and principal consultants and the loss of their services would materially harm our business.
We believe that our success depends, and will likely continue to depend, upon our ability to retain the services of our competitors are larger than we arecurrent executive officers, directors, principal consultants and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could.others. In addition, we have established relationships with universities, hospitals and research institutions, which have historically provided, and continue to provide, us with access to research laboratories, clinical trials, facilities and patients. The loss of the uncertainties associated with litigation couldservices of any of these individuals or institutions would have a material adverse effect on our ability to raise the funds necessary to continue our operations, or enter into strategic partnerships that would help us bring our products to market.
Our common stock before this offering will,is a “penny stock,” which places restrictions on broker-dealers recommending the stock for purchase.
Our common stock is defined as “penny stock” under the Exchange Act, and the rules promulgated thereunder. The SEC has adopted regulations that define “penny stock” to include common stock that has a market price of less than $5.00 per share, subject to certain exceptions. These rules include the following requirements:
● | broker-dealers must deliver, prior to the transaction, a disclosure schedule prepared by the SEC relating to the penny stock market; | |
● | broker-dealers must disclose the commissions payable to the broker-dealer and its registered representative; | |
● | broker-dealers must disclose current quotations for the securities; | |
● | if a broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market; and | |
● | a broker-dealer must furnish its customers with monthly statements disclosing recent price information for all penny stocks held in the customer’s account and information on the limited market in penny stocks. |
Additional sales practice requirements are imposed on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser’s written consent to the transaction prior to sale. These disclosure requirements may have the effect of reducing the level of trading activity in the aggregate, beneficially own 3,573,576 shares representing approximately 38.7% ofsecondary market for our outstanding capitalcommon stock. As a result, if these stockholders werefewer broker-dealers may be willing to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire.
There is a limited trading market for our common stock.
Our common stock is not listed on any national securities exchange. Accordingly, investors may find it more difficult to buy and we do not expect any active market to develop forsell our warrants. Although we intend to apply to listshares than if our common stock and our Series A Warrantswas traded on the NASDAQ Capital Market, an active trading market for our securities may never develop or be sustained following this offering. If an active market for our securities does not develop, it may be difficult for you to sell shares or Series A Warrants you purchase in this offering without depressing the market price for the shares or at all. The initial public offering price forexchange. Although our common stock will be determined through negotiations withis quoted on the underwritersOTCQB, it is an unorganized, inter-dealer, over-the-counter market which provides significantly less liquidity than the Nasdaq Capital Market or other national securities exchange. These factors may have an adverse impact on the trading and the negotiated price may not be indicative of the market price for our common stock after this offering. The initial public offering price may vary from the market price of our common stock.
Provisions of our Restated Certificate of Incorporation could delay or prevent the acquisition or sale of our business.
Our second Amended and Restated Articles of Incorporation permit our Board of Directors to designate new series of preferred stock and issue those shares without any vote or action by our stockholders, subject to certain approval rights by the holders of Series A Warrants after the offering. As a result of thesePreferred Shares. Such newly authorized and other factors, you may not be able to sell yourissued shares of our commonpreferred stock and Series A Warrants at or abovecould contain terms that grant special voting rights to the initial public offering price or at all. Further,holders of such shares that make it more difficult to obtain stockholder approval for an inactive market may also impair our ability to raise capital by selling sharesacquisition of our common stock and may impair our ability to enter into strategic partnershipsbusiness or acquire companies or products by using our sharesincrease the cost of common stock as consideration.
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You may not sell, transfer or assign your Series B Warrants to anyone else. We do not intend to list the Series B Warrantspay dividends on any securities exchange or any other trading market. Because the Series B Warrants are non-transferable, there is no market or other means for you to directly realize any value associated with them. You must exercise the Series B Warrants and purchaseour Common Stock underlying the Series B Warrants to realize any potential value from the Series B Warrants. We intend that the Units being registered in this offering will be listed on the NASDAQ Capital Markets and therefore will trade in the secondary market. Since the Series B Warrants are included with the Units in the initial public offering but will not trade in the secondary market a portion of the value of the initial public offering price could be attributed to the Series B Warrant and it could adversely affect the trading price of the Units in the secondary market.
We have paid no assurance that such post-effective amendments will be declared effective.
Our issuance of Common Stock upon exercise of warrants or options may depress the price and other terms of this offering determined at pricing. You should read this table together withour Common Stock.
As of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.
As of June 30, 2014 | ||||||||
Actual | Pro Forma as Adjusted (1) | |||||||
Stockholders’ Equity: | ||||||||
Preferred stock, $.001 par value, 500,000 shares authorized, none issued or outstanding actual, pro forma or pro forma as adjusted | - | - | ||||||
Common stock, $.001 par value, 49,500,000 shares authorized, 7,781,175 issued and outstanding actual; 9,131,275 shares issued and outstanding pro forma as adjusted | 7,782 | 9,131 | ||||||
Additional paid in capital | 3,360,064 | 10,362,714 | ||||||
Accumulated deficit | (1,930,615 | ) | (1,930,615 | ) | ||||
Total stockholders’ equity | $ | 1,437,232 | $ | 8,441,231 |
Risks Related to the Rights Offering
The Subscription Price was set by our board of directors and does not necessarily indicate the actual or market value of our new Series A Preferred Shares.
The Subscription Price for each share of our Series A Preferred Share is $0.014 per share. Our board of directors approved the Subscription Price after considering, among other things: the belief that all shareholders should be outstanding after thisoffered the opportunity to purchase Series A preferred stock like those being purchased by the Standby Purchasers; the Standby Commitment Amount that the Standby Purchasers agreed to purchase; the number of authorized Series A Preferred Shares set forth in the Second Amended Charter; and the availability of and likely cost of capital of other potential sources of capital. The Subscription Price is not intended to bear any relationship to the book value of our assets or our past operations, cash flows, losses, financial condition, net worth or any other established criteria used to value securities. The Subscription Price may not be indicative of the fair value of the Series A Preference Shares.
The rights offering may be terminated under certain circumstances prior to the expiration of the offering period, and neither we nor the rights agent will have any obligation to you except to return your subscription payments.
We may decide not to continue with the rights offering or terminate the rights offering prior to the Expiration Time. If the rights offering is basedterminated, all subscription payments will be returned as soon as practicable, without interest.
You must act promptly and follow instructions carefully if you want to exercise your rights.
If you desire to purchase new Series A Preferred Shares in the rights offering, you must act promptly to ensure that all required rights exercise forms and payments are actually received by the rights agent prior to the Expiration Time. The time period to exercise rights is limited. If you or your broker, bank or other nominee fail to complete and sign the required rights exercise forms, send an incorrect payment amount or otherwise fail to follow the procedures that apply to the exercise of your rights, we may reject your exercise of rights or accept it only to the extent of the payment received. Neither we nor the rights agent undertake to attempt to correct or contact you concerning an incomplete or incorrect rights exercise form or payment or to contact you concerning whether a broker, bank or other nominee holds rights on 7,781,175 shares outstanding asyour behalf. We have the sole discretion to determine whether an exercise properly follows the procedures that apply to the exercise of June 30, 2014 and it does not include:
There is no trading market for Series A Preferred Shares or subscription rights, making it difficult to sell any Series A Preferred Shares you receive upon exercise of the subscription rights.
Because there currently is no market for the Series A Preferred Shares and we do not intend to list or quote the Series A Preferred Shares and subscription rights on any securities exchange or automated quotation system, it will be difficult for you to sell your Series A Preferred Shares. The liquidity of, and trading market for, the Series A Preferred Shares also may be adversely affected by other factors, including:
● | change in our financial performance or prospects; | |
● | the prospects for companies in our industry; | |
● | the number of holders of Series A Preferred Shares; and | |
● | the interest of securities dealers in making a market in our Series A Preferred Shares. |
The price of our Common Stock is volatile and it may decline before or after the subscription rights expire or after you exercise your subscription rights.
The market price of our common stock historically has experienced and may continue to experience significant price fluctuations. We cannot assure you that the public trading market price of our common stock will not decline after you elect to exercise your subscription rights. Moreover, we cannot assure you that, following the exercise of your subscription rights, you will be able to sell your Series A Preferred Shares or the shares of common stock converted from your Series A preferred stock at a price equal to or greater than the Subscription Price per share. As a result, you may lose all or part of your investment in our Series A Preferred Shares.
If you do not exercise your subscription rights in the rights offering, you may suffer dilution in your percentage ownership of the company.
If you do not exercise any of your subscription rights in the rights offering, the number of our common stock that you own will not change. However, because our Series A Preferred Shares will be convertible into an increasing number of our common stock shares, your percentage ownership will be diluted, and the percentage ownership of the Standby Purchasers may be increased, after completion of the rights offering and fulfillment of the Standby Commitment Amount if you do not exercise any of your subscription rights.
The receipt of subscription rights may be treated as a taxable distribution to you.
The distribution of the subscription rights should be a non-taxable distribution under Section 305(a) of the Internal Revenue Code, and we expect to treat the distribution as such. However, this position is not free from doubt and is not binding on the Internal Revenue Service or the courts. If this distribution of subscription rights is part of a “disproportionate distribution” under Section 305(b) of the Internal Revenue Code, your receipt of subscription rights may be treated as the receipt of a taxable distribution to you equal to the fair market value of the subscription rights. Any such distribution would be treated as dividend income to the extent of our current or accumulated earnings and profits, if any, with any excess being treated as a return of capital to the extent thereof and then as capital gain. Each holder of ordinary shares is urged to consult their own tax advisor with respect to the particular tax consequences of the distribution of subscription rights. See “Material U.S. Federal Income Tax Considerations.”
If you make payment of the Subscription Price by uncertified check, your check may not clear in sufficient time to enable you to purchase shares in the rights offering.
Any uncertified check used to pay for shares to be issued in this rights offering must clear prior to the Expiration Time of this rights offering, and the clearing process may require five or more business days. If you choose to exercise your subscription rights, in whole or in part, and to pay for shares by uncertified check and your check has not cleared prior to the expiration of the rights offering, you will not have satisfied the conditions to exercise your subscription rights and will not receive the shares you attempted to purchase and you will lose the value of your subscription rights.
Our management will have broad discretion over the use of any net proceeds from the sale of Series A Preferred Shares in this offering, you may not agree with how we use the proceeds, and we may not use the proceeds successfully.
Our management will have broad discretion as to the use of any net proceeds from this subscription of Series A preferred stock and could use them for purposes other than those contemplated at the time of this offering. Accordingly, you will be relying on the judgment of our management with regard to the use of any proceeds from the sale of securities in this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that we will use the proceeds in a way that does not yield a favorable, or any, return for you.
Additional stock offerings in the future may dilute then-existing stockholders’ percentage ownership of the Company.
Given our plans and expectations that we will need additional capital and personnel, we anticipate that we will need to issue additional shares of common stock or securities convertible into or exercisable for shares of common stock, including convertible preferred stock, convertible notes, stock options or warrants. The issuance of additional securities in the future will dilute the percentage ownership of then current stockholders.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “potential,” “possible,” “probable,” “believes,” “seeks,” “may,” “will,” “should,” “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.
You should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described above under the heading “Risk Factors” of this prospectus. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required under applicable law. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.
This prospectus also includes estimates of market size and industry data that we obtained from industry publications and surveys and internal company sources. The industry publications and surveys used by management to determine market size and industry data contained in this prospectus have been obtained from sources believed to be reliable.
We estimate that the net proceeds from the sale of Series A preferred stock offered pursuant to the exercise of subscription rights set forth in this prospectus, including the proceeds received from the Standby Purchasers, will be adjusted basedup to approximately $4.8 million if all of the subscription rights are exercised, and approximately $2.5 million if none of the subscription rights are exercised and, as a result, the Standby Commitment is exercised in full, in each case after deducting the estimated offering expenses that are payable by us. We will not receive any gross or net proceeds from the offering of the subscription rights to the holders of our common stock on the actual initial publicRecord Date. In addition, holders of an aggregate of $4,829,856 in debt (based on the accrued interest through July 27, 2020) are expected to convert such debt into Series A Preferred Shares on substantially the same terms, subject to certain conditions.
We currently intend to use the net proceeds that we receive in this offering pricefor working capital purposes and general corporate purposes, including proceeds should be for working capital and development and approval of our treatment program and marketing of our facilities development and enhancement of our products, capital expenditures, expansion of our operations, and new product development. The precise amount and timing of the application of such proceeds will depend upon our funding requirements and the availability and cost of other termsfunds.
Until we use the net proceeds of this offering for the above purposes, we intend to invest the funds in short-term, investment grade, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return. We have not yet determined the amount or timing of the expenditures for the categories listed above, and these expenditures may vary significantly depending on a variety of factors. As a result, we will retain broad discretion over the use of the net proceeds from this offering.
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We have not paid cash dividends on our common stock in the past and have no present intention of paying cash dividends on our common stock in the foreseeable future. Future dividends, if any, on our common stock will be at pricing.
If you purchase any of the units and Series B Warrants offered by this prospectus,invest in our common stock, your ownership interest will be immediately and substantially diluted immediately to the extent of the difference between the initial public offering priceSubscription Price per shareSeries A Preferred Share, which is convertible into shares of our common stock at the initial ratio of 1:1, and the pro forma net tangible book value per share of our common stock after giving effect to this initial public offering.
Our historicalas adjusted net tangible book value as of June 30, 2014March 31, 2020 was $1.4 million, or $0.18$0.001 per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock, outstanding.
Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of $0.74 to existing stockholdersour common stock in this offering and immediate dilution of $5.08 inthe pro forma net tangible book value per share to new investors purchasingof our common stock inimmediately after this offering.
The following table illustrates this dilution on athe per share basis.
Assumed Initial Public Offering Price Per Share | $ | 6.00 | |||
Historical Net Tangible Book Value per share as of June 30, 2014 | $ | 0.18 | |||
Pro Forma Net, Tangible Book Value per share as of June 30, 2014 | $ | 0.92 | |||
Increase in Net Tangible Book Value per share Attribute to New Investment | $ | 0.74 | |||
Pro Forma Net Tangible Book Value per share after this Offering | $ | 0.92 | |||
Dilution per share to New Investors | $ | 5.08 |
Public offering Subscription Price per share | $ | 0.014 | ||||||
As adjusted net tangible book value per share as of March 31, 2020 | $ | 0.001 | ||||||
Dilution in as adjusted net tangible book value per share attributable to this offering | $ | (0.013 | ) | |||||
Pro forma as adjusted net tangible book value per share after this offering | $ | 0.008 | ||||||
Dilution in pro forma net tangible book value per share to new investors | $ | (0.006 | ) |
The information above is based on 121,682,672 as adjusted and pro forma as adjusted shares of our common stock outstanding as of March 31, 2020 and 307,642,014 as adjusted shares outstanding and 747,985,319 pro forma as adjusted shares outstanding assuming exercise of all subscription rights of our Series A preferred stock as of March 31, 2020 or a combined total of common stock and Series A preferred stock of 429,324,686 shares outstanding as adjusted and 680,625,010 shares outstanding pro forma as adjusted assuming exercise of all subscription rights as of March 31, 2020.
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The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2020:
● | on an actual basis; | |
● | on an adjusted basis assuming the four events set forth below had occurred on March 31, 2020; and | |
● | on a pro forma as adjusted basis assuming the four events set forth below had occurred on March 31, 2020 and all subscription rights are exercised, thereby resulting in 747,985,319 Series A Preferred Shares issued and outstanding after the completion of the rights offering. |
The following four events are assumed initial publicto have occurred on March 31, 2020 for purposes of the terms “as adjusted” and “pro forma as adjusted” in the table below :
1. | conversion of $1,635,000 of short-term notes, related parties and $74,409 of accrued interest into 4,368,278 shares of common stock and 4,368,278 warrants to purchase common stock at the offering price. Conversion of these notes results in a gain on extinguishment of debt of $1,276,995. | |
2. | conversion of all of the outstanding Series B preferred stock and Series D preferred stock into the Company’s common stock. This adjustment reflects the reduction of the derivative liability associated with certain features of the Series B warrants which is eliminated in connection with the Rights Offering. This adjustment also reflects the reduction of the derivative liability associated with the redemption put feature on the Series D financing which is eliminated in connection with the Rights Offering. The elimination of these derivative liabilities results in a gain of $219,922. This event has now occurred. This event occurred on July 27, 2020 which resulted in the issuance of 2,119,713 shares of common stock from the conversion of the Series B preferred stock and 15,773,363 shares of common stock from the conversion of the Series D preferred stock, including the accrued dividends for both Series B and Series D preferred stock through the date of conversion. | |
3. | the effectiveness of the Second Amended Charter as approved by the holders of the majority voting power of our Company. This event has now occurred. | |
4. | conversion into Series A preferred stock of all of the outstanding balances of the Hawes Note (with the outstanding principal amount of $424,615 as of March 31, 2020) and April Secured Note (with the outstanding principal amount of $500,000 at March 31, 2020 and $3,842,695 as of April 17, 2020) together with accrued and unpaid interest thereon in each case. |
This table should be read in conjunction with ‘‘Use of Proceeds’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and our financial statements and related notes thereto included in this prospectus.
As of March 31, 2020 | ||||||||||||
Actual | As adjusted | Pro forma as adjusted | ||||||||||
Cash | $ | 122,400 | $ | 3,457,595 | $ | 9,622,400 | ||||||
Total current liabilities | 6,447,188 | 3,986,224 | 3,986,224 | |||||||||
Total long-term liabilities | 441,633 | 221,710 | 221,710 | |||||||||
Mezzanine equity: Series D Preferred Stock, $0.001 par value per share, 238,871 shares authorized, 149,448 shares issued and outstanding actual, 0 as adjusted, and 0 pro forma as adjusted assuming exercise of all subscription rights, as of March 31, 2020 | 6,281,433 | - | - | |||||||||
Stockholders’ equity: | ||||||||||||
Series A Preferred Stock, $0.001 par value per share, 800,000,000 shares authorized, 0 share issued and outstanding actual, 307,642,014 as adjusted and 747,985,319 shares pro forma as adjusted assuming exercise of all subscription rights as of March 31, 2020 | - | 307,642 | 747,985 | |||||||||
Series B Preferred Stock, $0.001 par value per share, 10,000 shares authorized, 6,100 shares issued and outstanding actual, 0 as adjusted, and 0 pro forma as adjusted assuming exercise of all subscription rights, as of March 31, 2020 | 6,100 | - | - | |||||||||
Common Stock, $0.001 par value, 1,600,000,000 shares authorized, 99,878,079 shares issued and outstanding actual, 121,682,672 shares issued and outstanding as adjusted and 121,682,672 shares pro forma as adjusted assuming exercise of all subscription rights, as of March 31, 2020 | 99,878 | 121,683 | 121,683 | |||||||||
Additional paid-in capital | 28,117,978 | 38,589,135 | 44,313,597 | |||||||||
Accumulated deficit | -39,815,966 | -38,319,049 | -38,319,049 | |||||||||
Non-controlling interest | -370,132 | -370,132 | -370,132 | |||||||||
Total stockholders’ equity | -11,968,236 | 329,279 | 6,494,084 |
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DESCRIPTION OF THE RIGHTS OFFERING
Terms of the Rights Offering
We are distributing to eligible holders of our common stock non-transferable subscription rights to purchase our new Series A Preferred Shares for each share of common stock held on July 28, 2020, the Record Date for the rights offering. Each subscription right entitles the holder to subscribe for three Series A Preferred Shares at the Subscription Price of $0.014 per Series A Preferred Share. Each Series A Preferred Share initially will be convertible into one share of common stock, subject to adjustments to reflect stock splits, reclassifications and certain other events.
The Subscription Price for each share of our Series A Preferred Share is $0.014 per share. Our board of directors approved the Subscription Price after considering, among other things: the belief that all shareholders should be offered the opportunity to purchase Series A preferred stock like those being purchased by the Standby Purchasers; the Standby Commitment Amount that the Standby Purchasers agreed to purchase; the number of authorized Series A Preferred Shares set forth in the Second Amended Charter; and the availability of and likely cost of capital of other potential sources of capital. The Subscription Price is not intended to bear any relationship to the book value of our assets or our past operations, cash flows, losses, financial condition, net worth or any other established criteria used to value securities. The Subscription Price may not be indicative of the fair value of the Series A Preferred Shares.
As of the Record Date for the rights offering, price122,139,432 shares of $6.00 per unitcommon stock, 0 shares of Series B preferred stock, and 0 shares of Series D preferred stock were issued and outstanding. Each previously outstanding share of Series B preferred stock automatically converted into shares of Common Stock upon the occurrence of a “Series D Mandatory Conversion Event” under the Certificate of Designation of Preferences, Rights and Limitations of the Series D preferred stock. A “Series D Mandatory Conversion Event” was deemed to occur upon the written consent of the holders of a majority of Series D preferred stock then outstanding, voting as a separate class. In connection with and prior to the effectiveness of its Second Amended Charter, the holders of a majority of the Series D preferred stock initiated such a Series D Mandatory Conversion Event, causing all outstanding shares of Series D preferred stock and Series B Warrant,preferred stock to be converted into shares of Common Stock, such that prior to the commencement of the rights offering, all outstanding shares of Series B preferred stock and Series D preferred stock have now converted into shares of common stock and no such shares of preferred stock are outstanding.
We have not employed any brokers, dealers or underwriters in connection with the solicitation or exercise of subscription rights in this rights offering, and no commissions, fees or discounts will be payable or paid to brokers, dealers or underwriters in connection therewith.
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Purpose of the Rights Offering
On April 17, 2020, the Standby Purchasers purchased secured convertible notes (“April Secured Notes”) and warrants (“April Warrants”) from the Company pursuant to a secured convertible note and warrant purchase agreement (the “April SPA”) and in consideration, the Company received an aggregate amount of $2,842,695 in proceeds which includes $7,500 from an additional investor in a subsequent closing. As part of the April Offering, the FWHC Note previously issued by the Company was amended and superseded by an April Secured Note in the amount of $1,000,000 issued to FWHC Bridge. According to the April SPA, the Standby Purchasers agreed to purchase shares of the newly created Series A preferred stock corresponding to the Standby Commitment Amount in connection with an offering of Series A Preferred Shares at the same subscription price paid by other investors in such offering. In addition, it is expected that the April Secured Notes will convert into shares of Series A preferred stock at the completion of this rights offering, upon satisfaction of certain conditions set forth in the April SPA.
Our board of directors (the “Board”) determined that all holders of our common stock should have the opportunity to subscribe for Series A preferred stock on the same terms as the Standby Purchasers and concluded that a rights offering provided the best means of providing that opportunity to all holders. Each Series A Preferred Share initially will be convertible into one share of common stock, subject to adjustments to reflect stock splits and reclassifications.
The aggregate gross proceeds of Series A preferred stock offered in this rights offering, inclusive of amounts raised by the Company under the April SPA through the issuance of April Secured Notes and April Warrants thereunder and through the conversion of debt will be $10.0 million if all subscription rights are exercised. However, management of the Company does not expect that all stockholders will exercise their subscription rights in this rights offering.
First, the Standby Purchasers have agreed not to exercise any subscription rights they have as stockholders of the Company and have instead agreed to purchase shares of Series A preferred stock corresponding to the unexercised rights up to the Standby Commitment Amount at the same Subscription Price. However, if the aggregate gross proceeds from the exercise of subscription rights in this rights offering exceeds the Standby Commitment Amount, the Standby Commitment Amount that the Standby Purchasers will be required to invest in us will be reduced on a proportional basis by the number of Series A Preferred Shares purchased by subscription rights holders in this rights offering. As a result, the minimum amount that we will raise from the sale of Series A Preferred Shares in this rights offering and under the Standby Commitment will be $2,842,695.
Second, the Company understands that RMS Shareholder, a holder of approximately 42% of the outstanding common stock as of the Record Date, does not intend to exercise its subscription rights.
We plan to use the proceeds of this offering for general corporate and working capital purposes and for the further development of our L-CYTE technology. See “Use of Proceeds” for more information.
No Board Recommendation
The exercise of your subscription rights and an investment in the Series A Preferred Shares must be made according to your own evaluation of your own best interests and after considering all of the information included in or incorporated by reference in this prospectus, including the risk factors under “Risk Factors.” Neither we nor our Board nor any Standby Purchaser or their affiliates makes any recommendation to subscription rights holders regarding whether or not they should exercise their subscription rights.
The Rights
We will distribute to each holder of our common stock who was a record holder of our common stock at 5:00 p.m., New York City time, on the Record Date, at no charge, one non-transferable subscription right for each share of common stock owned, for a total of approximately 122,139,432 subscription rights. Stockholders who own common stock in book-entry form through DTC will receive beneficial ownership of their subscription rights in accordance with DTC’s procedures. All other stockholders will receive subscription rights in certificated form.
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Each subscription right will allow holders to purchase three Series A Preferred Shares . We will not issue fractional Series A Preferred Shares upon the exercise of these subscription rights. The Subscription Price for each Series A Preferred Share is $0.014. If you hold your shares in a brokerage account or through a dealer or other nominee, please see the information under “Information for Beneficial Holders and Brokers, Banks and Other Nominees.”
Subscription Right
Subject to certain earlier deadlines described under “Expiration, Extension, Amendment and Cancellation of the Rights Offering,” you may purchase three convertible Series A Preferred Shares per subscription right exercised by delivering all required documents and paying the Subscription Price prior to the Expiration Time. You are not required to exercise any of your subscription rights.
Standby Commitment
The Standby Purchasers, led by FWHC Bridge, LLC (“FWHC Bridge”), have each agreed to purchase their proportional share of Series A Preferred Shares corresponding to the unexercised rights up to the Standby Commitment Amount at the same Subscription Price as other holders of common stock would by exercising their subscription rights. However, if the aggregate gross proceeds from the exercise of subscription rights in this rights offering exceeds the Standby Commitment Amount, the Standby Commitment Amount that the Standby Purchasers will be required to invest in us will be reduced on a proportional basis by the number of Series A Preferred Shares purchased by subscription rights holders in this rights offering.
The ownership interest and voting power in the Company held by FWHC Bridge, its affiliates, and its Section 13(d) Group members (collectively, the “FWHC Group”) will increase substantially as a result of this offering and the Standby Commitment, as convertible notes held by the Standby Purchasers, some of whom are members of the FWHC Group, will be converted into Series A Preferred Shares and the Standby Purchasers may acquire additional Series A Preferred Shares as part of the Standby Commitment. Based on security ownership as of the Record Date and assuming the Standby Commitment is utilized in full, the FWHC Group will have beneficial ownership (as calculated under Rule 13d-3 under the Exchange Act) of approximately 70% of the voting power of the Company immediately after the completion of the rights offering which also assumes the conversion of all outstanding promissory notes, including the ones held by the FWHC Group into Series A Preferred Shares, and the exercise of all warrants held by the FWHC Group. See “Security Ownership of Certain Beneficial Owners and Management.”
The Standby Purchasers have not received, and will not receive, compensation for their commitment to purchase Series A Preferred Shares.
Modification and Cancellation of the Rights Offering
Cancellation of the Rights Offering
Our Board may cancel this rights offering, in whole or in part, in its sole discretion at any time prior to the Expiration Time for any reason, including a change in the market price of our common stock, or for no reason. If we terminate this rights offering, in whole or in part, all affected subscription rights will expire without value and all subscription payments received by the rights agent will be returned promptly, without interest or deduction.
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Expiration, Extension, Amendment and Cancellation of the Rights Offering
You may exercise your subscription rights at any time before the Expiration Time. Your full payment of the Subscription Price must be received by the rights agent on or prior to the Expiration Time for the rights offering. We recommend that you use an insured overnight courier that provides delivery tracking or use registered mail, with return receipt requested.
We may, in our sole discretion, extend the time for exercising the subscription rights. We will extend the duration of the rights offering as required by applicable law and may choose to extend it if we decide to give investors more time to exercise their subscription rights. In the event that we extend the rights offering, we do not expect to extend the rights offering beyond September 15, 2020. If we elect to extend the expiration of the rights offering, we will issue a press release announcing such extension no later than 9:00 a.m., New York City time, on the next business day after the most recently announced Expiration Time.
We reserve the right, in our sole discretion, to amend or modify the terms of this rights offering. In the event of a material change in the rights offering, including the waiver of a material condition, we will extend the duration of the rights offering if necessary to ensure that at least five business days remain in the rights offering following notice of the material change.
If you do not exercise your subscription rights before the Expiration Time, your unexercised subscription rights will be null and void and will have no value.
Issuance of Series A Preferred Shares upon Valid Exercise
If you validly exercise your subscription rights in accordance with the procedures set forth under “Summary of Procedures to Follow” and the “Instructions of Exercise of Subscription Rights” provided to you, we will issue to you the Series A Preferred Shares for which you have validly subscribed as soon as practical after the expiration of the rights offering. If you hold your common stock shares in book-entry form through DTC you will receive beneficial ownership of your rights in accordance with DTC’s procedures. If you hold your common stock shares in any other form, your rights will be distributed to you in certificated form. Series A Preferred Shares issued in the rights offering upon the exercise of subscription rights will be registered in the name of the subscription rights holder of record.
Summary of Procedures to Follow
Exercise of Rights
Rights certificates, which will evidence the subscription rights, will be mailed to stockholders of record as of the Record Date. Rights may be exercised by stockholders who are record owners by delivering the following to the rights agent for actual receipt, at or prior to the Expiration Time for the rights offering:
● a properly completed and executed subscription rights certificate with any required signature guarantees or other supplemental documentation; and
● payment of the full Subscription Price in the manner described below under “Payment of Subscription Price.”
Rights also may be exercised by a stockholder whose shares are registered in the name of a broker, bank or other nominee by contacting the broker, bank or other nominee, which can arrange, on the stockholder’s behalf, delivery of the properly completed and executed subscription rights certificate and the applicable subscription price. A fee may be charged by such broker, bank or other nominee for this service. The broker, bank or other nominee must actually receive, by the beneficial holder exercise deadline, instructions to exercise the subscription rights so that the rights agent may receive, prior to the Expiration Time, all required documents the subscription payment. Your subscription rights will not be considered exercised unless the rights agent actually receives from you or your broker, bank or nominee, as the case may be, all of the required documents and payment of your full Subscription Price prior to the Expiration Time for the rights offering.
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Payment of Subscription Price
The Subscription Price is $0.014 per Series A Preferred Share. Each subscription right entitles a holder to purchase three Series A Preferred Shares . Fractional shares will not be issued. Your payment of the Subscription Price must be made in U.S. dollars for the full number of our Series A Preferred Shares for which you are subscribing by:
● | wire transfer of immediately available funds to the subscription account maintained by the rights agent pursuant to the following wire instruction, with reference to the rights holder’s name: Name of the bank: Regions Bank ABA #062005690 (Wire) 053012029 (ACH) Address of the Bank: 3700 Glenwood Ave Ste 200 Raleigh NC 27612 Account Holder: Issuer Direct Corp. Address of the Account Holder: One Glenwood Ave, Suite 1001 Raleigh, NC 27603 Account No.: 0236974420 | |
● | uncertified, certified or cashier’s check or bank draft drawn upon a U.S. bank and payable to “Issuer Direct Corporation (as rights agent for H-CYTE, Inc.)”; or | |
● | U.S. postal money order payable to “Issuer Direct Corporation (as rights agent for H-CYTE, Inc.).” |
Your payment will be considered received by the rights agent only upon, as applicable,
● | receipt of collected funds in the subscription account designated above; | |
● | clearance of any uncertified check drawn on a U.S. bank; or | |
● | receipt by the rights agent of any certified check or bank draft drawn upon a U.S. bank or of any U.S. postal money order. |
If you are paying by uncertified check, please note that uncertified checks may take five or more business days to clear. If you wish to pay the total Subscription Price by uncertified check, we urge you to make payment sufficiently in advance of the time this rights offering expires to ensure that your payment is received by the rights agent and clears by the Expiration Time. We urge you to consider using a wire transfer, certified or cashier’s check or U.S. postal money order to help avoid missing the opportunity to exercise your subscription rights should you decide to exercise your subscription rights. The rights agent will hold your payment of the Subscription Price in a segregated account with other payments received from other subscription rights holders until we issue Series A Preferred Shares to you upon completion of the rights offering.
Signature Guarantee May Be Required
Your signature on each subscription rights certificate must be guaranteed by an eligible institution, such as a member firm of a registered national securities exchange, or a member of the Financial Industry Regulatory Authority, or a commercial bank or trust company having an office or correspondent in the United States, subject to standards and procedures adopted by the rights agent, unless:
● | your subscription rights certificate provides that shares are to be delivered to you as record holder of those subscription rights; or | |
● | you are an eligible institution. |
Delivery of Subscription Materials and Payment
You should deliver your subscription rights documents and payment of the total Subscription Price to the rights agent by one of the methods described below:
By hand, mail or courier to:
Rights Agent: Issuer Direct Corporation
Attn: Julie Felix
Address: 1981 Murray Holladay Road, Suite 100, SLC UT, 84117
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You may call the rights agent at 801.272.9294. Delivery to an address or by any method other than as set forth above will not constitute valid delivery.
Revocation of Exercise
Your exercise of rights may be withdrawn at any time prior to the revocation deadline, which will be 5:00 p.m., New York City time, on the business day prior to the Expiration Time, but not thereafter, subject to applicable law. Following the revocation deadline, your exercise of rights may not be revoked in whole or in part for any reason, including a decline in our common stock price, even if we have not already issued the shares of Series A preferred stock to you. For a revocation to be effective, a written or facsimile transmission notice of revocation must be received by the rights agent prior to the deadline for revocation at the address listed above.
You are responsible for all commissions, fees and other expenses, including brokerage commissions and transfer taxes, incurred in connection with the purchase or exercise of your subscription rights, except that we will pay any fees of the rights agent associated with this rights offering.
Information for Beneficial Holders and Brokers, Banks and Other Nominees
Procedures For DTC Participants and Other Beneficial Owners
If you are a beneficial owner of our common stock or will receive your subscription rights through a broker, bank or other nominee, we will ask your broker, bank or other nominee to notify you of this rights offering. If you wish to exercise your subscription rights, you will need to have your broker, bank or other nominee act for you. To indicate your decision to exercise, or not to exercise, your subscription rights, you should complete and return to your broker, bank or other nominee the form entitled “Beneficial Owner Election Form,” or any alternative form that your nominee provides to you, such that it will be received by the beneficial holder exercise deadline, which is 5:00 p.m., New York City time, on [________] , 2020, which is the midpointlast business day prior to the Expiration Time, unless the Expiration Time is extended. You should receive this form from your broker, bank or other nominee with the other rights offering materials. You should contact your broker, bank or other nominee if you do not receive this form, but you believe you are entitled to participate in this rights offering. We are not responsible if you do not receive the form from your broker, bank or nominee or if you receive it without sufficient time to respond.
If your subscription rights are held of record through DTC, you may exercise your subscription right by instructing DTC to transfer your subscription rights from your account to the account of the rights agent, together with a certification as to the aggregate number of subscription rights you are exercising and the number of Series A Preferred Shares you are subscribing for along with payment of the applicable amount of Subscription Price.
Notice and Certification to be Provided by Brokers, Bank and Other Nominees
If you are a broker, bank or other nominee who holds our common stock for the account of others as of the Record Date, you should notify the respective beneficial owners of such shares of this rights offering as soon as possible to find out their intentions with respect to exercising their subscription rights. You should obtain instructions from the beneficial owners with respect to their subscription rights. We have provided a “Beneficial Owner Election Form” that you may provide to beneficial holders to obtain their instructions with respect to their subscription rights. If the beneficial owner so instructs, you should complete the appropriate subscription rights certificates and submit them to the rights agent with the proper payment. If you hold our common stock for the account(s) of more than one beneficial owner, you may exercise the number of subscription rights to which all such beneficial owners in the aggregate otherwise would have been entitled had they been direct record holders of our common stock as of the Record Date, provided that you, as a nominee record holder, make a proper showing to the rights agent by submitting the form entitled “Nominee Holder Certification” that we will provide to you with your rights offering materials. If you did not receive this form, you should contact the rights agent to request a copy.
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Foreign Restrictions
Stockholders whose records addresses are outside the United States (for these purposes, the United States includes its territories and possessions and the District of Columbia) will receive written notice of the rights offering; however, rights certificates will not be mailed to such stockholders. The rights to which those certificates relate will be held by the rights agent for such foreign stockholders’ accounts until instructions are received to exercise the rights. If no instructions are received by the Expiration Date, such rights will expire.
Employee Plan Considerations
If you are a stockholder that is an employee benefit plan, including corporate savings plans and 401(k) plans, profit sharing/retirement plans for self-employed individuals and individual retirement accounts, which we collectively refer to as retirement plans, that is subject to the Employee Retirement Income Security Act of 1974, which we refer to as ERISA, you should be aware that additional contributions of cash to the retirement plan (other than rollover contributions or trustee-to-trustee transfers from other retirement plans) in order to exercise rights would be treated as retirement plan contributions and, therefore, when taken together with other contributions previously made, may be treated as excess or nondeductible contributions subject to excise taxes. In the case of retirement plans qualified under Section 401(a) of the Internal Revenue Code, additional cash contributions could cause violations of the maximum contribution limitation of Section 415 of the Internal Revenue Code or other qualification rules. Retirement plans in which contributions are so limited should consider whether there is an additional source of funds available within the retirement plan, including the liquidation of assets, with which to exercise the subscription rights. Because the rules governing retirement plans are extensive and complex, retirement plans contemplating the exercise of rights should consult with their counsel prior to such exercise.
Retirement plans and other tax exempt entities, including governmental plans, also should be aware that if they borrow in order to finance their exercise of subscription rights, they may become subject to the tax on unrelated business taxable income under Section 511 of the Internal Revenue Code. If any portion of an individual retirement account is used as security for a loan, the portion so used it treated as a distribution to the individual retirement account depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Internal Revenue Code contain prohibited transaction rules that may affect the exercise of the subscription rights. Due to the complexity of these rules and the penalties for noncompliance, retirement plans should consult with their counsel regarding the consequences of their exercise of subscription rights under ERISA and the Internal Revenue Code.
Determinations Regarding Exercise and Revocation
Determinations Regarding the Exercise or Subscription Rights
We will decide all questions concerning the timeliness, validity, form and eligibility of the exercise or revocation of exercise of your subscription rights, and any such determinations by us will be final and binding. We, in our sole discretion, may waive, in any particular instance, any defect or irregularity, or permit, in any particular instance, a defect or irregularity to be corrected within such time as we may determine. We will not be required to make uniform determinations in all cases. We may reject the exercise or revocation of exercise of any of your subscription rights because of any defect or irregularity. We will not accept an exercise of subscription rights or revocation of exercise until all irregularities have been waived by us or cured by you within such time as we decide, in our sole discretion.
Neither we nor the rights agent will be under any duty to notify you of any defect or irregularity in connection with your exercise of subscription rights or revocation of exercise, and we will not be liable for failure to notify you of any defect or irregularity. We reserve the right to reject your exercise of subscription rights or revocation of exercise if such exercise or revocation is not in accordance with the terms of this rights offering or not in proper form. We will also not accept the exercise of your subscription rights if our issuance of our preference or common stock to you could be deemed unlawful under applicable law.
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Calculation of Subscription Rights Exercised
If you do not indicate the number of subscription rights being exercised, or do not forward full payment of the total Subscription Price payment for the number of subscription rights that you indicate are being exercised, then we may treat you as having exercised your subscription right with respect to the maximum number of subscription rights that may be exercised with the aggregate Subscription Price payment you delivered to the rights agent. If we do not apply your full Subscription Price payment to your purchase of Series A Preferred Shares, we or the rights agent will return the excess amount to you by mail, without interest or deduction, as soon as practicable after the Expiration Time for this rights offering.
Regulatory Limitation
We will not be required to issue any Series A Preferred Share to you pursuant to this rights offering if, in our opinion, you would be required to obtain prior clearance or approval from any governmental regulatory authorities to own or control such shares and if, at the Expiration Time, you have not obtained such clearance or approval.
Compliance with Law
We are not making this rights offering in any country, state or other jurisdiction in which it is unlawful to do so, nor are we distributing or accepting any offers to purchase any of our Series A Preferred Shares from subscription rights holders who are residents of those countries, states or other jurisdictions or who are otherwise prohibited by applicable laws or regulations from accepting or exercising the subscription rights. We may delay the commencement of this rights offering in those jurisdictions, or change the terms of this rights offering, in whole or in part, in order to comply with the securities laws or other legal requirements of those jurisdictions. We may decline to make modifications to the terms of this rights offering requested by those jurisdictions, in which case, if you are a resident of such jurisdictions, or if you are otherwise prohibited by applicable laws or regulations from accepting or exercising the subscription rights, you will not be eligible to participate in this rights offering.
Effects of the Rights Offering
Common Stock Outstanding
As of the Record Date, we had 122,139,432 shares of common stock, 0 shares of Series B preferred stock and 0 shares of Series D preferred stock, issued and outstanding. All of the outstanding shares of Series B preferred stock and Series D preferred stock converted into shares of common stock prior to the commencement of the rights offering in the manner described above under the subsection “Terms of the Rights Offering.” We expect to have 122,139,432 shares of common stock and 680,625,010 shares of Series A preferred stock outstanding and no shares of Series B preferred stock or Series D preferred stock outstanding immediately after the rights offering.
Beneficial Ownership of Standby Purchasers
For a description of the beneficial ownership of the Standby Purchasers after the rights offering, see “Security Ownership of Certain Beneficial Owners and Management.”
Shares of Common Stock Issuable upon Exercise of Warrants and Options
As of the Record Date, we had warrants and options to purchase a total of 46,041,518 shares of common stock at various exercise prices, either fixed or variable. The warrants and options with variable exercise prices may contain anti-dilution provisions that adjust the exercise price range listed onof shares issuable upon exercise of the cover pagewarrants whenever we issue additional equity shares.
Getting Additional Information about the Rights Offering
Questions About Exercising Subscription Rights
If you have any questions or require assistance regarding the method of exercising your subscription rights or requests for additional copies of this prospectus, would increase (decrease) our pro forma net tangible book valueplease contact Jeremy Daniel, the Chief Financial Officer of the Company by approximately $1,200,000, our pro forma net tangible book value per share by approximately $0.13email at jdaniel@thelunghealthinstitute.com or phone at 813-280-1243x123.
Rights Agent
We have appointed Issuer Direct Corporation to act as rights agent for this rights offering. We will pay all fees and dilution per shareexpenses of the rights agent related to new investors by approximately $0.13, assumingits roles in connection with this rights offering and have also agreed to indemnify the rights agent from liabilities that they may incur in connection with this rights offering. However, all commissions, fees and expenses (including brokerage commission and fees and transfer taxes) incurred in connection with the numberpurchase or exercise of shares offeredrights will be for the account of the holder of the rights, and none of such commissions, fees or expenses will be paid by us as set forth onor the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
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OF FINANCEFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis.analysis by management provides information with respect to our financial condition and results of operations for the fiscal years ended December 31, 2019 and 2018 and for the quarterly period ended March 31, 2020.
Overview
On October 18, 2018, H-CYTE entered into an Asset Purchase Agreement, as amended by the amendment to Asset Purchase Agreement date January 8, 2019 (as amended, the “APA”) with RMS Group, pursuant to which it acquired certain assets and assumed certain liabilities of RMS Group, as reported in the 8-K/A filed in March of 2019 (the “RMS Transaction”). Based on the terms of the APA, the former RMS members had voting control of the combined company as of the closing of the RMS Transaction. For accounting purposes, the RMS Transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by the RMS Group and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of the RMS Group.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion to develop and distribute an FDA-approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a ten-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company entered into a services agreement with Rion (the “Rion Services Agreement”) which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. While the current LHI cellular therapy for chronic lung disease does not require FDA approval due to its biologic nature, the L-CYTE-01 therapy will need to be approved or cleared by the FDA before it is marketed in the U.S. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an IND application for review by the FDA for treatment of COPD.
Due to COVID-19, all of the LHI clinics are currently closed. The Company will evaluate reopening these clinics at the appropriate time. The Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled for treatment, both first time patients and recurring patients, and have rescheduled these patients for August 2020. However, there is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. Future quarters’ revenue is dependent on the timing of being able to treat patients again. 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. The Company is currently evaluating whether or not its protocol has the potential to help people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached. With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and 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.
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Results of Operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019
Revenue, Cost of Sales and Gross Profit
The Company recorded revenue for the three months ended March 31, 2020 and 2019 of approximately $1,017,000 and $1,324,000, respectively. The decrease in revenue for the three months ended March 31, 2020 is mainly attributable to a decrease in the number of treatments provided by the Biosciences division partially because of cancelling all treatments effective March 23, 2020.
For the three months ended March 31, 2020 and 2019, the Company incurred approximately $377,000 and $559,000 in cost of sales, respectively. The decrease in cost of sales for the three months ended March 31, 2020 is mainly attributable to a decrease in the number of treatments provided by the Biosciences division. The Company’s cost of sales is comprised of two main components: medical supplies and personnel costs for the Biosciences division. Medical supplies are predominantly variable costs and based on the number of treatments provided; personnel expenses are also variable as these are hourly positions. The number of treatments provided were 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.
For the three months ended March 31, 2020 and 2019 the Company generated a gross profit totaling approximately $640,000 (63%) and $765,000 (58%), respectively. The decrease in gross profit was due to the reduction in revenue, net of the cost of sales efficiencies. The increase in gross margin percentage for the three months ended March 31, 2020, is due to a greater proportionate reduction in cost of sales from cost controls for medical supply purchases and the ability to perform treatments using fewer staff members than the reduction in revenue.
Operating Expenses
● | Salaries and Related Costs |
For the three months ended March 31, 2020 and 2019, the Company incurred approximately $1,224,000 and $1,533,000 in salaries and related costs, respectively. The decrease in salaries and related costs is mainly attributable to a reduction in executive compensation. The Company anticipates that salaries and related costs will be further reduced in 2020 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.
● | Other General and Administrative |
For the three months ended March 31, 2020 and 2019, the Company incurred approximately $1,230,000 and $1,488,000 in other general and administrative costs, respectively. The decrease is primarily attributable to reduction in operating activities in the DenerveX division.
Of the total other general and administrative costs, for the three months ended March 31, 2020 and 2019, professional fees were approximately $316,000 and $369,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs incurred in 2019 to maintain CE Mark in Europe.
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The Company anticipates that the 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 months ended March 31, 2020 and 2019, the Company incurred approximately $750,000 and $0 in research and development expenses, respectively. The expense was in connection with the Rion Services Agreement. An additional $750,000 in expense will be incurred upon the achievement of certain milestones in the Rion Services Agreement. At this time, the Company is not able to estimate when these milestones will occur.
● | Advertising |
For the three months ended March 31, 2020 and 2019, the Company had approximately $145,000 and $1,136,000, respectively, in advertising costs. The decrease is attributable mainly to the Company determining that its marketing channels were not yielding the expected results for promoting the Company’s Biosciences division. The Company expects these expenses will continue at these reduced rates until the LHI clinics are reopened and patients are being treated again.
● | Depreciation and Amortization |
For the three months ended March 31, 2020 and 2019, the Company recognized approximately $22,000 and $211,000 respectively, in depreciation and amortization expense. The decrease is mainly attributable to amortization expense declining from $184,000 in the three months ended March 31, 2019 to $0 in the three months ended March 31, 2020 due to the complete write-off of intangibles at fiscal year-end 2019.
● | Other Income (Expense) |
Interest expense for the three months ended March 31, 2020 and 2019 was approximately $56,000 and $92,000, respectively. The decrease is attributable to the inclusion of debt instrument accretion for the period ended March 31, 2019 in the amount of $64,000.
The change in fair value of redemption put liability and change in fair value of the derivative liability - warrants for the three months ended March 31, 2020 were approximately $194,000 and $175,000, respectively. The redemption put liability is related to the Series D preferred stock financing in the fourth quarter of 2019. The Series B preferred stock’s derivative liability-warrants was recorded as a measurement period adjustment to the purchase price allocation related to the RMS Transaction in the third quarter of 2019.
Departure of Directors and Certain Officers, Election of Directors, Appointment of New Board Members and Officers.
On February 29, 2020, the Company accepted the resignations of Briley Cienkosz, Chief Marketing Officer, and Gary Mancini, Chief Relationship Officer, for personal reasons and not as a result of any disputes or disagreements.
On May 7, 2020, William Horne, the Company’s 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 go to his position as Chairman of the Board or as a Director. The resignation was not as a result of any disagreement with the Company or its policies and practices.
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. The Company will need to raise cash from debt and equity offerings following the closing of this rights offerings to continue its operations. There can be no assurance that the Company will be successful in doing so.
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Going Concern
The Company incurred net losses of approximately $2,416,000 and $3,695,000 for the three months ended March 31, 2020 and 2019, 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 Nevada in July 30, 2013 as Spinez Corp. MEDOVEXits report on the Company’s consolidated financial statements for the year ended December 31, 2019. The presence of the going concern explanatory paragraph suggests that the Company may not have sufficient liquidity or minimum cash levels to operate the business. Since its inception, the Company has incurred losses and anticipates that the Company will continue to incur losses until its products can generate enough revenue to offset its operating expenses. The present level of cash is insufficient to satisfy our current operating requirements.
In the parent company of Debride, which was incorporated underevent the laws of FloridaCompany is unable to fund its operations from existing cash on October 1, 2012, but didhand, 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 commence operations until February 1, 2013. MEDOVEX is a development stage company that has acquired a patent, patent applications and other intellectual property rightsinclude any adjustments relating to the use, development,recoverability and commercializationclassification of recorded asset amounts or the DenerVex device (the “DenerVex”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.
Recent Financing Developments
● | FWHC Financing |
On March 27, 2020, the Company issued a demand note in the principal amount of $500,000 to FWHC Bridge, in exchange for a loan in such amount. On April 9, 2020, the Company and FWHC Bridge amended and restated the demand note (as so amended and restated, the “FWHC Note”). to reflect the funding by FWHC Bridge of an additional advance of $500,000, bringing the aggregate amount of indebtedness funded by FWHC Bridge to $1,000,000. The DenerVexFWHC Note bears simple interest at a rate of 12% per annum. FWHC Bridge is intended to bean affiliate of FWHC, a unique device that combines tissue scraping and electrocautery designed to alleviate the back pain associated with facet joint syndrome.
● | Payroll Protection Program |
On April 29, 2020, the Company issued a promissory note (the “PPP Note”) in the medical technology area,principal amount of $809,082 to the Bank of Tampa in connection with particular focus ona loan in such amount made by the developmentBank of medical devices. Our first acquisitionTampa under the Payroll Protection Program (the “PPP”). The PPP Note bears interest at a rate of 1% per annum. The PPP Note is payable in 18 monthly payments of $45,533.23 commencing 6 months from the DenerVex device. The primary purposedate of the registration of this offeringPPP Note. While the PPP Note is dated April 29, 2020, the loan was not formally approved and funded until May 7, 2020.
The loan is re-payable in 18 monthly payments commencing November 29, 2020. The Company can apply for loan forgiveness in an amount equal to fund the pursuit, with appropriate governmental approvals and clinical trialssum of the commercial developmentfollowing 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 PPP. Not more than 40% of the DenerVex device. We believe that the DenerVex deviceamount forgiven can be developedattributed to encompass a numbernon-payroll costs.
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Debt
On April 17, 2020, the Company entered into the April SPA with the Purchasers pursuant to which the Company received an aggregate of medical applications, including pain relief. Besides development$2,842,695 in gross proceeds through the sale to the Purchasers of the DenerVex device,April Secured Notes and April Warrants (which number includes a subsequent investor for $7,500). After taking into account subsequent closings occurring after April 17, 2020, an aggregate of thirty-three Purchasers participated in the balanceApril Offering by purchasing April Secured Notes and April Warrants. The proceeds of the net proceeds of this offeringApril Offering will be used for working capital including any potential acquisitionand general corporate purposes. The April Offering resulted in the issuance of April Secured Notes in gross proceeds of $2,842,695. As part of the April Offering, the FWHC Note previously issued by the Company was amended and superseded by an April Secured Note in the amount of $1,000,000 issued to FWHC Bridge. Additionally, in connection with the April Offering, the Company entered into an amendment with FWHC Bridge with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the RMS Transaction and which was purchased by FWHC Bridge from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other companies or their technologies in areas where our experienced, world-class management team believesthings, eliminates the largest, most targetable market opportunities exist.
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 exchange for 750,108their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the Subscription Price in connection with this rights offering.
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 the FWHC Note. On April 17, 2020, Horne Management, LLC converted the loans into 4,368,278 shares of common stock inand a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock at the Subscription Price. As part of the April Offering, the FWHC Note was converted into an April Secured Note and is no longer a short-term note.
Cash activities for the three months ended March 31, 2020 and 2019 is summarized as follows:
Working Capital Deficit
As Of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Current Assets | $ | 361,000 | $ | 2,275,000 | ||||
Current Liabilities | 6,447,000 | 5,774,000 | ||||||
Working Capital Deficit | $ | 6,086,000 | $ | 3,499,000 |
Cash Flows
Cash activity for the three months ended March 31, 2020 and 2019 is summarized as follows:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash used in operating activities | $ | (1,890,759 | ) | $ | (3,878,137 | ) | ||
Cash used in investing activities | — | (377,069 | ) | |||||
Cash provided by financing activities | 589,063 | 6,777,447 | ||||||
Net (decrease) increase in cash | $ | (1,301,696 | ) | $ | 2,522,241 |
As of March 31, 2020, the Company had approximately $122,000 of cash on hand.
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Contractual Obligations and a 1% royalty on all salesCommercial Commitments
The short-term notes, related parties, as of any product sold based on the patent. In September 2013, we entered into a Co-Development Agreement with James Andrews, M.D. (“Dr. Andrews”), a directorMarch 31, 2020 totaling $2,135,000 is comprised of the Company, whereby Dr. Andrews committed to further evaluate the DenerVex device and to seek to make modifications and improvements to such technology. In exchange for such services, the Company agreed to pay Dr. Andrews a royalty equal to two (2%) percent of the DenerVex net sales during the five (5) year term of the Co-Development Agreement. Upon the termination of the term of the Co-Development Agreement, which has a minimum term of five (5) years, then the royalty payable to Dr. Andrews shall be reduced to one (1%) percent of DenerVex net sales after such termination of products covered by any U.S. patent on which Dr. Andrews is listed as a co-inventor; if any such patents are obtained. Such one (1%) percent royalty shall continue during the effectiveness of such patent. Pursuant to the Co-Development Agreement, Dr. Andrews agreed to assign any modifications or improvements to the DenerVexloans made to the Company subject to the royalty rights described
Years Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table sets forth certain operational data including their respective percentages of revenues for the validation testing as defined by regulatory requirements specificyears ended December 31, 2019 and 2018:
Year Ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | Change | Change% | |||||||||||||||||||||
Revenues | $ | 8,346,858 | 100 | % | $ | 7,883,115 | 100 | % | 463,743 | 6 | % | |||||||||||||
Gross Profit | 6,294,051 | 75 | % | 5,516,546 | 70 | % | 777,705 | 14 | % | |||||||||||||||
` | ||||||||||||||||||||||||
Operating Expenses | 36,852,436 | 442 | % | 9,708,592 | 123 | % | 27,143,844 | 280 | % | |||||||||||||||
Operating Loss | (30,558,385 | ) | -366 | % | (4,192,046 | ) | -53 | % | (26,366,339 | ) | 629 | % | ||||||||||||
Other Income (Expense) | 750,507 | 9 | % | (202,103 | ) | -3 | % | 952,610 | 471 | % | ||||||||||||||
Net Loss | (29,807,878 | ) | -357 | % | (4,394,149 | ) | -56 | % | (25,413,729 | ) | 578 | % | ||||||||||||
Net loss attributable to common stockholders | $ | (33,196,029 | ) | -398 | % | $ | (4,394,149 | ) | -56 | % | (28,801,880 | ) | 655 | % | ||||||||||
Loss per share – Basic and Diluted | $ | (0.34 | ) | $ | (0.13 | ) | ||||||||||||||||||
Weighted average outstanding shares used to compute basic and diluted net loss per share | 96,370,562 | 33,661,388 |
Revenue and Gross Profit
Revenue is derived predominantly from the Company’s Biosciences division, which resulted in revenue, net of allowance for refunds, for the year ended December 31, 2019 and December 31, 2018, of approximately $8,347,000 and $7,883,00, respectively. The increase in revenue is mainly attributable to an increase in the number of treatments provided to the product. Estimated costs: $50,000
For the year ended December 31, 2019 and December 31, 2018, the Company generated a gross profit totaling approximately $6,294,000 (75% of product development do not addressrevenue) and $5,517,000 (70% of revenue), respectively. The improvement in gross margin is primarily attributable to the costsCompany’s reduction in cost of regulatory clearance.sales coupled with an increase in revenues. In 2019, the Company performed more treatments with fewer clinical staff resulting in higher revenue and lower personnel expenses. The Company not Devicix, is responsible for obtaining regulatory clearance. The final product generated in Phase V will be presented to regulatory agencies for approval. Including clinical trials, the costs of regulatory approval to obtain commercial clearance are forecasted to be approximately $2.9 million.
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We classify our operating expenses into twothe following categories: researchsalaries and development andrelated costs, other general and administrative.
● | Salaries and Related Costs |
For the year ended December 31, 2019 and developmentDecember 31, 2018, the Company incurred approximately $8,646,000 and $3,779,000, respectively, in salaries and related costs. Included in salaries and related costs for the year ended December 31, 2019 was approximately $1,690,000 in compensation expense related to the common stock issued to Mr. William E. Horne on April 25, 2019. These shares were fully vested upon the issuance of a restricted stock award. The remaining increase in salaries and related costs is primarily attributable to the year ended December 31, 2018 reflecting only the expenses of the RMS Group and 2019 reflecting the consolidated costs for H-CYTE. Excluding the non-recurring stock compensation expense of approximately $1,690,000, the Company anticipates that salaries and related costs will decrease in 2020 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 primarily in response to the COVID-19 pandemic.
● | Other General and Administrative |
For the year ended December 31, 2019 and December 31, 2018, the Company incurred approximately $6,954,000 and $3,352,000, respectively, in other general and administrative costs. The increase is attributable to the year ended December 31, 2018 reflecting only the expenses of RMS and 2019 reflecting the consolidated costs for H-CYTE. Other general and administrative cost increases are attributable to increases in professional fees, contractors, and insurance expenses. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs incurred to maintain CE Mark in Europe. The Company has incurred additional accounting, consulting and legal fees due to the cost of being a public company and costs related to the reverse acquisition accounting in 2019. Contractor expenses consist primarily of fees paid to external service providers, laboratory supplies, costs for facilities and equipment,advertising contractors and other costsprofessionals utilized for research and development activities. Research and developmentpublic company administrative expenses. Insurance expenses are recorded in operating expenses inincreased mainly to the period in which they are incurred. Estimates have been used in determining the expense liability of certain costs where services have been performed but not yet invoiced. We monitor levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.
● | Advertising |
For the year ended December 31, 2019 and December 31, 2018, the Company had approximately $4,910,000 and $1,876,000, respectively, in advertising costs. The increases were attributable to increased marketing efforts to promote the Company’s Biosciences division. The Company expects these expenses to decrease significantly as the Company was not receiving the expected return on investment related to marketing expense and changed its strategy in 2020.
● | Loss on Impairment |
The Company recorded a loss on impairment for its DenerveX technology and its goodwill totaling approximately $2,944,000 and $12,564,000, respectively, for the year ended December 31, 2019. As the Company has determined that the DenerveX System no longer represents part of its strategic plans for the future, to support continued research and development activities, commercializationthe loss on impairment of our product candidate and increased coststhe technology was recorded. The Company also determined the fair value of operating asthe reporting unit was less than the carrying amount of goodwill. As a public company. These increases will likely include increased costsresult, during the fourth quarter of 2019 the Company recorded a goodwill impairment charge.
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For the year ended December 31, 2018, the Company recognized approximately $607,000 in impairment loss related to the hiringwrite-off of capitalized costs for the design and development of an application to be sold on the iOS and Android store platforms.
● | Depreciation & Amortization |
During year ended December 31, 2019, the Company recognized approximately $834,000 in depreciation and amortization expense, compared to approximately $95,000 in 2018. The increase is primarily attributable to amortization of the technology intangible asset acquired in the RMS Transaction. The expense for 2020 will be significantly lower due to the loss on impairment recorded for year ended December 31, 2019.
● | Other Income (Expense) |
Interest expense for the year ended December 31, 2019 and 2018 was approximately $299,000 and $184,000, respectively. The increase is attributable to the debt assumed in the RMS Transaction as well as the additional personneldebt financing in 2019. This expense may grow in 2020 as a result of potential incremental debt financing.
The change in fair value of redemption put liability and feeschange in fair value of the derivative liability - warrants for the year ended December 31, 2019 were approximately $347,000 and $827,000, respectively, and was a result of the assumption of the Series B Convertible Preferred Stock in the RMS Transaction and the Series D Convertible Preferred Stock financing in 2019, respectively.
Cash Flows
Net cash used in operating activities was approximately $12,291,00 during the year ended December 31, 2019, compared to outside consultants, lawyersapproximately $3,545,000 in 2018. Net cash used by investing activities was approximately $393,000 during the year ended December 31, 2019, compared to approximately $23,000 during the year ended December 31, 2018. Net cash provided by financing activities was approximately $14,039,000 during the year ended December 31, 2019, compared to approximately $3,386,000 in 2018.
The Company had approximately $1,424,000 and accountants, among$70,000 of cash on hand at December 31, 2019 and 2018, respectively.
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.
Equity
During the first quarter of 2019, the Company entered into a securities purchase agreement (the “SPA”) with purchasers pursuant to which the purchasers invested in the Company an aggregate amount of $7,200,000, with $7,000,000 in cash and $200,000 by cancellation of debt. All the convertible notes from the SPA were automatically converted into shares of common stock.
In July 2019, the Company raised $100,000 by selling 200,000 shares of common stock at $0.50 per share.
On November 21, 2019, H-CYTE entered into a securities purchase agreement (the “Series D SPA”) with FWHC, an accredited investor, for the purchase of 146,998 shares of Series D preferred stock, par value $0.001 per share and a ten-year warrant to purchase up to 14,669,757 shares of common stock at an exercise price of $0.75 per share (the “Warrant”) resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). In January 2020, the Company closed on an additional $100,000 in the Series D SPA with an unrelated investor.
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Short-term Notes, Related Party
The short-term note, related party, as of December 31, 2019, totaling $1,635,000 is comprised of four loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes. In connection with the April Offering, these loans were converted into 4,368,278 shares of common stock and a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock at the Subscription Price and such loans are no longer outstanding.
A loan for $900,000 was made on July 25, 2019. This loan accrues interest at 5.5% and is due and payable upon demand of the creditor.
Three loans were made between September and December 2019 totaling $735,000, with interest rates of 12% increasing to 15% if not repaid by maturity (six months after advance) and if not repaid within two months of advance, warrant coverage of approximately 1.14 warrants per $1 advanced. As part of the April Offering (as defined herein), Mr. Horne subordinated his notes to the April Secured Notes. YPH Holdings, LLC, which is controlled by Michael Yurkowsky, purchased a $25,000 April Secured Note in the April Offering.
Other Debt Acquired in the RMS Transaction
The $750,000 convertible notes payable assumed in the RMS Transaction, 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. The $650,000 remaining principal balance of these convertible notes matured in August and September 2019.
In November 2019 the Company redeemed $350,000 of convertible notes payable in principal, and $52,033 and $80,225 in accrued interest and penalties, respectively, for three of the noteholders.
The Company also reached an extension with the remaining noteholder which extended the maturity date of the loan for one year, until September 30, 2020. This note had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of approximately $425,000 for the year ending December 31, 2019. Additionally, approximately 424,000 warrants were issued in connection with the extension of the note. The convertible notes are secured by all the assets of the Company.
On March 27, 2020, this remaining outstanding note was acquired from the noteholder by FWHC Bridge, an affiliate of FWHC, a pre-existing stockholder of the Company, which served as lead investor in the Series D SPA described above.
The Company also has certain notes payable with outstanding balances of approximately $78,000 and $0 at December 31, 2019 and 2018, respectively. The notes had a maturity date of August 1, 2019, but the Company successfully reached an agreement on August 12, 2019 for an eighteen-month extension on the notes.
Funding Requirements, Liquidity and Going Concern
The Company incurred net losses of approximately $29,808,000 and $4,394,000 for the years ending December 31, 2019 and 2018, respectively. 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. The consolidated financial statements are prepared using United States generally accepted accounting principles (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Biosciences division will continue to incur losses until sufficient revenue is attained utilizing the infusion of financial resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol as well as taking the protocol through the FDA process.
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The recent coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of operations. The impact of the outbreak of COVID-19 on the businesses and the economy in the U.S. and the rest of the world is and is expected to continue to be significant. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. The Company recently has taken steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through at least the end of July. This decision has put significant financial strain on the Company. The Company made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, and Dallas. The Company will reevaluate when operations will recommence at these clinics as more information about COVID-19 becomes available.
The Company believes these expense reductions are necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled these patients to August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s fourth quarter 2019 revenue was approximately $1.8 million. The Company’s revenue in the first quarter of 2020 was substantially less than that of the fourth quarter in 2019 and the Company believes that future quarters’ revenue is dependent on the timing for being able to treat patients again. The Company will continue to focus on its goal of taking the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases.
With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA. There can be no assurance that the Company will be successful in doing so.
Although these cost reduction measures were taken in the first quarter of 2020, with the Company’s revenue-generating activities suspended, the present level of cash is insufficient to satisfy the Company’s current operating requirements. The Company is seeking additional sources of funds from the sale of equity or debt securities or through a credit facility.
On April 17, 2020, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with an aggregate of 32 investors (the “Purchaser(s)”) pursuant to which the Company received an aggregate of $2,842,445 in gross proceeds (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 an aggregate of $2,842,445 in Secured Convertible Promissory Notes, which includes a subsequent investor for $7,500 (the “April Secured Notes”). The April Secured Notes bear interest at 12% per annum and have a maturity date of October 31, 2020. The April Secured Notes are secured by all of the Company’s assets pursuant to a security agreement and an intellectual Property Security Agreement which are included as Exhibits to this Annual report on Form 10-K. The conversion price of the April Secured Notes shall be equal to the lesser of (i) the Subscription Price in this rights offering and (ii) the price per share obtained by dividing (x) $3,000,000 by the number of fully diluted shares outstanding immediately prior to the commencement of this rights offering. The obligations of the Company under the April Secured Notes are guaranteed by each of the Company’s subsidiaries. FWHC Bridge is an affiliate of FWHC, who has acted as our lead investor in the Series D SPA described above. FWHC Bridge was also the lender of the $1,000,000 loaned to the Company in March and April through the FWHC Note and was the lead investor in the April Offering purchasing an additional $1,535,570 of April Secured Notes. YPH Holdings, LLC, which is an affiliate of Michael Yurkowsky, who is a Director of the Company, purchased $25,000 of April Secured Notes on the same terms as all other expenses. Additionally, we anticipateinvestors.
Each Purchaser received a warrant to purchase 100% of the aggregate number of shares of common stock into which such Purchaser’s April Secured Note may ultimately be converted, except that FWHC Bridge separately received an April Warrant to purchase up to 200% of the aggregate number of shares of Common stock into which the April Secured Note in the amount of $1,000,000 issued to FWHC Bridge in substitution of the FWHC Note may ultimately be converted. The April Warrants have an exercise price equal to the Subscription Price in this rights offering.
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The April SPA provides a commitment on the part of each Purchaser to agree to invest an identical amount (as purchased in the April Offering and excluding the April Secured Note issued to FWHC Bridge in substitution for the FWHC Note) in this rights offering as a standby commitment (the “Standby Commitment”). In the event that any stockholders in this rights offering do not fully subscribe for their share of Series A preferred stock, their purchase would be filled by the Purchasers on a pro rata basis up to the Standby Commitment Amount. In the event that any Purchaser fails to fulfil its respective Standby Commitment then the April Warrants issued to such Purchaser in the April Offering will be cancelled.
In connection with the April Offering, the Company’s CEO Bill Horne entered into an amendment letter to his employment agreement which provides that his salary will be reduced to $0 per month; provided that on the date that the Company receives FDA approval to commence clinical trials for its products, Mr. Horne’s salary will be increased costs associatedto a total of $18,750 per month (i.e. $225,000 per annum). Following the completion of this offering, the Company intends to enter into a second amendment letter with beingMr. Horne to his employment agreement, which would raise his base salary under his employment agreement to $20,833.33 per month (i.e. $250,000 per annum), upon terms and conditions to be mutually agreed to by the parties and subject to further approval by the board of directors.
As part of the April Offering, the holders of certain existing warrants which contained anti-dilution price protection and other objectionable features that would have been triggered by the April Offering agreed to waive and permanently terminate all such price protections on their warrants moving forward. In connection with this rights offering, the Company intends to implement one-time adjustment of the exercise price of these warrants to equal the Subscription Price and to gross up the number of warrants issuable.
In addition, in connection with the April Offering, the Company entered into an amendment with FWHC Bridge with respect to the sole remaining convertible note originally issued in 2018 and assumed in the RMS Transaction, which such convertible note was purchased by FWHC Bridge from its original holder on March 27, 2020. This note has a public company includingprincipal amount of $424,615 as of December 31, 2019. The amendment provides that interest under the note will no longer be payable monthly and will accrue until maturity or conversion.
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 stockholders. 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, relatedor discontinue operations. The consolidated financial statements do not include any adjustments relating to services associated with maintaining compliance with exchange listingthe recoverability and Securitiesclassification of recorded asset amounts or the amounts and Exchange Commission requirements, insurance, and investor relations costs.
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles.U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.
On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.
We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this prospectus,report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
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Fair Value Measurements
We measure certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and Procedures
We use the fair value measurement framework to correct this material weakness, including, among other things, hiringvalue these assets and report the fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a controllerfair value hierarchy that prioritizes observable and unobservable inputs used to perform certain accountingmeasure fair values in their broad levels. These levels from highest to lowest priority are as follows:
● | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; | |
● | Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and | |
● | Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available. |
The determination of fair value and reporting functions to further segregate dutiesthe assessment of a measurement’s placement within the Company.hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also added John C. Thomas, Jr.engage external advisors to our Boardassist us in determining fair value, as appropriate.
Although we believe that the recorded fair value of Directors in April 2014 as our financial expertinstruments is appropriate at December 31, 2019, these fair values may not be indicative of net realizable value or reflective of future fair values.
Income Taxes
The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and chairincome tax bases of the Audit Committee. Mr. Thomas is a certified public accountant with over 24 years of experience as a chief financial officer for public and private companies.
The Company files income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. The tax years that could be subject to federal audit are 2013.
Revenue Recognition
We have sustained losses since inception which has generally resulted in a zero percent effective tax rate; in addition we have not incurred any interest or penalties. Our policy is to recognize interest and penalties accrued on tax matters as a component of income tax expense.
The Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606, Revenue From Contracts with Customers, which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company records revenue under ASC 606 when control is transferred to the customer, which is consistent with past practice. The adoption of ASC 718this standard did not have a material impact on the consolidated financial statements.
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The Company uses a standard pricing model for the types of cellular therapy treatments that is generallyoffered to its patients. The transaction price accounts for medical, surgical, facility, and office services rendered by LHI for consented procedures and is recorded as revenue. The Company recognizes revenue when the terms of a contract with a patient are satisfied.
The Company offers two types of cellular therapy treatments to their patients.
1) | The first type of treatment includes medical services rendered typically over a two-day period in which the patient receives cellular therapy. For this treatment type, revenue is recognized in full at time of service. | |
2) | The Company also offers a four-day treatment in which medical services are rendered typically over a two-day period and then again, approximately three months later, medical services are rendered for an additional two days of treatment. Payment is collected in full for both service periods at the time the first treatment is rendered. Revenue is recognized when services are performed based on the estimated stand-alone selling price for each session of treatment. The Company has deferred recognition of revenue amounting to approximately $1,046,000 and $326,000 at December 31, 2019 and December 31, 2018, respectively. |
Management performed an analysis of its customer refund history for refunds issued related to prior year’s revenue. Management used the results of this historical refund analysis to record a reserve for anticipated future refunds related to recognized as an expense over the requisite service period. No options were granted during the first six months of 2014. For the period endedrevenue. At December 31, 2013, the following stock option grants were made, giving effect to a 1 for 2 reverse stock split:
Grant Date | Options Granted | Exercise Price | Estimated Fair Value of Underlying Stock | Intrinsic Value | |||||||||
October 14, 2013 | 60,000 | $ | 2.50 | $ | 2.50 | None |
Weighted fair value of options granted | $ | 2.50 | ||
Expected term (years) | 6 | |||
Risk-free interest rate | 2.75 | % | ||
Volatility | 81 | % | ||
Dividend yield | None |
Operating expenses: | ||||
General and administrative | $ | 910,131 | ||
Research and development | 347,150 | |||
Total operating expenses | 1,257,281 | |||
Net loss | $ | (1,257,281 | ) |
Operating expenses: | ||||
General and administrative | $ | 582,946 | ||
Research and development | 90,387 | |||
Total operating expenses | 673,333 | |||
Net loss | $ | (673,333 | ) |
There was approximately $68,000, and $0 of revenue recognized by the Company for the year ended December 31, 2013. The presence of2019 and 2018 for the going concern explanatory paragraph may suggest that we may not have sufficient liquidity or minimum cash levels to operate the business.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02 (as amended), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are no recentlyclassified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The Company has not entered into significant lease agreements in which it is the lessor. For the lease agreements in which the Company is lessee, under Topic 842, lessees are required to recognize a lease liability and right-of-use asset for all leases (except for short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components.
In June 2018, FASB issued accounting standards thatASU No. 2018-07, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 in the first quarter of 2019. The adoption of this standard did not have a material impact on us.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which amends the approaches and methodologies in accounting for income taxes during interim periods and makes changes to certain income tax classifications. The JOBS Act permits an “emerging growth company” such as usnew standard allows exceptions to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Off-Balance Sheet Arrangements
As of March 31, 2020, the Company did 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 were not a tiny incision is made aboveparty to any derivative contracts or synthetic leases at December 31, 2019.
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On July 11, 2019, MedoveX changed its named to H-CYTE, Inc. (“H-CYTE,” the facet joint“Company,” or “we”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the DenerVex will be inserted throughCompany’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 entered into an Asset Purchase Agreement, as amended by the amendment to Asset Purchase Agreement date January 8, 2019 (as amended, the “APA”) with RMS Group, pursuant to which it acquired certain assets and assumed certain liabilities of RMS Group, as reported in the 8-K/A filed in March of 2019 (the “RMS Transaction”). Based on the terms of the APA, the former RMS members had voting control of the combined company as of the closing of the RMS Transaction. For accounting purposes, the RMS Transaction was treated as a cannulareverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the facet joint region. The cannula has a bullet-shaped tip that acts as a retractor system. The physician performingacquisition date of January 8, 2019 now reflect the procedure inserts a guidewire downhistorical financial statements of RMS.
Prior to the facet joint regionRMS Transaction, the consolidated results for H-CYTE included the financial activities of RMS, LI, RMS Nashville, RMS Pittsburgh, RMS Scottsdale, RMS Dallas, RMS State, CHIT, RMS LI Management, and Stockholder. H-CYTE included LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale, as VIEs.
As of the RMS Transaction, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), MedoveX Corp, CHIT, and Lung Institute Tampa, LLC (LI Tampa formerly Blue Zone Lung Tampa, LLC) and the cannula/retractor is inserted over that wire. The inner bullet is removed, leaving a hollow tube for working space. The device is positioned and manipulated via fluoroscopy. No other devices or tools are required beyond standard surgical tools for closure and an electrocautery unit. The DenerVex is designed to be powered by (and compatible with) a few currently marketed electrocautery consoles. However, in order to get the widest possible distributionresults of the aforementioned VIE’s. Additionally, H-CYTE Management, LLC is the operator and manager of the various Lung Health Institute clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale.
The Company has two divisions: the medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). The Company has decided to focus its available resources on the Biosciences division as it represents a significantly greater opportunity than the DenerveX division as explained below in the section titled “Business.” The Company is no longer manufacturing or selling the DenerveX device and is exploring how to best monetize such technology.
Biosciences Division
The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicine to treat chronic lung disease. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality care to the LHI clinics located in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas, while producing positive medical outcomes.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion to develop and distribute an FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company intends to develop its own cautery generator. Activationentered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the device is intended to resultlimited purpose of (i) consulting with and assisting H-CYTE in the combined effectfurther research and development for the generation of a tissue removal actionnew cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agreed to consult with electrocauteryH-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
With these agreements, Rion serves as the facet joint surface resulting in removalproduct supplier and co-developer of the nerves and synovial membrane tissues. The treatment of each joint will take a couple of minutes and the incision will be closedL-CYTE-01 with a single suture stitch.
Evolving Impact of COVID-19
The recent coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial condition and results of operations going forward in 2020. The impact of the adult U.S. population suffer from chronic lower back pain.
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The Company believes these expense reductions are necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled these patients into August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020. As such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s fourth quarter 2019 revenue was approximately $1.8 million. The Company’s revenue in the first quarter of 2020 was substantially less than that of the fourth quarter in 2019 and the Company believes that future quarters’ revenue is dependent on the timing for being able to treat patients again. 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. The Company will evaluate reopening the clinics at the appropriate time.
Company’s Two Operating Divisions
The Company has two divisions: the Biosciences division and the DenerveX division. The Company has decided to focus its available resources on the Biosciences division as it represents a significantly greater opportunity than the DenerveX division as explained below. The Company is no longer manufacturing or selling the DenerveX device and is exploring its options as to how best to monetize such technology.
Healthcare Medical Biosciences Division
The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicine to treat chronic lung disease. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality care to the LHI clinics located in Tampa, Nashville, Scottsdale, Pittsburgh, and Dallas, while producing positive medical outcomes.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion to develop and distribute an FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of disability in U.S. adults. Approximately 31% of chronic low back pain is attributed to FJS, which effects the facet jointsdeath in the spine,U.S. Rion has established a novel technology to harness the small stabilizing joints located betweenhealing 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 behind adjacent vertebrae. When FJS occurs,neurological organ systems. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the facet jointsCompany 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 backfurther research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
With these agreements, Rion will serve as the spine degenerateproduct supplier and subsequently cause pain. The facet joints are found at every level on both sidesco-developer of the lumbar spine. They provide about 20% of the twisting stability in the low back. Each facet joint is positioned at each level of the spine to provide the needed support, especiallyL-CYTE-01 with rotation.
The following information pertains to the facet joint region. The cannula has a bullet-shaped tip that acts as a retractor system. The physician performing the procedure inserts a guidewire down to the facet joint region and the cannula/retractor is inserted over that wire. The inner bullet is removed, leaving a hollow tube for working space. The device is positioned and manipulated via fluoroscopy. No other devices or tools are required beyond standard surgical tools for closure. The DenerVex device is designed to be powered by (and compatible with) currently marketed electrocautery consoles currently in most procedure rooms. Activation of the device results in the combined effect of a tissue removal action with electrocautery to the facet joint surface resulting in removal of the nerves and synovial membrane tissues. The treatment of each joint is estimated to take a couple of minutes and the incision is closed with a single suture stitch.
Competition
Developing and commercializing new productsFDA approved drugs and therapies is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change. We facechanges. The Company faces intense competition worldwide from medical device,pharmaceutical, biomedical technology, and medical productstherapy, and combination products companies, including major medical productspharmaceutical companies. WeThe Company may be unable to respond to technological advances through the development and introduction of new products. Most of ourthe Company’s existing and potential competitors have substantially greater financial, sales and marketing, sales,manufacturing and distribution, manufacturing and technological resources. These competitors may also be in the process of seeking FDA or(or other regulatory approvals, orapprovals) and patent protection for new products. Our competitors may commercialize new products in advance of our products. Our productsThe Company’s biologics product lines also face competition from numerous existing products and procedures, which currently are considered part of the standard of care. We believeThe Company believes that the principal competitive factors in ourits markets are:
● | the quality of outcomes for medical conditions; |
● | acceptance by |
● | ease of use and reliability; |
● | technical leadership and superiority; |
● | effective marketing and distribution; |
● | speed to market; and |
● | price and qualification for insurance coverage and reimbursement. |
The Company will also compete in the marketplace to recruit and retain qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses complementary to ourits products or advantageous to ourits business.
The Company is aware that several of several companies that compete orits competitors are developing technologies in ourits current and future products areas. With regardThere are numerous regenerative medicine providers who make claims that they are able to the DenerVex device, we believe that our principaltreat chronic lung disease. Most of these competitors include RF ablation devices manufacturers Cosmanare small clinics with little brand recognition. The landscape is changing as academia and Stryker. We may also face competition from cryodenervation device manufacturers,large well-known providers, such as Spembly Medical Systems. We may also face competitionthe Mayo Clinic, are beginning to develop therapies for multiple diseases using regenerative medicine.
Customers
The Company’s customer base consists of individuals who are suffering from developing but potentially untested technologies such as as Zyga’s GLYDER device. In order to compete effectively, our products will have to achieve widespread market acceptance, receive adequate insurance coveragechronic lung disease that are searching for alternative methods of treatment outside of traditional pharmaceutical care which has not been successful for them in the past.
Intellectual Property
The Company is currently a direct care service provider and reimbursement, be cost effective and be simultaneously safe and effective. Please see “Business-Industry Market” for a detailed descriptiondoes not own any intellectual property around its current procedure. The development of the currently available treatments for FJS.
Governmental authorities in the United States, atU. S. (at the federal, state and local level,levels) and in other countriesabroad, extensively regulate, among other things, the research and development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. Any product
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FDA Regulation
The current LHI cellular therapy for chronic lung disease does not require FDA approval due to its biologic nature. The L-CYTE-01 therapy that we develop mustwill be approved by the FDA before they may be legally marketeddeveloped in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries.
FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, record-keeping, market clearance or approval, advertising and promotion, import and export, marketingsales and sales,marketing, and distribution of medical devices and products.
In the United States, the FDA subjects medicalpharmaceutical and biologic products to rigorous review. If we dothe Company does not comply with applicable requirements, weit may be fined, the government may refuse to approve ourits marketing applications or to allow usit to manufacture or market ourits products, and wethe Company may be criminally prosecuted. Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions, or criminal prosecution.
The FDA Policy framework serves to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:
The Company meets the requirement of the FDA to find any opportunities to expedite trials due to its existing LHI treatment plus combination biologic in development with Rion, known as L-CYTE-01. This combination meets the definition of a regenerative advanced therapy: “cell therapy, therapeutic tissue engineering products, human cell and product registration requirements in many foreign countries intissue products, and combination products using any such therapies or products, except for those regulated solely under section 361 of the PHS Act and part 1271 of title 21, Code of Federal Regulations.” The L-CYTE-01 protocol will be used to treat, modify, reverse, or cure a serious or life-threatening disease or condition such as COPD. The Company also has real-world data (3000+ patients with statistically significant data points) which we may seekindicates the drug has the potential to sell our products, includingaddress an unmet medical need.
Proprietary Medical Device Business (DenerveX division)
The Company’s business of designing and marketing proprietary medical devices for commercial use in the areas of product standards, packaging requirements, labeling requirements, importU.S. and export restrictionsEurope began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System and tariff regulations, duties and tax requirements. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.
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In the Notified Body. Further inspections may occur oversecond quarter of 2019, the life of the product. Our third partyCompany determined that its contract manufacturer has ISO certification which is generally one ofwas not able to meet the requirements for approval underproducing the guidelines establishedfinished DenerveX product. Additionally, in its evaluation of its current distribution channels, the Company determined that many of these channels were not cost effective. As a result of the above evaluations, certain European distributor agreements were terminated, all other representatives were notified that the Company had temporarily suspended the manufacture and sale of the DenerveX product, the Company continued to source alternative manufacturing and distributor options, and the Company is considering other product-monetizing strategies, including, but not limited to, strategic partnerships. To date, these efforts have not been successful.
In the first quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and distributor options for the DenerveX product. Although the Company believes the DenerveX technology has value, the Company does not believe it will realize the value in the European Union.
In the United States,U. S., there are Federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in Federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA as pharmaceuticals, biologics, medical devices, and hospitals, physicians and other potential purchasers of such products. Other provisions of Federal and state laws provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. In addition, certain states have implemented regulations requiring medical device and pharmaceutical companies to report all gifts and payments of over $50 to medical practitioners. This does not apply to instances involving clinical trials.
Although we intendthe Company intends to structure ourits future business relationships with clinical investigators and purchasers of ourits products to comply with these and other applicable laws, it is possible that some of ourthe Company’s business practices in the future could be subject to scrutiny and challengechallenged by Federal or stateState enforcement officials under these laws.
Research and Development Expense
Research and development firm contractedcosts and expenses consist primarily of fees paid to develop the DenerVex device, which was entered into in November 2013, contemplates a five-phase development process with an FDA submission applicationexternal service providers, laboratory testing, supplies, costs for clearance on or around March 2015. Including materials, the Company estimates that the process will cost approximately $1,000,000facilities and will take approximately 16 months. The project plan does not budgetequipment, and other costs for IP work, marketing work, regulatory, or training material or manufacturing development, including fixtures and validation. The project is currently in the latter stages of Phase 2 and the beginning stages of Phase 3, and we are currently evaluating a concept prototype of the DenerVex.
Employees
As of July 28, 2020, the Company had 19 total full-time employees. None of ourits employees are represented by a union.
Properties
The Company leases corporate office space in Tampa, FL and Atlanta, GA (the offices in Atlanta have been subleased). The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. Each location has its own expiration date ranging from July 31, 2020 to August 31, 2023. During the fiscal years ended December 31, 2019 and December 31, 2018, the Company paid for all of its leases in the aggregate amounts of $545,422 and $421,480, respectively. At the time of filing, all of these clinics are closed as a result of COVID-19. The Company will evaluate reopening these clinics at the appropriate time. Despite of the temporary closed status of its clinics, the Company is current on all of its lease payments and estimates to incur a sum of $549,829 on its office and clinic leases in the fiscal year of 2020.
The Company believes its existing facilities are suitable to meet current operational needs.
Legal Proceedings
The Company may be subject to a collective bargaining agreement or represented by trade or labor union. Wevarious claims, complaints, and legal actions that arise from time to time in the normal course of business. Management does not believe that we have a good relationship with our employees.
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Our current executive officers are Jarrett Gorlin, Chief Executive Officer, Patrick Kullmann, President and Chief Operating Officer, Charles Farrahar, Chief Financial Officer, Secretary, and Treasurer, and Dennis Moon, Senior Vice President.
The following sets forth certaintable provides information aboutas of the directors anddate of this prospectus as to each person who is, as of the filing hereof, a director and/or executive officersofficer of the Company:
Name | Position(s) | Age | ||
Chief Executive Officer | 66 | |||
Chief Financial Officer | 44 | |||
40 | ||||
Michael Yurkowsky | Director | 48 | ||
Raymond Monteleone | Director (1) | 72 |
William “Bill” Horne is a founder and current Medical Director for the American Sports Medicine Institute, a non-profit organization dedicated to the prevention, education and research in orthopaedic and sports medicine, as well as the Andrews Research and Education Institute.
Raymond Monteleone, Director
Raymond Monteleone serves managerial and consultative roles at several enterprises. Mr. Monteleone currently serves as the chairman and president of Paladin Global Partners, LLC since 2007; a board member and vice president of Dannelly, Monteleone & Associates, LLC since 2010; sits on the board of Chenmoore Engineering Inc. [NasdaqGM:BMTI] since August2015; is a managing member at Diner Investment Partners, LLC since 2016 and Uyona Management, LLC since 2013; a managing member and the chief financial officer at HBRE, LLC since 2013 and Horne Management, LLC since 2011; and the president at Monteleone & Associates Consulting, Inc. since 2005. BioMimetic TherapeuticsMr. Monteleone received a college degree from the New York Institute of Technology and an MBA degree from Florida Atlantic University. Mr. Monteleone is developingpresently the interim CFO of LVI Intermediate Holdings, Inc.
A former partner with Arthur Young (now EY), Ray Monteleone joined H-CYTE after working closely with several large and commercializing bio-active recombinant protein-device combination products forsmall companies serving as board member and/or advisor, specializing in strategic planning, health care, tax and financial planning and corporate management. Mr. Monteleone previously held officer positions with Sensormatic Electronics Corporation, a billion-dollar company listed in the healing of musculoskeletal injuriesNew York Stock Exchange and disease, including orthopedic, periodontal, spine and sports injury applications. Mr. Papasan has also served aswas a member of the Board of Directors of Reaves Utility Income Fund [NasdaqCM:UTG], a closed-end management investment company, since February 2003 and of Triumph Bancshares, Inc. (a bank holding company) since April 2005. Mr. Papasan also serves as a Director of SSR Engineering, Inc., AxioMed Spine Corporation, and MiMedx Group, Inc.
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Michael Yurkowsky, Director
Michael Yurkowsky operates his own family office, YP Holdings LLC, which has an investment portfolio of 50 private companies and participated in over 100 financing transactions with public companies since 2012. Previously Mr. Yurkowsky managed his own hedge fund and worked as a broker at several national broker-dealer firms.
Michael Yurkowsky comes to H-Cyte with more than 25 years of experience in financial services. Yurkowsky spent the first ten years of his career working as a broker with several national broker-dealers and as a licensed investment banker. He went on to start and manage his own hedge fund, specializing in debt arbitrage. In 2012, he opened his own family office, YP Holdings LLC, which has invested in more than 50 private companies and participated in more than 100 public company which he joined in 2001. Over the past 24 years,financing transactions. Throughout his career, Mr. ThomasYurkowsky has served as the CFO of numerous startup companies and managed their financing activities from the initial financing up to their initial public offering. Some of these companies are still private and some have become public entities. The companies in the health care industry that have gone public while Mr. Thomas was the CFO include CytRx Corporation (1986 – 1990), CytRx Biopool (1988 – 1991), Medicis Pharmaceutical Corporation (1988 –1991), EntreMed, Inc. (1991 – 1997), DARA BioSciences, Inc. (1998 – 2009) and, MiMedx, Inc. (2006 – 2009). He has also been the CFO of Surgi-Vision, Inc., a private research company involved in MRI technology (1998 – 2010).Mr. Thomas has also been the CFO of Motion Reality, Inc., a privately-held company with proprietary software that captures and analyzes motion data since 1991. Mr. Thomas is a certified public accountant and is the Chairman of the Finance Committee and a Trustee at The Walker School, a private pre-K through 12th grade school in Marietta, Georgia.
Jeremy Daniel, Chief Financial Officer
Jeremy Daniel has been the Chief Financial Officer of Regenerative Medicine Solutions, LLC (“RMS”) since 2013. Prior to that, Mr. Daniel worked in the private sector in the accounting and finance field for the past twenty years. Mr. Jeremy Daniel is a board memberCertified Public Accountant and received a college degree from the University of MedShape in Atlanta, Georgia and Chairman of Barrington Children’s Charities which he and his wife founded. Tom holds a BBA from St. Norbert CollegeCincinnati and an MBA degree from Loyola University of Chicago.
Ann Miller, Chief Operating Officer
Ann Miller as Chief of Staff at Shriners HospitalsOperating Officer, is responsible for Childrenleading operations through research evaluation and Medical Director of Shriners’ Spinal Cord Injury Unit. Dr. Betz is also a Professor of Orthopedic Surgery at Temple University School of Medicine.
Family Relationships
There are no family relationships among the President of Judicial Correction Services, Inc. (“JCS”), the largest provider of private probation services in the country, which he co-founded in 2001. In 2011, he successfully negotiated the sale of JCS to Correctional Healthcare Companies (“CHC”), after which he has continued to serve as the President of JCS. Under Mr. Gorlin’s leadership, JCS made INC. Magazine’s listofficers and directors, nor are there any arrangements or understanding between any of the Fastest Growing Companies in America in 2010, 2011, and 2012. Mr. Gorlin began his career by becoming the youngest rated commercial helicopter pilot at the ageDirectors or Officers of 16, and becoming the chief pilot for the Fulton County Sheriff’s Office in Atlanta, Georgia. Mr. Gorlin has served a Captain and Commander at the Fulton County Sheriff’s Office where he has worked from 1996our Company or any other person pursuant to present. He continueswhich any Officer or Director was or is to serve his community through law enforcement as the commander of a reserve unit overseeing 90 deputy sheriffs, who work in the courts, jail and warrant divisions. Mr. Gorlin also serves as a political advisor and consultant to many elected officials in the Atlanta area, including the current sitting Sheriff of Fulton and Clayton County, Georgia. He has also served on the campaign finance committee for the former Governor of Georgia Roy Barnes.
Involvement in Certain Legal Proceedings
During the experience, qualifications, attributes and skills necessary to serve as Senior Vice President because of hispast ten years, of experience in the military and in management of employees.
● | the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
● | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
● | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | |
● | found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law; | |
● | the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
● | the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Director Independence
Since our common stock is currently quoted on the CompanyOTCQB, we are subject to the fullest extent permitted by law.
Board Leadership Structure
Our board of directors has responsibility for the oversight of the Company’s risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable our board to understand the company’s risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk.
The audit committee reviews information regarding liquidity and operations and oversees our management of financial risks. Periodically, the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance. Oversight by the audit committee includes direct communication with our external auditors, and discussions with managementthe CFO regarding significant risk exposures and the actions management has taken to limit, monitor or control such exposures. The compensation committee is responsible for assessing whether any of our compensation policies or programs has the potential to encourage excessive risk-taking. The nominating/corporate governance committee manages risks associated with the independence of the board, corporate disclosure practices, and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board is regularly informed through committee reports about such risks. Matters of significant strategic risk are considered by our board as a whole.
Board Committees and Independence
Our board of directors has established an audit committee a nominating and corporate governance committee and a compensation committee, each of which operates under a charter that has been approved by our boardboard. We intend to establish a nominating and which goes into effect upon closing of this offering.
Mr. ThomasRaymond Monteleone chairs the audit committee. The audit committee’s main function is to oversee our accounting andthe financial reporting processes, internal systems of control, independent registered public accounting firm relationships and the audits of our financial statements. Upon closing of this offering, this committee’s responsibilities will include, among other things:
In addition, we intend to post on our website,www.hcyte.com, all disclosures that are required by law or the listing standards of The NASDAQOTCQB Capital Market concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this prospectus.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the compensationExchange Act requires each person who is a director or officer or beneficial owner of our named executive officers duringmore than 10% of the fiscal years ended December 31, 2013:
Name & Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||
Jarrett Gorlin, CEO | 2013 | 37,500 | 0 | 0 | 0 | 37,500 | ||||||||||||||||
Patrick Kullmann, COO | 2013 | 25,000 | 0 | 0 | 0 | 25,000 | ||||||||||||||||
Charles Farrahar, CFO | 2013 | 22,917 | 0 | 0 | 0 | 22,917 | ||||||||||||||||
Dennis Moon, VP | 2013 | 25,000 | 0 | 0 | 0 | 25,000 |
EXECUTIVE COMPENSATION Summary Compensation Table
All other compensation for William E. Horne is related to |
The current annualized salaries of our executive officers as of March 31, 2020 are as follows:
Name & Position | Annual Salary | |||
Jarrett Gorlin, CEO | $ | 180,000 | ||
Patrick Kullmann, President & COO | $ | 170,000 | ||
Charles Farrahar, CFO | $ | 110,000 | ||
Dennis Moon, VP | $ | 120,000 |
Name & Position | Annual Salary | |||
William E. Horne, CEO | $ | - | ||
Jeremy Daniel, CFO | $ | 200,000 | ||
Ann Miller, COO | $ | 200,000 |
William E. Horne reduced his annual salary, effective March 16, 2020 to $0 originally until H-CYTE received FDA Clearance for its L-CYTE-01 protocol.
On July 27, 2020, William Horne and the Company entered into a second amendment to his employment agreement to update his compensation paid to directors in 2013, but $30,000 of directors’ fees were incurred. The Board establishedas the CEO until a policy of paying outside (non-employee) directors $5,000replacement CEO is identified. William Horne’s base salary shall be $12,500.00 per quarter for each full quarter of service. The Board also voted to grant each outside directormonth (i.e., $150,000.00 per annum); provided that effective on the Board at October 14, 2013 (6 persons atfirst day of the calendar month immediately following the Qualified Financing Closing, his base salary will be increased to a total of $20,833.33 per month (i.e. $250,000.00 per annum). The “Qualified Financing Closing” has the meaning set forth in that time) a stock option for 10,000 sharescertain Secured Convertible Note and Warrant Purchase Agreement or April SPA dated as of common stock at an exercise price of $2.50 per share.
OUTSTANDING EQUITY AWARDS AT December 31, 2019 | ||||||||||||||||||||||||||||||||||
OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) | |||||||||||||||||||||||||
William E. Horne | 250,000 | — | — | 0.40 | January 8, 2029 | — | — | — | — | |||||||||||||||||||||||||
Jeremy Daniel | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Ann Miller | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Michael Yurkowsky | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Raymond Monteleone | — | — | — | — | — | — | — | — | — |
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Director Compensation
Name & Position | Fiscal Year | Fees earned or paid in cash ($) | Stock Awards ($) | Option Awards ($) | Non-equity incentive plan compensation ($) | Change in pension value and nonqualified deferred compensation earnings | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
William E. Horne, Chairman of the Board | 2019 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
2018 | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Michael Yurkowsky, Director | 2019 | 5,000 | - | - | - | - | - | 5,000 | ||||||||||||||||||||||||
2018 | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Raymond Monteleone, Director | 2019 | 135,000 | - | - | - | - | - | 135,000 | ||||||||||||||||||||||||
2018 | - | - | - | - | - | - | - |
There were no equity awards granted to the named executive officers in 2013.
There are understandings between the Company and Mr. Raymond Monteleone as follows: $5,000 per shareBoard of Director meeting only if and when the Company becomes profitable, $2,500 per quarter as Audit Committee Chair, and $5,000 per month for advisory services. Following the completion of this offering, the Company intends to enter into an agreement with Mr. Monteleone where in connection with his continued services as a director, he would receive an annual base director fee of $50,000, an annual fee of $10,000 for his service on each subcommittee established by the same terms as non-affiliated shareholders. In the aggregate, directorsBoard, and options to acquire up to 1,500,000 shares of common stock of the Company, purchased 212,500upon terms and conditions to be mutually agreed to by the parties and subject to further approval by the Board of Directors.
For the three months ended March 31, 2020 and 2019, the Company paid $0 in Board of Director fees to Michael Yurkowsky and Raymond Monteleone.
Equity Compensation Plan Information
The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of December 31, 2019.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | 425,000 | $ | 1.39 | 2,225,000 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 425,000 | $ | 1.39 | 2,225,000 |
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Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information regarding the beneficial ownership of the common stock by (i) our directors and named executive officers (including persons who served as principal executive officer and principal financial officer during a portion of the fiscal year ended December 31, 2019) and all the named executives and directors as a group and (ii) any other person or group that to our knowledge beneficially owns five percent or more of each class of our outstanding voting securities. Except as indicated below, the address of each holder is the address of all listed stockholders is c/o H-CYTE Inc., 201 East Kennedy Blvd, Suite 700, Tampa, Florida 33602. Unless otherwise indicated, each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
Amount and Nature of Beneficial Ownership
Beneficial Owner | Common Stock Shares Beneficially Owned (1) | Percent of Outstanding Common Stock Shares Beneficially Owned (2) | ||||||
William E. Horne, Chief Executive Officer and Chairman of the Board(3) | 10,183,912 | 8.34 | % | |||||
Michael Yurkowsky, Director(4) | 1,022,009 | * | ||||||
Raymond Monteleone, Director(5) | - | - | ||||||
Jeremy Daniel, Chief Financial Officer(6) | - | - | ||||||
Ann Miller, Chief Operating Officer | - | - | ||||||
Directors and executive officers as a group (5 people) | 11,205,921 | 9.17 | % | |||||
RMS Shareholder, LLC (7) | 50,925,276 | 41.69 | % | |||||
FWHC Holdings, LLC and Section 13(d) Group(8) | 29,399,514 | 24.07 | % |
*Less than 1%.
(1) We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants, or the conversion of convertible promissory notes, that are either immediately exercisable or convertible, or that will become exercisable within 60 days after July 28, 2020. These shares are deemed to be outstanding and beneficially owned by the person holding those options, warrants or convertible promissory notes for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Unless otherwise specified in the 2013 private placement. footnotes to this table, the percentage of shares beneficially owned is based on 122,139,432 shares of our common stock issued and outstanding as of July 28, 2020 , as well as the inclusion of any securities convertible into or exercisable to purchase common stock for such individual in the 60 days following July 28, 2020.
(3) Includes 4,725,634 shares of common stock that Mr. Horne owns directly with sole voting power, 4,368,278 shares of common stock that Mr. Horne owns directly with sole voting power, options to purchase 250,000 shares of common stock exercisable within 60 days from July 28, 2020 and warrants to purchase 840,000 shares of common stock exercisable within 60 days from July 28, 2020. Excludes 8,901,948 shares of common stock that Mr. William Horne indirectly owns through his ownership in RMS Shareholder, LLC (“RMS”). Mr. Horne beneficially owns 17.48% of the issued and outstanding membership interests of RMS, through his control of Horne Management LLC and Uyona Management, LLC, who are each members of RMS. RMS holds 50,925,276 shares of common stock of the Company. Mr. Horne is not a control person of RMS and does not have any voting or dispositive power over the shares of common stock owned by RMS. The resale of these shares are subjectwill be distributed to the lock up. See “Shares Eligible Future Sale – Lock-Up”.
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(4)
(5) Mr. Raymond Monteleone beneficially owns 0.18% of the issued and outstanding membership interest of RMS, which in turn holds 50,925,276 shares of common stock. Mr. Raymond Monteleone is not a control person of RMS and does not have any voting or dispositive power over the shares of common stock of the Company reimburses CEO Jarrett Gorlin for approximately 1,200 square feetowned by RMS. The shares will be distributed to the equity owners of office space he rentsRMS upon the occurrence of certain events. Mr. Monteleone disclaims beneficial ownership of the shares owned by RMS.
(6) Mr. Jeremy Daniel beneficially owns 0.81% of the issued and outstanding membership interest of RMS, which in Atlanta Georgia for executive office space atturn holds 50,925,276 shares of common stock. Mr. Jeremy Daniel is not a ratecontrol person of $2,000 per month plus related utilities,RMS and does not have any voting or dispositive power over the exact amount billedshares of common stock of the Company owned by RMS. The shares will be distributed to himthe equity owners of RMS upon the occurrence of certain events. Mr. Daniel disclaims beneficial ownership of the shares owned by RMS.
(7) RMS directly holds 50,925,276 shares of common stock of the Company. James St. Louis is the sole manager of RMS and therefore is deemed the beneficial owner of 50,925,276 shares of common stock. Mr. St. Louis individually owns approximately 6.0% of RMS.
(8) Includes 14,699,757 shares of common stock held by FWHC Holdings, LLC (“FWHC”) and 14,699,757 shares of common stock issuable upon exercise of warrants held of record by FWHC . FWHC, FWHC Bridge, LLC (“Bridge”), FWHC Bridge Friends, LLC (“Bridge Friends”), HOA Capital, LLC (“HOA Capital”), J. Rex Farrior, III and Todd Wagner are collectively referred to as the property.“FWHC Group.” The manager of FWHC and Bridge Friends is HOA Capital . The manager of HOA Capital is Mr. Farrior. The manager of Bridge is Mr. Wagner. Mr. Farrior and Mr. Wagner have in the past jointly invested in projects and may be deemed to be acting in concert with one another with respect to the securities of the Company believesheld of record by any member of the FWHC Group. As a result, each of FWHC, HOA Capital, Bridge, Bridge Friends, Mr. Farrior and Mr. Wagner may be deemed to share voting and dispositive power with respect to the securities of the Company held of record by any of them. On July 7, 2020, the FWHC Group, in the expectation that the rights offering would be completed on or about September 4, 2020, filed a Schedule 13D/A reporting beneficial ownership of 649,265,447 shares of common stock. That number differs from the number presented in the table above because the number reported in the Schedule 13D/A assumes completion of the rights offering, including (a) the issuance of the maximum number of Series A Preferred Shares as part of the Standby Commitment, including by Bridge and Bridge Friends, (b) the concurrent conversion of all outstanding promissory notes, including the ones held by Bridge and Bridge Friends, into Series A Preferred Shares, and (c) the exercise of all warrants held of record by Bridge and Bridge Friends. As disclosed in such reimbursement is on terms no less favorable then itSchedule 13D/A, the beneficial ownership of the FWHC Group under these additional assumptions would receive from leasing space from a third party. The Company has also chartered aircraft from TAG Aviation, a privately-held aircraft leasing company owned by CEO Jarrett Gorlin. The total amount spent in 2013 with TAG Aviation wasbe approximately $34,000. The Company believes that such aircraft charter is on terms no less favorable then it would receive from a third party.
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Policies and Procedures for Related Person Transactions
Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders, or their immediate family members, each of whom we refer to as a “related person,” has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Chief Executive Officer.CEO. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction.
If advance review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.
A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider:
● | the related person’s interest in the related person transaction; |
● | the approximate dollar value of the amount involved in the related person transaction; |
● | the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss; | |
● | whether the transaction was undertaken in the ordinary course of our business; |
● | whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party; and | |
● | the purpose of, and the potential benefits to us of, the |
The committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is in our best interests. The committee may impose any conditions on the related person transaction that it deems appropriate.
In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, our board of directors has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of this policy:
● | interests arising solely from the related person’s position as an executive officer of another entity | |
● | a transaction that is specifically contemplated by provisions of our charter or bylaws. |
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The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.
We did not have a written policy regarding the review and approval of related person transactions prior to this offering.transactions. Nevertheless, with respect to such transactions, it was our policy for our board of directors to consider the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests.
In addition, all related person transactions required prior approval, or later ratification, by our board of directors.
Policies and Procedures for Approving Related Person Transactions
Our policy and procedure with respect to any related person transaction between the Company and any related person requiring disclosure under Item 404(a) of regulation S-K under the Exchange Act, is that the Company’s audit committee reviews all such transactions.
This review covers any material transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which the Company was and is to be a participant, and a related party had or will have a direct or indirect material interest, including, purchases of goods or services by or from the related party or entities in which the related party has a material interest, indebtedness, guarantees of indebtedness and employment by the Company of a related party. The board of directors has adopted a written policy reflecting the policy and procedure identified above.
Consulting Expense
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 per month for advisory services and $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 per month and the fees per quarter as the Audit Committee Chair to $2,500. For year ended December 31, 2019 and 2018, the Company has expensed approximately $125,000, and $0 in compensation to Mr. Monteleone, respectively. For the three months ended March 31, 2020 and 2019, the Company has expensed approximately $30,000, and $35,000 in compensation to Mr. Monteleone, respectively.
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For year ended December 31, 2019 and three months ended March 31, 2019, the Company expensed approximately $68,000 and $27,000, 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 year ended December 31, 2019 and three months ended March 31, 2020, the Company expensed approximately $71,000 and $15,000, respectively.
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Debt and Other Obligations
The Company had various related party transactions in 2018. For the period of incorporation providesJanuary 1, 2018 to March 13, 2018, the Company received approximately $528,000 from one of its stockholders (members of RMS Shareholder, LLC) and approximately $228,000 from its CEO, also then RMS’ CEO, as part of a line of credit that we will indemnify our directorswas established in 2017. On March 13, 2018, the entire $1,856,000 line of credit received from the RMS members and officersthe CEO, including contributions from 2017, was transferred to the fullest extent permittedBioCell Capital, LLC debt instrument (“BioCell Capital Line of Credit”).
The BioCell Capital Line of Credit also consisted of capital contributions from related parties totaling approximately $4,306,000, inclusive of the aforementioned $1,856,000, to RMS in 2018. The BioCell Capital Line of Credit was converted to RMS members’ equity and was excluded from the APA on January 8, 2019.
The Company also received a short-term advance from one of its stockholders (RMS members), who was also the CEO of H-CYTE, in the amount of $180,000 in December 2018 for working capital needs. This liability was not assumed in the RMS Transaction.
Horne Management, LLC, controlled by Nevada law. In addition, we have entered into indemnification agreements withWilliam E. Horne, our directors.
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We are distributing to our outside directors. If any of the Awards granted under the Plan expire, terminate or are forfeited for any reason before they have been exercised, vested or issued in full, the unused shares allocable to or subject to those expired, terminated or forfeited awards will become available for further grants under the Plan.
Percentage of Shares Beneficially Owned | |||||||||
Number of Shares Beneficially Owned(1) | Before Offering | After Offering | |||||||
Scott M.W. Haufe, M.D., Director | 772,608 | (2) | 9.9 | % | 8.5% | ||||
Renee Honig | 600,000 | 7.7 | % | 6.6% | |||||
Jarrett Gorlin, Director and Officer | 559,478 | (3) | 7.2 | % | 6.1% | ||||
Larry W. Papasan, Director | 196,076 | (4) | 2.5 | % | 2.1% | ||||
John C. Thomas, Jr. | 50,000 | (5) | 0.6 | % | 0.5% | ||||
Patrick Kullmann, Officer | 193,576 | (6) | 2.5 | % | 2.1% | ||||
Charles Farrahar, Officer | 193,576 | 2.5 | % | 2.1% | |||||
Major General C.A. “Lou” Hennies, Chairman | 99,288 | (4) | 1.3 | % | 1.1% | ||||
James R. Andrews, M.D., Director | 99,288 | (4) | 1.3 | % | 1.1% | ||||
Thomas E. Hills, Director | 99,288 | (4) | 1.3 | % | 1.1% | ||||
Steve Gorlin, Director | 417,474 | (7) | 5.4 | % | 4.6% | ||||
Randal R. Betz, M.D., Director | 99,288 | (4) | 1.3 | % | 1.1% | ||||
Dennis Moon, Officer | 193,576 | (4) | 2.5 | % | 2.1% | ||||
Officers and Directors as a Group (12 persons) | 2,973,576 | 38.2 | % | 32.3% |
Authorized Capital Stock
As of the bylaws that will be in effect upon the closingdate of this offering. We have filed copiesprospectus, our authorized capital stock consists of these documents with the SEC as exhibits to our registration statement,1,600,000,000 shares of which this prospectus forms a part. The descriptioncommon stock, $0.001 par value, and 1,000,000,000 shares of preferred stock, $0.001 par value.
As of the capitalRecord Date, there were 122,139,432 shares of common stock reflects changes toissued and outstanding, 0 shares of Series A preferred stock issued and outstanding, 0 shares of Series B preferred stock issued and outstanding, and 0 shares of Series D preferred stock issued and outstanding. As of the Record Date, there were approximately 240 holders of record of our capital structure that will occur upon the closing of this offering.
Holders of our common stock are entitled to one vote for each share heldowned as of record on all matters submitted to a voteon which stockholders may vote. Holders of stockholders andcommon stock do not have cumulative voting rights. Anrights in the election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.
Preferred Stock
Our Second Amended Charter authorizes our Board to and mayissue preferred stock from time to time with such designations, preferences, conversion or other rights, voting powers, restrictions, dividends or limitations as to dividends or other distributions, qualifications or terms or conditions of redemption as shall be adversely affecteddetermined by the rightsBoard for each class or series of stock. Preferred stock is available for possible future financings or acquisitions and for general corporate purposes without further authorization of stockholders unless such authorization is required by applicable law, or the holders of sharesrules of any securities exchange or market on which our stock is then listed or admitted to trading.
Our Second Amended Charter permits our Board of Directors to designate new series of preferred stock that we may designate and issue inthose shares without any vote or action by our stockholders, subject to certain approval rights by the future.
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As of the discretionRecord Date, there were 0 shares of Series B preferred stock and 0 shares of Series D preferred stock, issued and outstanding.
The Second Amended Charter, among other things, authorizes the Company to determineissue up to 1,000,000,000 shares of preferred stock, among which 800,000,000 shares shall be designated as the new Series A preferred stock. The following is a summary of the rights, preferences, powers, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privilegesqualifications and liquidation preferences, of each series of preferred stock.
1. Dividends.
From and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. There will be no shares of Preferred Stock outstanding upon the closing of this Offering.
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2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.
Preferential Payments to Holders of Series A Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Series A preferred stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders and, in the event of a Deemed Liquidation Event (as defined in the Second Amended Charter), the holders of shares of Series A preferred stock then outstanding shall be entitled to be paid out of the consideration payable to stockholders in such Deemed Liquidation Event or out of the consideration received by the Company for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Company), together with any other assets of the Company available for distribution to its stockholders, all to the extent permitted by Nevada law governing distributions to stockholders, as applicable, before any payment shall be made to the holders of common stock by reason of their ownership thereof, an amount per share equal to one (1) times the Series A Original Issue Price for such share of Series A preferred stock, plus any Series A Accruing Dividends accrued but unpaid thereon, whether or not declared. If upon any such liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, the assets of the Company available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A preferred stock the full amount to which they shall be entitled under subsection 2.1 of the Second Amended and Restated Articles of Incorporation, the holders of shares of Series A preferred stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after the payment in full of all outstanding warrants.
3. Voting.
On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A preferred stock shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A preferred stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Second Amended and Restated Articles of Incorporation, holders of Series A preferred stock shall vote together with the holders of common stock as a single class and on an as-converted to common stock basis.
The holders of record of the shares of Series A preferred stock, exclusively and as a separate class, shall be entitled to elect up to two (2) directors of the Company.. Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the majority of the outstanding shares of Series A preferred stock (the “Requisite Holders”), given either at a special meeting of such holders of Series A preferred stock duly called for that purpose or pursuant to a written consent of the Requisite Holders. If the holders of shares of Series A preferred stock fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting exclusively and as a separate class, then deliverable uponany directorship not so filled shall remain vacant until such time as the holders of the Series A preferred stock elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Company other than by the stockholders of the Company that are entitled to elect a person to fill such directorship, voting exclusively and as a separate class.
4. Conversion.
The holders of the Series A preferred stock shall have conversion rights (the “Conversion Rights”) as follows:
Each share of Series A preferred stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series A Original Issue Price by the Series A Conversion Price (as defined below) in effect at the time of conversion. The “Series A Conversion Price” shall initially be equal to the Series A Original Issue Price. The Series A Conversion Price, and the rate at which shares of Series A preferred stock may be converted into shares of common stock, shall be subject to adjustment as provided in the Second Amended and Restated Articles of Incorporation.
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In the event of a notice of redemption of any shares of Series A preferred stock, the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not fully paid on such redemption date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Company or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Series A preferred stock.
Upon the vote or written consent of the Requisite Holders, all of the outstanding Series A preferred stock shall convert into shares of common stock of the Company in accordance with the Second Amended and Restated Articles of Incorporation.
5. Redemption.
Unless prohibited by Nevada law governing distributions to stockholders, each share of Series A preferred stock shall be redeemed by the Company at a price equal to at a price equal to the greater of (A) 100% of the Series A Original Issue Price per such share of Series A preferred stock, plus any Series A Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon and (B) the fair market value of such share of Series A preferred stock (as determined in accordance with the Second Amended and Restated Articles of Incorporation) as of the date of the Company’s receipt of a request for redemption (the “Redemption Price”), in three (3) annual installments commencing not more than sixty (60) days after receipt by the Company at any time on or after the second (2nd) anniversary of the date on which the first share of Series A preferred stock was issued from the Requisite Holders of written notice requesting redemption of all shares of Series A preferred stock (the “Redemption Request”). Upon receipt of a Redemption Request, the Company shall apply all of its assets to any such redemption, and to no other corporate purpose, except to the extent prohibited by Nevada law governing distributions to stockholders.
A copy of the Second Amended Charter is attached hereto as Exhibit 3.1. The Second Amended Charter has become effective.
We do not plan to list the Series A preferred stock or the subscription rights on any stock exchange or the over-the-counter stock exchange market.
Warrants and Options
As of the Record Date, the Company had outstanding warrants exercisable to purchase 49,984,796 shares of common stock at a weighted average exercise or conversionprice of $0.78 per share, subject to certain adjustments as described below, and outstanding options exercisable to purchase 425,000 shares of common stock at a weighted average exercise price of $1.39 per share. The exercise prices of such warrants would have been entitled uponare subject to adjustment based on varying anti-dilution provisions contained in such consolidation or merger or other transaction.
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We are offering the subscription rights to purchase Series A Preferred Shares underlying the rights directly to you. We have not employed any brokers, dealers or underwriters in connection with the solicitation or exercise of subscription rights in the rights offering and B Warrants shallno commissions, fees or discounts will be adjustedpaid in connection with the rights offering. Issuer Direct Corporation is acting as rights agent for the rights offering. We intend to such lower price.
We will pay all customary fees and are not transferable for 180 days from the dateexpenses of the commencement of salesrights agent related to the rights offering, except for fees, applicable brokerage commissions, taxes and other expenses relating to the exercise of the offering except as allowed by FINRA Rule 5110(g).
Future sales of substantial amounts of our common stock shares in the public market, including shares issued upon exercise of outstanding options, or the anticipationavailability of these sales,such shares for sale in the public market, could materially and adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of equity or equity-related securities.
On the Record Date, H-CYTE had 122,139,432 shares of common stock, on the NASDAQ Capital Market, we cannot assure you that there will be an active market for our common stock.
Rule 144
In general, under Rule 144, and we expect that a substantial portion of these restricted securities will be subject to the lock-up agreements described below. These restricted securities may be sold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 or Rule 701 under the Securities Act.
Our affiliates who have beneficially owned our common stock for at least six months, but lessincluding the holding period of any prior owner other than a year, isone of our affiliates, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
● 1% of the number of common stock shares then outstanding, which would equal approximately 122,139 shares based on the number of shares outstanding on the Record Date; and
● the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 notice by such sharesperson with respect to such sale, if our class of common stock is listed on Nasdaq, the New York Stock Exchange, or the NYSE American.
Sales under Rule 144 by our affiliates are also subject onlyto manner of sale provisions and notice requirements and to the availability of current public information about us.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF OUR COMMON STOCK
TableMaterial U.S. Federal Income Tax Considerations
The following discussion sets forth the material U.S. federal income tax consequences of Contents
U.S. Holders of Rights to Purchase Series A Preferred Shares
The tax consequences of the rights offering will depend on whether the rights offering is part of a “disproportionate distribution” within the meaning of Section 305 of the Code. We believe and whointend to take the position, and the following discussion assumes, that the rights offering is not deemedpart of a disproportionate distribution.
For U.S. federal income tax purposes, neither the receipt nor the exercise of the subscription rights should result in taxable income or loss to have been an affiliate of ours duringyou. Moreover, you should not realize a loss if you do not exercise the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information,subscription rights. The holding period volume limitation, or notice provisionsfor a share acquired upon exercise of Rule 144. Rule 701 also permits affiliates of ours to sell their Rule 701 shares under Rule 144 without complyinga subscription right will begin with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuantexercise. The basis for determining gain or loss upon the sale of a share acquired upon the exercise of a subscription right will generally be equal to Rule 701the sum of:
● the Subscription Price per share;
● any servicing fee charged to you by your broker, bank or trust company; and until expiration
● the basis, if any, in the subscription right that you exercised.
A gain or loss recognized upon a sale of a share acquired upon the exercise of a subscription right will be a capital gain or loss assuming the share is held as a capital asset at the time of sale. Such capital gain or loss will be long-term capital gain or loss if your holding period for the share exceeds one year at the time of sale. As noted above, your basis in a share issued upon exercise of the one year lock-up period described below.
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If an allocation of basis is made to the subscription rights and the subscription rights are later exercised, the basis in the common stock you originally owned will be reduced by an amount equal to the basis allocated to the subscription rights. If the subscription rights expire without exercise, you should realize no loss and no portion of your basis in your common stock should be allocated to the unexercised subscription rights.
If you exercise the subscription rights received in this rights offering after disposing of our common stock with respect to which the subscription rights were received, then certain aspects of the tax treatment of the exercise of the subscription rights are unclear, including the allocation of tax basis between our common stock previously sold and the subscription rights, the impact of such allocation on the amount and timing of gain or loss recognized with respect to our common stock previously sold, and the impact of such allocation on the tax basis of our common stock acquired through exercise of the subscription rights. If you exercise the subscription rights received in this rights offering after disposing of the common stock with respect to which the subscription rights were received, you should consult your tax advisor.
The underwriters are committeddiscussion above relating to purchase all the unitsU.S. federal income tax consequences of this rights offering assumes that the rights offering is not part of a “disproportionate distribution” within the meaning of Section 305 of the Code. A disproportionate distribution is a distribution or series of distributions, including deemed distributions, that has the effect of the receipt of cash or other property by some stockholders or holders of debt instruments convertible into stock (including interest payments to the holders of the debt) and Series B Warrants offered by us ifan increase in the proportionate interest of other stockholders in a company’s assets or earnings and profits. We have not distributed any unitscash or other property with respect to any other class of the company’s stock and Series B Warrants are purchased,currently does not expect to make any such distribution.
In addition, although we do not currently plan to make a distribution with respect to any other class of stock, we cannot assure you that such distribution will not be made. It is also unclear whether the fact that we also have outstanding options and warrants could cause the receipt of the subscription rights to be part of a “disproportionate distribution.” If, contrary to our expectations, we make a distribution of cash or property with respect to a class of stock other than those covered byits common stock, if the option to purchase additional units described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
If the underwritersreceipt of the subscription rights is treated as a “disproportionate distribution” and thus is taxable as described above and subscriptions rights expire without exercise, all or partthe recipient of this option, theythe subscription rights will purchase units and Series B Warrants covered byrecognize a short term capital loss equal to the option attax basis of such rights, which will be subject to limitations relating to the public offering price less the underwriting discounts and commissions that appeardeductibility of capital losses. If, on the cover pageother hand, the subscription rights are exercised, the recipient will not recognize any gain or loss on the exercise of this prospectus. If this option is exercised in full, the total pricesubscription rights, the tax basis of the shares acquired upon the exercise of the rights will be equal to the public will be approximately $ ,Subscription Price paid for the shares and the total proceeds to us, before expenses, will be $ .
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U.S. Holders of Series A Preferred Shares
Receiving Distributions on Series A Preferred Shares. Subject to the underwriters, whichdiscussion below under “—Passive Foreign Investment Company Provisions,” U.S. holders will be applied againstrequired to include in gross income the non- accountable expenses that will be paid by us togross amount of any distribution received on the underwriters in connection with this offering. The underwriting agreement provides that in the event the offering is terminated, the $60,000 advance paid to the underwriters will be returned to usSeries A Preferred Shares to the extent that offering expensesthe distribution is paid out of the company’s current or accumulated earnings and profits as determined for U.S. federal income tax purposes, which we refer to as a dividend. With respect to non-corporate U.S. holders, certain dividends received in taxable years beginning before January 1, 2013, from a qualified foreign corporation will be subject to U.S. federal income tax at a maximum rate of 15%. Non-corporate holders must hold their Series A Preferred Shares for a minimum holding period, during which they are at the risk of loss, in order to be eligible for the reduced rates of taxation, regardless of the company’s status as a qualified foreign corporation. Holders that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not actually incurred bybe eligible for the underwriters.reduced rates of taxation. In addition, the representativerate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. U.S. holders should consult their own tax advisor regarding the application of the underwriter hasrelevant rules to their particular circumstances.
Dividends from the right to appoint one non-voting observer to attend all meetings of the Company's Board of Directors for a period of three years which commences on the effective date of this registration statement, subject to certain limitations relating to Regulation FD compliance and preservation of the attorney-client privilege. We have also agreed to pay or reimburse the underwriters, over and above the underwriting discount, for certain out of pocket expenses in connection with this offering, including (i) legal feescompany will generally not be eligible for the representative’s counsel, notdividends-received deduction, which is generally allowed to exceed $75,000,U.S. corporate stockholders on dividends received from certain domestic and (ii) miscellaneous expenses associated with the offering not to exceed $25,000. Such expenses can include filing costs with the SEC and FINRA, printing and reproduction of presentation materials, preparation and delivery of stock transfer agent fees, and the costs of informal and road show meetings.
Distributions in excess of the underwriters’ unit warrant are identical to those offered by this prospectus. The representative’s unit warrant is exercisable for cash or on a cashless basis at per share exercise price equal to 120%current and accumulated earnings and profits of the public offering price of one unitcompany will be applied first to reduce the U.S. holder’s tax basis in this offering commencing on a date which is one yearits Series A Preferred Shares, and thereafter will constitute gain from the datesale or exchange of effectivenesssuch shares. In the case of a non-corporate U.S. holder, the registration statement of which this prospectusmaximum U.S. federal income tax rate applicable to such “gain” is a part and expiring on a date which15% under current law if the holder’s holding period for its Series A Preferred Shares exceeds twelve months. This reduced rate is no more than fivescheduled to expire effective for taxable years from such effective date incompliance with FINRA Rule 5110(f)(2)(H)(i). These warrantsbeginning after December 31, 2012. Special rules not here described may apply to U.S. holders who do not have anti-dilution protectionsa uniform tax basis and are not transferable for 180 days from the date of the commencement of sales of the offering except as allowed by FINRA Rule 5110(g).
Dispositions of Series A Preferred Shares. Subject to the Company's officersdiscussion below under “—Passive Foreign Investment Company Provisions,” U.S. holders of Series A Preferred Shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other taxable disposition of such shares in an amount equal to the difference between the amount realized from such sale, exchange or other taxable disposition and 10% shareholders, will have agreed not to sell any shares of common stock owned by them for a period of 12 months from the date of this offering. The remaining shareholders who own an aggregate of 1,040,675 shares of common stock, will have agreed not to sell any shares of common stock for a period of 182 days from the date of this offering. Thereafter, these shareholders may sell up to 16.67% of their holdings each month, provided that the price of each sale is greater than $6.25 per share.U.S. holders’ tax basis in such shares. In the evencase of a non-corporate U.S. holder, the maximum U.S. federal income tax rate applicable to such gain is 15% under current law if the holder’s holding period for such Series A Preferred Shares exceeds twelve months. This reduced rate is scheduled to expire effective for taxable years beginning after December 31, 2012. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company Provisions. The treatment of U.S. holders of Series A Preferred Shares in some cases could be materially different from that our common stock trades at $150% of the offering price of the Units for fifteen (15) consecutive trading days at anytime after 182 days from the effective date of this offering the lock-ups described above shall terminate.
For U.S. tax purposes, a foreign corporation is classified as a PFIC for any taxable year if either (1) 75% or more of its gross income is “passive income” (as defined for U.S. federal income tax purposes) or (2) the underwritersaverage percentage of assets held by such corporation which produce passive income or selling group members, if any, participatingwhich are held for the production of passive income is at least 50%. For purposes of applying the tests in this offering and one or morethe preceding sentence, the foreign corporation is deemed to own its proportionate share of the underwriters participating in this offering may distribute prospectuses electronically. The Representative may agreeassets, and to allocate a numberreceive directly the proportionate share of units to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis asincome, of any other allocations. Other than the prospectus in electronic format, the information on these websites is not part of this prospectus or the registration statementcorporation of which this prospectus forms a part, has not been approvedthe foreign corporation owns, directly or endorsedindirectly, at least 25% by us or any underwriter in its capacity as underwriter, and shouldvalue of the stock. The company believes it will not be relied upon by investors.
The tests for determining PFIC status are applied annually, and it is difficult to accurately predict future income and assets relevant to this determination. Accordingly, the underwriters and their affiliates maycompany cannot assure U.S. holders that it will not become a PFIC. If the company should determine in the future provide various investment banking, commercial bankingthat it is a PFIC, it will endeavor to so notify U.S. holders of Series A Preferred Shares, although there can be no assurance that it will be able to do so in a timely and other financial servicescomplete manner. U.S. holders of Series A Preferred Shares should consult their own tax advisor about the PFIC rules, including the availability of certain elections.
Pursuant to newly enacted Code Section 1298(f), for us and our affiliates forany year in which may receive customary fees; however, except as disclosed in this prospectus, nothe company is a PFIC, each U.S. holder will be required to file an information statement regarding such services were providedU.S. holder’s ownership interest in the 180-day periodcompany. In addition, under current law, if a U.S. holder makes a qualified electing fund or mark-to-market election, such U.S. holder must attach a completed IRS Form 8621 to a timely filed U.S. federal income tax return. U.S. holders should consult with their own tax advisors regarding the requirements of filing information returns and qualified electing fund and mark-to-market elections.
Medicare Tax. For taxable years beginning after December 31, 2012, dividends paid to and capital gains recognized by certain U.S. individuals, estates or trusts with respect to the Series A Preferred Shares may be subject to a 3.8% Medicare tax.
The preceding this filingdiscussion of material U.S. federal tax considerations is for information only. It is not tax advice. Prospective investors should consult their own tax advisors regarding the particular U.S. federal, state, local and we have no present arrangements withnon-U.S. tax consequences of purchasing, holding and disposing of our Series A preferred stock or common stock, including the consequences of any of the underwriters or their affiliates for any further services to be provided through the 90-day period following the effectiveness of this offering or thereafter.
The validity of the securities being offered hereby is beingby this prospectus has been passed upon for us by Sichenzia Ross Friedman Ference LLP. Certain legal matters related to the offering will be passed upon for the underwriters by Roetzel & Andress, LPA, Fort Lauderdale, Florida.
The audited consolidated financial statements of Medovex Corp and subsidiariesH-CYTE, Inc. as of and for the years ended December 31, 20132019 and the related statements of operations, changes in stockholder’s equity and cash flows for the period from February 1, 2013 (inception) through December 31, 2013, and related footnotes appearing in this registration statement,2018 have been so included in reliance on the report of Marcum LLP,audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements are included in this prospectus and registration statement in reliance upon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of Frazier & Deeter, LLC, appearing elsewhere in this registration statement, given onherein, and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE MORE INFORMATION
We have filedare a reporting company and file annual, quarterly, special reports, and other information with the SECSEC. These reports and other information are available at the SEC’s website at http://www.sec.gov.
This prospectus is part of a registration statement on Form S-1 underthat we filed with the Securities Act with respect to the securities we are offering to sell. This prospectus, which constitutes part of the registration statement, does not include all of theSEC. Certain information contained in the registration statement has been omitted from this prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules and amendments to the registration statement. For further information with respect to us and our securities, we refer you to the registration statement and to the exhibits and schedules to the registration statement. Statements contained inthat are excluded from this prospectus about the contents of any contract, agreement or other document are not necessarily complete, and, in each instance, we refer you to the copy of the contract, agreement or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.
We also maintain a website at www.MEDOVEX.com. You maywww.hcyte.com, through which you can access our reports, proxy statements and other information free of charge at this website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.SEC filings. The information set forth on suchour website is not incorporated by reference and is not a part of this prospectus.
78 |
Page | |
Report of Independent Registered Public Accounting Firm | F-2 |
as of December 31, 2019 and 2018 | F-3 |
for the years ended December 31, 2019 and 2018 | F-4 |
Deficit for the years ended December 31, 2019 and 2018 | |
for the years ended December 31, 2019 and 2018 | |
F-7 |
F-1 |
To the Shareholders and Board of Directors and Shareholders of Medovex Corporation and Subsidiary
H-CYTE, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Medovex Corporation and SubsidiaryH-CYTE, Inc. (the “Company”) (formerly known as MedoveX Corp.), as of December 31, 2013,2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equitydeficit and cash flows for the period from February 1, 2013 (inception)years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2013.2019 and 2018, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has negative working capital, has an accumulated deficit, has a history of significant operating losses and has a history of negative operating cash flow. Additionally, the Company has closed clinic operations and experienced significant losses related to COVID-19 in 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Adoption of New Accounting Standard
As discussed in Notes 3 and 5 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal year 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audit.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits we are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesOur audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
/s/ Frazier & Deeter, LLC
Tampa, Florida
April 22, 2020
We have served as the Company’s auditor since 2018.
F-2 |
CONSOLIDATED BALANCE SHEETS
December 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 1,424,096 | $ | 69,628 | ||||
Accounts receivable | 22,667 | 15,242 | ||||||
Other receivables | 18,673 | 5,144 | ||||||
Prepaid expenses | 810,143 | 59,678 | ||||||
Total Current Assets | 2,275,579 | 149,692 | ||||||
Right-of-use asset | 738,453 | — | ||||||
Property and equipment, net | 219,703 | 266,916 | ||||||
Other assets | 36,877 | 38,288 | ||||||
Total Assets | $ | 3,270,612 | $ | 454,896 | ||||
Liabilities, Mezzanine Equity and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Interest payable | $ | 53,198 | $ | 158,371 | ||||
Accounts payable | 1,485,542 | 882,456 | ||||||
Accrued liabilities | 324,984 | 183,183 | ||||||
Other current liabilities | 175,181 | 462,856 | ||||||
Short-term notes, related party | 1,635,000 | 180,000 | ||||||
Short-term convertible notes payable | 424,615 | — | ||||||
Notes payable, current portion | 66,836 | — | ||||||
Dividend payable | 108,641 | — | ||||||
Deferred revenue | 1,046,156 | 326,064 | ||||||
Lease liability, current portion | 453,734 | — | ||||||
Total Current Liabilities | 5,773,887 | 2,192,930 | ||||||
Long-Term Liabilities | ||||||||
Lease liability, net of current portion | 302,175 | — | ||||||
Notes payable, net of current portion | 11,545 | — | ||||||
Convertible debt to related parties | — | 4,306,300 | ||||||
Derivative liability - warrants | 315,855 | — | ||||||
Redemption put liability | 267,399 | — | ||||||
Deferred rent | — | 22,206 | ||||||
Total Long-Term Liabilities | 896,974 | 4,328,506 | ||||||
Total Liabilities | 6,670,861 | 6,521,436 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Mezzanine Equity | ||||||||
Series D Convertible Preferred Stock - $.001 par value: 238,871 shares authorized, 146,998 and 0 shares issued and outstanding at December 31, 2019 and 2018, respectively | 6,060,493 | — | ||||||
Total Mezzanine Equity | 6,060,493 | — | ||||||
Stockholders’ Deficit | ||||||||
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at December 31, 2019 and 2018 | — | — | ||||||
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 6,100 and 0 shares issued and outstanding at December 31, 2019 and 2018, respectively | 6 | — | ||||||
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at December 31, 2019 and 2018 | — | — | ||||||
Common stock - $.001 par value: 199,000,000 and 49,500,000 shares authorized. 99,768,704 and 33,661,388 shares issued and outstanding at December 31, 2019 and 2018, respectively | 99,769 | 33,661 | ||||||
Additional paid-in capital | 28,172,146 | 3,566,339 | ||||||
Accumulated deficit | (37,362,531 | ) | (9,296,408 | ) | ||||
Non-controlling interest | (370,132 | ) | (370,132 | ) | ||||
Total Stockholders’ Deficit | (9,460,742 | ) | (6,066,540 | ) | ||||
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 3,270,612 | $ | 454,896 |
See accompanying notes to consolidated financial statements referred
F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Revenues | $ | 8,346,858 | $ | 7,883,115 | ||||
Cost of Sales | (2,052,807 | ) | (2,366,569 | ) | ||||
Gross Profit | 6,294,051 | 5,516,546 | ||||||
Operating Expenses | ||||||||
Salaries and related costs | 8,646,471 | 3,778,917 | ||||||
Other general and administrative | 6,953,549 | 3,352,104 | ||||||
Advertising | 4,909,724 | 1,875,731 | ||||||
Loss on impairment | 15,508,401 | 606,595 | ||||||
Depreciation & amortization | 834,291 | 95,245 | ||||||
Total Operating Expenses | 36,852,436 | 9,708,592 | ||||||
Operating Loss | (30,558,385 | ) | (4,192,046 | ) | ||||
Other Income (Expense) | ||||||||
Other expense | (124,118 | ) | (17,920 | ) | ||||
Interest expense | (299,331 | ) | (184,183 | ) | ||||
Change in fair value of redemption put liability | 346,696 | — | ||||||
Change in fair value of derivative liability – warrants | 827,260 | — | ||||||
Total Other Income (Expenses) | 750,507 | (202,103 | ) | |||||
Net Loss | $ | (29,807,878 | ) | $ | (4,394,149 | ) | ||
Accrued dividends on Series B Convertible Preferred Stock | 84,939 | — | ||||||
Finance costs on issuance of Series D Convertible Preferred Stock | 66,265 | — | ||||||
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants | 287,542 | — | ||||||
Deemed dividend on Series D Convertible Preferred Stock | 2,916,813 | — | ||||||
Deemed dividend on beneficial conversion features | 32,592 | — | ||||||
Net loss attributable to common stockholders | $ | (33,196,029 | ) | $ | (4,394,149 | ) | ||
Loss per share – Basic and Diluted | $ | (0.34 | ) | $ | (0.13 | ) | ||
Weighted average outstanding shares used to compute basic and diluted net loss per share | 96,370,562 | 33,661,388 |
See accompanying notes to above present fairly,consolidated financial statements
F-4 |
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the year ended December 31, 2019 and 2018
Series B Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
Balances - January 1, 2018 | — | $ | — | 33,661,388 | $ | 33,661 | $ | 3,566,339 | $ | (4,868,454 | ) | $ | (403,937 | ) | $ | (1,672,391 | ) | |||||||||||||||
Acquisition of State, LLC | — | — | — | (33,805 | ) | 33,805 | — | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | (4,394,149 | ) | — | (4,394,149 | ) | ||||||||||||||||||||||
Balances - December 31, 2018 | — | $ | — | 33,661,388 | $ | 33,661 | $ | 3,566,339 | $ | (9,296,408 | ) | $ | (370,132 | ) | $ | (6,066,540 | ) | |||||||||||||||
Purchase accounting adjustments | 9,250 | 9 | 24,717,270 | 24,717 | 12,657,182 | — | — | 12,681,908 | ||||||||||||||||||||||||
Adjustment for assets and liabilities not included in Merger | — | — | — | — | — | 5,258,300 | — | 5,258,300 | ||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
Finance costs on issuance of Series B Convertible Preferred Stock and related warrants | — | — | — | — | (132,513 | ) | — | — | (132,513 | ) | ||||||||||||||||||||||
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 | ||||||||||||||||||||||||
Issuance of common stock pursuant to warrant exchange | — | — | 403,125 | 403 | 72,160 | — | — | 72,563 | ||||||||||||||||||||||||
Conversion of Preferred Series B Stock | (2,650 | ) | (2 | ) | 715,279 | 716 | (714 | ) | — | — | — | |||||||||||||||||||||
Repurchase of Series B Convertible Preferred Stock | (500 | ) | (1 | ) | — | — | (49,999 | ) | — | — | (50,000 | ) | ||||||||||||||||||||
Issuance of common stock to pay accrued dividends on Series B Convertible Preferred Stock | — | — | 50,367 | 50 | 19,376 | — | — | 19,426 | ||||||||||||||||||||||||
Issuance of common stock to pay accrued interest on convertible short-term debt | — | — | 1,667 | 2 | 665 | — | — | 667 | ||||||||||||||||||||||||
Issuance of common stock in exchange for consulting fees incurred | — | — | 280,085 | 280 | 95,253 | — | — | 95,533 | ||||||||||||||||||||||||
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants | — | — | — | — | 287,542 | (287,542 | ) | — | — | |||||||||||||||||||||||
Deemed dividend on beneficial conversion features | — | — | — | — | 32,592 | (32,592 | ) | — | — | |||||||||||||||||||||||
Issuance of common stock per restricted stock award to executive (Note 9) | — | — | 4,225,634 | 4,226 | 1,686,028 | — | — | 1,690,254 | ||||||||||||||||||||||||
Issuance of warrants pursuant to short-term notes, related party | — | — | — | — | 56,378 | — | — | 56,378 | ||||||||||||||||||||||||
Issuance of warrants pursuant to extension of maturity date on convertible debt | — | — | — | — | 106,158 | — | — | 106,158 | ||||||||||||||||||||||||
Deemed dividend on Series D Convertible Preferred Stock | — | — | — | — | (60,493 | ) | (3,130,146 | ) | — | (3,190,639 | ) | |||||||||||||||||||||
Beneficial conversion of Series D Convertible Preferred Stock | — | — | — | — | 623,045 | — | — | 623,045 | ||||||||||||||||||||||||
Finance costs on issuance of Series D Convertible Preferred Stock and related warrants | — | — | — | — | (37,618 | ) | (66,265 | ) | — | (103,883 | ) | |||||||||||||||||||||
Issuance of warrants pursuant to private placement of Series D Convertible Preferred Stock | — | — | — | — | 1,893,006 | — | — | 1,893,006 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 94,828 | — | — | 94,828 | ||||||||||||||||||||||||
Accrued dividends on Series B Convertible Preferred Stock | — | — | — | — | (84,939 | ) | — | — | (84,939 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (29,807,878 | ) | — | (29,807,878 | ) | ||||||||||||||||||||||
Balances – December 31, 2019 | 6,100 | $ | 6 | 99,768,704 | $ | 99,769 | $ | 28,172,146 | $ | (37,362,531 | ) | $ | (370,132 | ) | $ | (9,460,742 | ) |
See accompanying notes to consolidated financial statements
F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (29,807,878 | ) | $ | (4,394,149 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 834,291 | 95,245 | ||||||
Loss on impairment | 15,508,401 | 606,595 | ||||||
Amortization of debt discount | 152,342 | — | ||||||
Interest and penalties on extension of short-term convertible notes | 85,365 | — | ||||||
Stock based compensation | 1,785,082 | — | ||||||
Loss on write-off of inventory | 131,455 | — | ||||||
Common stock issued for consulting services | 95,533 | — | ||||||
Issuance of warrants to extend short-term debt | 106,158 | — | ||||||
Change in fair value of derivative liability – warrants and redemption put liability | (1,173,956 | ) | — | |||||
Bad debt expense | 90,137 | — | ||||||
Changes in operating assets and liabilities, net of purchase transaction: | ||||||||
Accounts receivable | 48,195 | 2,189 | ||||||
Other receivables | (13,529 | ) | — | |||||
Accounts receivable from related party | — | 56,342 | ||||||
Prepaid expenses and other assets | (697,529 | ) | 83,855 | |||||
Interest payable | (10,592 | ) | 158,371 | |||||
Accounts payable | 121,907 | (97,638 | ) | |||||
Accrued liabilities | (263,874 | ) | (121,761 | ) | ||||
Other current liabilities | (2,875 | ) | 353,414 | |||||
Deferred revenue | 720,092 | (309,376 | ) | |||||
Deferred rent | — | 22,206 | ||||||
Net Cash Used in Operating Activities | (12,291,275 | ) | (3,544,707 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | (20,686 | ) | (11,295 | ) | ||||
Purchases of intangible assets | — | (12,000 | ) | |||||
Purchase of business, net of cash acquired | (302,710 | ) | — | |||||
Cash excluded in Merger | (69,629 | ) | — | |||||
Net Cash Used in Investing Activities | (393,025 | ) | (23,295 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from short-term notes, related party | 1,635,000 | 180,000 | ||||||
Proceeds from line of credit, related parties | — | 756,350 | ||||||
Repayment of line of credit, related parties | — | (1,856,350 | ) | |||||
Proceeds from issuance of note payable, related parties | — | 4,306,300 | ||||||
Payment of dividends | (14,684 | ) | — | |||||
Payment on debt obligations | (370,636 | ) | — | |||||
Proceeds from common stock, net of issuance costs | 4,337,106 | — | ||||||
Proceeds from warrants, net of issuance costs | 2,613,965 | — | ||||||
Proceeds from issuance of Series D Convertible Preferred stock, net of issuance costs | 5,888,017 | |||||||
Payment on Preferred stock Series B redemption | (50,000 | ) | — | |||||
Net Cash Provided by Financing Activities | 14,038,768 | 3,386,300 | ||||||
Net Increase (Decrease) in Cash | 1,354,468 | (181,702 | ) | |||||
Cash - Beginning of period | 69,628 | 251,330 | ||||||
Cash - End of period | $ | 1,424,096 | $ | 69,628 | ||||
Supplementary Cash Flow Information | �� | |||||||
Cash paid for interest | $ | 197,500 | $ | 25,812 | ||||
Acquisition of State, LLC non-controlling interest | — | 33,805 | ||||||
Property and equipment purchases included in accounts payable | — | 184,800 | ||||||
Non-cash investing and financing activities | ||||||||
Common stock issued to pay accrued dividends | 19,426 | — | ||||||
Deemed dividend on adjustment to exercise price on convertible debt and certain warrants | 287,542 | — | ||||||
Deemed dividend on beneficial conversion features | 32,592 | — | ||||||
Conversion of debt obligations to common stock | 225,937 | — | ||||||
Issuance of common stock pursuant to warrant exchange | 72,563 | — | ||||||
Issuance of warrants pursuant to conversion of short-term debt | 74,063 | — | ||||||
Issuance of warrants pursuant to note payable, related party | 56,378 | — | ||||||
Issuance of warrants to extend short-term debt | 106,158 | — | ||||||
Deemed dividend on Series D Convertible Preferred Stock | 3,190,639 | — | ||||||
Issuance of Warrants in connection with Series D Convertible Preferred Stock | 1,893,006 | — | ||||||
Beneficial conversion of Series D Convertible Preferred Stock | 623,045 | — | ||||||
Dividends accrued on Series B Convertible Preferred Stock | 65,512 | — | ||||||
Right-of-use asset additions | 1,165,785 | — | ||||||
Right-of-use liability additions | 1,187,991 | — |
F-6 |
Notes to consolidated financial statements
Note 1 – description of the company
On July 11, 2019, MedoveX Corp. (“MedoveX”) changed its name to H-CYTE, Inc. (“H-CYTE” or the “Company”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019. H-CYTE was incorporated in all material respects,Nevada on July 30, 2013 as SpineZ Corp.
On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the financial positionAPA was amended, and the Company acquired certain assets and assumed certain liabilities of Medovex CorporationRMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the APA and Subsidiary,its amendment (collectively the “APA”), the former RMS members had voting control of the combined company as of December 31, 2013,the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.
Prior to the merger of H-CYTE and RMS on January 8, 2019 (the “Merger”), the consolidated results for H-CYTE include Regenerative Medicine Solutions, LLC, LI, RMS Nashville, LLC (“Nashville”), RMS Pittsburgh, LLC (“Pittsburgh”), RMS Scottsdale, LLC (“Scottsdale”), RMS Dallas, LLC (“Dallas”), State, LLC (“State”), Cognitive Health Institute of Tampa (“CHIT”), RMS LI Management, and Shareholder and H-CYTE included Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”).
As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), MedoveX Corp, Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the results of the aforementioned 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 Company has two divisions: the medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). The Company has decided to focus its available resources on the Biosciences division as it represents a significantly greater opportunity than the DenerveX division as explained below. The Company is no longer manufacturing or selling the DenerveX device.
Healthcare Medical Biosciences Division (Biosciences division)
The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicine to treat an array of debilitating medical conditions. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality care while producing positive medical outcomes.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a 10-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
F-7 |
With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the FDA for treatment of COPD. The Company also applied for a grant in March 2020 through Biomedical Advanced Research and Development Authority (“BARDA”) to develop a protocol for the treatment of COVID-19. There can be no assurances that the Company will receive this grant.
Proprietary Medical Device Business (DenerveX division)
The Company’s business of designing and marketing proprietary medical devices for commercial use in the U.S. and Europe began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System, and it became commercially available throughout the European Union and several other countries that accept CE marking. In addition to the DenerveX device itself, the Company has developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device. Commercial production has been suspended since the first quarter of 2019. There was less than $100,000 in revenue from the product in 2019.
In the second quarter of 2019, the Company determined that their contract manufacturer was not able to meet the requirements for producing the finished DenerveX product. Additionally, in its evaluation of its current distribution channels, the Company determined that many of these channels were not cost effective. As a result of the above evaluations, certain European distributor agreements were terminated; all other representatives were notified that the Company had temporarily suspended the manufacture and sale of the DenerveX product; the Company continued to source alternative manufacturing and distributor options; and the Company is considering other product monetizing strategies, including, but not limited to, strategic partnerships. To date, these efforts have not been successful.
In the first quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and distributor options or other product monetizing relationships for the DenerveX product. Although the Company believes the DenerveX technology has value, the Company does not believe it will realize the value in the foreseeable future.
Considering the events and circumstances described above, the Company performed a long-lived asset impairment analysis. Based on the assumption there would be no future cash flows associated with the DenerveX product, management recorded an impairment loss of $2,944,000 for the unamortized intangible-technology for the year ended December 31, 2019.
The DenerveX Pro-40 generator is provided to customers agreeing to purchase the DenerveX device and cannot be used for any other purpose. Due to the generator not being able to be used for any other purpose, the Company has written off inventory totaling $131,000 as obsolete for the year ended December 31, 2019.
F-8 |
Note 2 - Liquidity, Going Concern and Management’s Plans
The Company incurred net losses of approximately $29,808,000 and $4,394,000 for the years ending December 31, 2019 and 2018, respectively. The Company has historically incurred losses from operations and itsexpects to continue to generate negative cash flows foras the period from February 1, 2013 (inception) to December 31, 2013 then ended in conformity withCompany’s revenue activities are suspended and as the Company implements its business plan. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of America.
The accompanying consolidatedBiosciences division will incur losses until sufficient revenue is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process.
The recent coronavirus outbreak (“COVID-19”) has adversely affected the Company’s financial statementscondition and results of operations. The impact of the outbreak of COVID-19 on the businesses and the economy in the U.S. and the rest of the world is, and is expected to continue to be, significant. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. The Company recently has taken steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through at least the end of July. This decision has put significant financial strain on the Company. The Company made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, and Dallas. The Company will reevaluate when operations will recommence at these clinics as more information about COVID-19 becomes available.
The Company believes these expense reductions are necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have been prepared assumingrescheduled these patients to August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s fourth quarter 2019 revenue was approximately $1.8 million. The Company expects that the first quarter of 2020 will be substantially less than the fourth quarter of 2019, and future quarters’ revenue is dependent on the timing of being able to treat patients again. The Company will continue as a going concern. As discussed in Note 3to focus on its goal of taking the L-CYTE-01 protocol to the consolidated financial statements, the Company is an early stage enterprise with no revenues, an inception period loss and limited capital resources.FDA for treatment of chronic lung diseases. The Company is subjectcurrently evaluating if its protocol has the potential to riskshelp people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached.
With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and uncertaintiesequity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.
On March 27, 2020 and April 9, 2020, the Company issued a demand note (the “Note”), each one in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) for a total of $1,000,000 in exchange for loans in such amount to cover working capital needs. Each Note bears simple interest at a rate of 8% per annum. The Investor is an affiliate of a pre-existing shareholder of the Company having been the lead investor in the Company’s recent Series D Convertible Preferred Stock Offering.
On April 17, 2020, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with an aggregate of 32 investors (the “Purchaser(s)”) pursuant to which the Company received an aggregate of $2,812,445 in gross proceeds (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 an aggregate of $2,812,445 in Secured Convertible Promissory Notes (the “April Secured Notes’). The April Secured Notes bear interest at 12% per annum and have a maturity date of October 31, 2020. The April Secured Notes are secured by all of the Company’s assets pursuant to a security agreement and an intellectual Property Security Agreement which are included as Exhibits to whether itthis Annual report on Form 10-K. The conversion price of the April Secured Notes shall be equal to the lesser of (i) the price per share paid by an investor, in the Qualified Financing (as defined below) for such new securities and (ii) the price per share obtained by dividing (x) $3,000,000 by the number of fully diluted shares outstanding immediately prior to the Qualified Financing. Qualified Financing is defined as an offering of preferred stock of at least $3.6 million, exclusive of the conversion of any April Secured Note or the Backstop Commitment (as defined below), at a price of at least $0.01279 per share. The obligations on the April Secured Notes are guaranteed by each of the Company’s subsidiaries. FWHC Bridge, LLC, which is an affiliate of FWHC, who has acted as our lead investor in the last several financing transactions and was the lender of the $1,000,000 loaned to the Company in March and April, was the lead investor in the April Offering purchasing $1,535,570 of April Secured Notes. YPH Holdings, LLC, which is an affiliate of Michael Yurkowsky, who is a Director of the Company, purchased $25,000 of April Secured Notes on the same terms as all other investors.
Each Purchaser received a warrant to purchase 100% of the aggregate number of shares of common stock into which such Purchaser’s April Secured Note may ultimately be converted, except that the holders of the Notes issued in March and April in the total amount of $1,000,000 received warrants to purchase up to 200% of the aggregate number of shares of Common stock into which such Note may ultimately be converted The April Warrants have an exercise price equal to the purchase price in the Qualified Offering.
F-9 |
The April SPA provides a commitment on the part of each Purchaser to agree to invest an identical amount (as purchased in the April Offering) in the Qualified Offering as a backstop commitment (the “Backstop Commitment”). The Qualified Offering is contemplated to be made in the form of a rights offering to holders of all of the Company’s common stock. Accordingly, in the event that any stockholders do not participate in the Qualified Offering, their purchase would be filled by the Purchasers on a pro rata basis. In the event that any Purchaser fails to fulfil its Backstop Commitment then the April Warrants issued to such Purchaser in the April Offering will be cancelled.
In connection with the April Offering, the Company’s CEO Bill Horne entered into an amendment letter to his employment agreement which provides that his salary will be reduced to $0 per month; provided that on the date that the Company receives FDA approval to commence clinical trials for its products, Mr. Horne’s salary will be increased to a total of $18,750 per month (i.e. $225,000 per annum. Mr. Horne also agreed to subordinate the promissory notes owed to him by the Company to the April Secured Notes.
As part of the April Offering, the holders of certain existing warrants which contained anti- dilution price protection and other objectionable features that would have been triggered by the April Offering agreed to a one- time adjustment of their exercise price to $.015 per share and to gross up the number of warrants issuable. In consideration, the holders of such pre-existing warrants waived all future anti- dilution price protection.
In addition, in connection with the April Offering, the Company entered into an amendment with the Investor for the remaining convertible notes which were originally issued in 2018 and assumed in the Merger. These notes have a principal amount of $424,615 as of December 31, 2019. The amendment provides that the conversion price of the notes will be equal to the purchase price in the Qualified Offering. The holder waived all future anti-dilution price protection.
As of December 31, 2019, the Company had cash on hand of $1,424,096. Cash on hand at April 13, 2020 was approximately $585,000. The Company’s cash is insufficient to fund its operations in the near-term and the Company will need to raise additional capital through debt or equity offerings to continue operations.
There can be no assurance that the Company will be able to raise additional funds or that the raiseterms and conditions of any future financings will be workable or acceptable to the Company or its shareholders. In the event the Company is unable to fund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, it needsthe Company may be forced to sustain its near term operations and pursue its longer term business strategy. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters also are described in Note 3.reduce our expenses, or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoveryrecoverability and classification of assetsrecorded 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 2 to the consolidated financial statements, the Company restated its consolidated financial statements for the period3 – Basis Of Presentation And Summary of February 1, 2013 (inception) through December 31, 2013 to correct its accounting for certain intangible property contributed to the Company at the date of its formation. The effectSignificant Accounting Policies
Based on the Company’s assets, liabilities and stockholders’ equity are described in Note 2 to the consolidated financial statements.
June 30, | December 31, | ||||||
2014 | 2013 | ||||||
(Unaudited) | (Restated) | ||||||
Assets | |||||||
Current Assets | |||||||
Cash | $ | 1,450,808 | $ | 2,606,075 | |||
Prepaid expenses | 1,437 | 3,252 | |||||
Total Current Assets | 1,452,245 | 2,609,327 | |||||
Property and Equipment, Net | 7,125 | 3,463 | |||||
Deferred initial public offering costs | 152,916 | 29,775 | |||||
Total Assets | $ | 1,612,286 | $ | 2,642,565 | |||
Liabilities and Stockholders' Equity | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 103,096 | $ | 36,125 | |||
Accrued liabilities | 71,958 | 30,000 | |||||
Total Liabilities | 175,054 | 66,125 | |||||
Commitments | |||||||
Stockholders' Equity | |||||||
Preferred stock - $.001 par value: 500,000 shares authorized, no shares outstanding | -- | -- | |||||
Common stock - $.001 par value: 49,500,000 shares authorized, 7,781,175 shares issued and outstanding | 7,782 | 7,782 | |||||
Common stock subscription receivable | -- | (100,000 | ) | ||||
Additional paid-in capital | 3,360,064 | 3,341,991 | |||||
Deficit accumulated during the development stage | (1,930,614 | ) | (673,333 | ) | |||
Total Stockholders' Equity | 1,437,232 | 2,576,440 | |||||
Total Liabilities and Stockholders' Equity | $ | 1,612,286 | $ | 2,642,565 |
For the six months ended June 30, 2014 | Period of February 1, 2013 (inception) to December 31, 2013 | |||||||
(Unaudited) | ||||||||
Revenues | $ | - | $ | -- | ||||
Operating Expenses | ||||||||
General and administrative | 910,131 | 582,946 | ||||||
Research and development | 347,150 | 90,387 | ||||||
Total Operating Expenses | 1,257,281 | 673,333 | ||||||
Net Loss | $ | (1,257,281 | ) | $ | (673,333 | ) | ||
Basic and diluted net loss per common share | $ | (0.16 | ) | $ | (0.15 | ) | ||
Basic and Diluted weighted average common shares outstanding | 7,781,175 | 4,469,000 |
Common Stock | Common Stock Subscription | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||
Shares | Amount | ||||||||||||||||||||
Balance - February 1, 2013 (Inception) | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
Issuance of common stock to founders, on February 1, 2013 at $0.01 per share | 2,624,892 | 2,625 | -- | 24,495 | -- | 27,120 | |||||||||||||||
Issuance of common stock to founder in exchange for cash of $7,750 ($0.01 per share on February 1, 2013) and contribution of technology asset pursuant to a Contribution and Royalty Agreement dated January 31, 2013 | 750,108 | 751 | -- | 6,999 | 7,750 | ||||||||||||||||
Common stock of the Company outstanding upon completion of the merger on September 13, 2013, originally issued on August 28, 2013 at $0.04 per share | 3,050,000 | 3,050 | -- | 118,950 | -- | 122,000 | |||||||||||||||
Issuance of common stock in private placement, completed in December 2013, net of offering costs at $2.50 pursuant to a private placement memorandum dated September 16, 2013 | 1,356,175 | 1,356 | (100,000 | ) | 3,155,295 | -- | 3,056,651 | ||||||||||||||
Stock based compensation | -- | -- | -- | 36,252 | -- | 36,252 | |||||||||||||||
Net loss | -- | -- | -- | -- | (673,333 | ) | (673,333 | ) | |||||||||||||
Balance - December 31, 2013, restated | 7,781,175 | $ | 7,782 | $ | (100,000 | ) | $ | 3,341,991 | $ | (673,333 | ) | $ | 2,576,440 | ||||||||
Collection of subscription receivable | 100,000 | 100,000 | |||||||||||||||||||
Stock based compensation | 18,073 | 18,073 | |||||||||||||||||||
Net loss | (1,257,281 | ) | (1,257,281 | ) | |||||||||||||||||
Balance – June 30, 2014 | 7,781,175 | $ | 7,782 | $ | -- | $ | 3,360,064 | $ | (1,930,614 | ) | $ | 1,437,232 |
For the six months ended June 30, 2014 | Period of Inception (February 1, 2013) to December 31, 2013 | ||||||
(Unaudited) | (Restated) | ||||||
Cash Flows from Operating Activities | |||||||
Net loss | $ | (1,257,281 | ) | $ | (673,333 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 677 | 472 | |||||
Stock based compensation | 18,073 | 36,252 | |||||
Changes in operating assets and liabilities: | |||||||
Prepaid expenses | 1,815 | (3,252 | ) | ||||
Accounts payable | 66,972 | 36,125 | |||||
Accrued liabilities | 41,959 | 30,000 | |||||
Net Cash Used in Operating Activities | (1,127,785 | ) | (573,736 | ) | |||
Cash Flows from Investing Activities | |||||||
Expenditures for property and equipment | (4,341 | ) | (3,935 | ) | |||
Net Cash Used in Investing Activities | (4,341 | ) | (3,935 | ) | |||
Cash Flows from Financing Activities | |||||||
Deferred initial public offering costs | (123,141 | ) | (29,775 | ) | |||
Proceeds from issuances of stock to founders | -- | 156,870 | |||||
Collection of common stock subscription receivable | 100,000 | -- | |||||
Proceeds from issuance of common stock in private placement, net of offering costs | -- | 3,056,651 | |||||
Net Cash Provided by Financing Activities | (23,141 | ) | 3,183,746 | ||||
Net Increase (Decrease) in Cash | (1,155,267 | ) | 2,606,075 | ||||
Cash - Beginning of period | 2,606,075 | -- | |||||
Cash - End of period | $ | 1,450,808 | $ | 2,606,075 |
The asset was originally presentedaudited consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ deficit, and the consolidated statements of cash flows do not reflect the historical financial information related to H-CYTE prior to the Merger as a Patent inthey only reflect the amounthistorical financial information related to RMS. For the audited consolidated statements of $1,611,000 with a corresponding Deferred Tax Liability of $611,000stockholders’ deficit, the common stock, preferred stock, and increased to additional paid in capital reflect the accounting for the stock received by the RMS members as of $1,000,000. the Merger as if it was received at the beginning of the periods presented.
Principles of ConsolidationAfter further consideration, management
U.S. GAAP requires that a related entity be consolidated with a company when certain conditions exist. An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by the Parent would be required if it is determined that the Company should have applied the guidance specified in Securities Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5(g) Transfers of Nonmonetary Assets by Promoters or Shareholders. Accordingly, the Company restated its December 31, 2013 balance sheet and statement of stockholders' equity to record the asset at the contributors' cost basis, which is nominal. The following table providesParent will absorb a condensed summarymajority of the effects ofVIE’s expected losses or residual returns if they occur, retain the change onpower to direct or control the Company December 31, 2013 balance sheet.
As Originally Reported | As Restated | |||||||
Assets | $ | 4,235,565 | $ | 2,642,565 | ||||
Liabilities | 677,126 | 66,125 | ||||||
Stockholders' Equity | $ | 3,576,440 | $ | 2,576,440 |
The correction that was made to our consolidated financial has no effect on our results of operations or basic and diluted loss per share for the year ended period of February 1, 2013 (inception) through December 31, 2013.
Use of Estimates
In preparing the financial statements, in conformity with USU.S. GAAP requires management to makedisclosure regarding estimates and assumptions used by management that affect the amounts reported in financial statements and accompanying notes. The Company’s significant estimates currently include the fair value, useful life and carrying amount of its patented technology, the deferred income tax asset and the related valuation allowance, and the fair value of its share based payment arrangements. For those estimates that are sensitive to the outcome of future events, actualActual results could differ from those estimates.
Note 4 – Summary of Significant Accounting Policies (continued)Cash
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balancebalances at December 31, 20132019 and June 30, 20142018 consists of funds deposited in checking accounts with commercial banks.
Accounts Receivable
Accounts receivable represent amounts due from customers for which potentially subjectrevenue has been recognized. Generally, the Company does not require collateral or any other security to concentrationssupport its receivables. Trade accounts receivable are stated net of credit risk, consist solelyan estimate made for doubtful accounts, if any. Management evaluates the adequacy of cash. At times throughout the year, the Company may maintain certain bankallowance for doubtful accounts regularly to determine if any account balances will potentially be uncollectible. Customer account balances are considered past due or delinquent based on the contractual agreement with each customer. Accounts are written off when, in excess of FDIC insured limits.management’s judgment, they are considered uncollectible. At December 31, 20132019 and June 30, 2014December 31, 2018, management believes no allowance is necessary. For the year ended December 31, 2019 and 2018, the Company had cash deposits that exceeded federally insured deposit limits. recorded bad debt expense of approximately $90,000 and $3,000, respectively.
F-10 |
Impairment of Long-Lived Assets
The Company believesreviews the values assigned to long-lived assets, including property and equipment and certain intangible assets, to determine whether events and circumstances have occurred which indicate that the remaining estimated useful lives may warrant revision or that the remaining balances may not be recoverable. The evaluation of asset impairment requires management to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment, and actual results may differ from estimated amounts. In such reviews, undiscounted cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required.
For the year ended December 31, 2019 and 2018, the Company recognized an impairment charge of approximately $2,944,000 and $607,000, respectively, related to certain intangible assets (See Note 7).
Goodwill
Goodwill represents the excess of purchase price over fair value of net identified tangible and intangible assets and liabilities acquired. The Company does not amortize goodwill; it tests goodwill for impairment on at least an annual basis. An impairment loss, if any, is measured as the excess of the carrying value of the reporting unit over the fair value of the reporting unit.
As of December 31, 2019, the Company performed a quantitative test and determined that the carrying value of the reporting unit exceeded the fair value. The Company’s goodwill balance was determined to be impaired as of the balance sheet date due to the adverse financial results for 2019, the negative projected cash results for 2020 and a significant decline in its funds are depositedmarket capitalization. As a result, we recorded a goodwill impairment charge of approximately $12,564,000 during the year ended December 31, 2019 (See Note 7).
Leases
In February 2016, the Financial Accounting Standard Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02 (as amended), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in high credit quality financial institutions. the statement of operations.
The Company has not experienced any lossesentered into significant lease agreements in such accountswhich it is the lessor. For the lease agreements in which the Company is lessee, under Topic 842, lessees are required to recognize a lease liability and right-of-use asset for all leases (except for short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the consolidated balance sheet as of the effective date and believes itdid not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components.
F-11 |
Other Receivables
Other receivables totaling approximately $19,000 and $5,000 at December 31, 2019 and 2018, respectively include receivables from the non-acquired Lung Institute, LLC due to Lung Institute Tampa, LLC for approximately $10,000 and $0, and approximately $9,000 and $5,000 reimbursement receivable for expenses from RMS at December 31, 2019 and 2018, respectively. The $10,000 receivable was a result of the Lung Institute, LLC being a transitory entity for Lung Institute Tampa, LLC while the merchant services accounts are being transferred.
Revenue Recognition
The Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606, Revenue From Contracts with Customers, which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company records revenue under ASC 606 when control is transferred to the customer.
The Company uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price accounts for medical, surgical, facility, and office services rendered by the Company for consented procedures and is recorded as revenue. The Company recognizes revenue when the terms of a contract with a patient are satisfied.
The Company offers two types of cellular therapy treatments to their patients.
1) | The first type of treatment includes medical services rendered typically over a two-day period in which the patient receives cellular therapy. For this treatment type, revenue is recognized in full at time of service. | |
2) | The Company also offers a four-day treatment in which medical services are rendered typically over a two-day period and then again, approximately three months later, medical services are rendered for an additional two days of treatment. Payment is collected in full for both service periods at the time the first treatment is rendered. Revenue is recognized when services are performed based on the estimated standalone selling price of each service. The Company has deferred recognition of revenue amounting to approximately $1,046,000 and $326,000 at December 31, 2019 and 2018, respectively. |
The Company’s policy is to not exposedoffer refunds to any significant credit risk associated withpatients. However, in limited instances the Company may make exceptions to this policy for extenuating circumstances. These instances are evaluated on a case by case basis and may result in a patient refund. Management performed an analysis of its cash deposits.
Research and development costs
Research and development expenses are expensed asrecorded in operating expenses in the period in which they are incurred.
Advertising
Advertising costs are recorded in operating expenses in the period in which they are incurred.
Stock-Based Compensation
The Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718, Compensation —- Stock Compensation (“ASC 718”). ASC 718 addresses all formsThe Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based payment (“SBP”)compensation, employee and non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718 awards result in a cost that is measured at fair value on the awards’ grant date, based on thereduced for estimated number of awards that are expected to vest and will result in a charge to operations.forfeitures.
F-12 |
Note 4 –
Summary of Significant Accounting Policies (continued)
The Company accountsutilizes the liability method of accounting for income taxes underas set forth in FASB ASC Topic 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for“Income Taxes”. Under the expected future tax consequences of events that have been included in the financial statements or tax returns. Under thisliability method, deferred tax assets and liabilitiestaxes are determined based on thetemporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect forduring the yearyears in which the differences are expected to reverse. Deferreddifference turns around. The Company accounts for interest and penalties on income taxes as income tax assets are reduced by aexpense. A valuation allowance to the extent management concludesallowances is recorded when it is more likely than not that the asseta tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply toIn determining the need for valuation allowances the Company considers projected future taxable income inand the years in which those temporary differences are expectedavailability of tax planning strategies.
From inception to be recovered or settled.
As a result of the acquisition, the Company did not have a liability for unrecognizedis required to file federal income tax uncertainties.
Net Loss perPer 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 anti-dilutiveantidilutive due to the Company’s net losses.
For the yearsperiods presented, there is no difference between the basic and diluted net loss per share.
Fair Value Measurements
The Company measures certain non-financial assets, liabilities, and equity issuances at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations.
The Company classified its stock warrants as either liability or equity instruments in accordance with ASC 480, “Distinguishing Liabilities from Equity” (ASC 480) and ASC 815, “Derivatives and Hedging” (ASC 815), depending on the specific terms of the warrant agreement. The Series B Warrants included a down-round protection feature that would also result in the issuance of additional shares of stock, are classified as liabilities pursuant to ASC 815 and are initially and subsequently measured at their estimated fair values. The Company will continue to record liability-classified warrants at fair value until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability. For additional discussion on the Series B Warrants, see Note 12.
The Company classified a redemption provision in its Series D Preferred Stock as a derivative liability in accordance with ASC 815. The Company will continue to record the redemption provision as a “Redemption Put Liability” until the Series D is converted or redeemed. For additional discussion on the Redemption Put Liability, see Note 12.
F-13 |
The Company uses the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded, adjusted above, or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
● | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; | |
● | Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and | |
● | Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
The Company evaluates its financial liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. Although the Company believes that the recorded fair value of our financial instruments is appropriate at December 31, 2019, these fair values may not be indicative of net realizable value or reflective of future fair values. There were no financial assets or liabilities carried at fair value as of December 31, 2018.
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 million 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.
F-14 |
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 $5.65 million via the issuance of new securities. On the date of closing the Company issued 6,111 additional Exchange Shares to RMS Shareholders as a result of the issuance of additional securities, which are included in the 39,772 shares above. Subsequent to the closing of the purchase transaction, an incremental 11,153 additional Exchange Shares were issued, for a total of 17,264 additional Exchange Shares. All additional Exchange Shares have been issued to the shareholders of RMS and these Series C Preferred shares converted to 17,263,889 shares of common stock; 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.
Under the terms of the APA, MedoveX purchased certain assets and assumed certain liabilities of RMS. The assets of RMS reported on the MedoveX consolidated balance sheet as of December 31, 2018 that were excluded in the Merger on January 8, 2019 included the following: cash of approximately $70,000 convertible debt to a related party of approximately $4,300,000, interest payable of approximately $158,000, short-term notes, related party of approximately $180,000, accounts payable of approximately $398,000 and other current liabilities of approximately $285,000. Additionally, there were certain on-going litigation matters that were not assumed as part of the January 8, 2019 Merger.
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 24.5 million shares of common stock outstanding at a market capitalization of $9.8 million. The estimated fair value of the net assets of MedoveX was $8.4 million 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 is above the fair value of its net assets. The MedoveX net asset value is 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 estimated 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 (see Note 3).
F-15 |
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 (see Note 3).
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 |
Notes payable relate to promissory notes assumed by Acquiree in a 2015 acquisition, which was later divested in 2016, with the assumed promissory notes being retained by Acquiree. The Company finalized an eighteen-month extension on the notes extending the maturity date to March 1, 2021. Payments on both notes are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. The promissory notes had outstanding balances of approximately $99,000 plus accrued interest of approximately $3,000 at January 8, 2019 (see Note 11) and promissory notes had outstanding balances of $78,000 as of December 31, 2019.
In the third quarter of 2018, convertible notes were issued pursuant to a securities purchase agreement with select accredited investors, whereby the Acquiree offered up to 1,000,000 units (the “Units”) at a purchase price of $50,000 per Unit. Each Unit consisted of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, for all periods presented because theyat a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering of Units, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The warrants are anti-dilutive.
In June 2014, the Financial Accounting Standards Board (“FASB”)offering, the Acquiree sold an aggregate of 15 Units and issued Accounting Standards Update (“ASU”) No. 2014-10, “Development Stage Entities (Topic 915): Eliminationto investors an aggregate of Certain Financial Reporting Requirements, Including$750,000 in principal amount of convertible notes and 1,875,000 warrants to purchase common stock, resulting in total gross proceeds of $750,000 to the Company. If converted at $0.40 the convertible notes sold in the offering are convertible into an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.” This ASU removesaggregate of 1,875,000 shares of common stock. The Acquiree recorded the definition of a development stage entityproceeds from the ASC, thereby removingnotes and the financial reporting distinctionaccompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of approximately $505,000 and $245,000, respectively. At acquisition date, the value of the notes was approximately $598,000. Due to the notes maturing in 2019, the warrants have fully accreted as of December 31, 2019.
The convertible notes had maturity dates between development stage entitiesAugust and other reporting entities from GAAP. In addition,September 2019 and were renegotiated or repaid during the ASU eliminatesthird and fourth quarters of 2019 (see Note 11).
F-16 |
The following schedule represents the requirements for development stage entitiesamount of revenue and net loss attributable to (1) present inception-to-date informationthe MedoveX acquisition which have been included in the consolidated statements of operations cash flows, and shareholders’ deficit, (2) labelfor the periods subsequent to the acquisition date:
For the Year Ended | ||||
December 31, 2019 | ||||
Revenues | $ | 67,631 | ||
Net loss attributable to MedoveX | $ | (4,754,680 | ) |
The following unaudited pro forma financial statementsinformation represents the consolidated financial information as those of a development stage entity, (3) disclose a descriptionif the acquisition had been included in the consolidated results beginning on the first day of the development stage activities in whichfiscal year prior to its acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entity is engaged,to remove any intercompany transactions and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. Early adoption is permitted. The Company has elected to adopt this ASU effective with these Annual Financial Statements and its adoption resulted in the removal of all development stage disclosures.
For the Year Ended December 31, 2018 | ||||||||||||
RMS | MedoveX | Pro Forma | ||||||||||
Revenues | $ | 7,883,115 | $ | 818,211 | $ | 8,701,326 | ||||||
Net loss | (4,394,149 | ) | (4,908,644 | ) | (9,302,793 | ) | ||||||
Net loss attributable to common shareholders | (4,394,149 | ) | (5,477,873 | ) | (9,872,022 | ) | ||||||
Loss per share- basic and diluted | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.17 | ) |
Note 5 – Right-of-use Asset And Lease Liability
Upon adoption of ASU No. 2016-02 (as amended) (See Note 3), additional current liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding ROU assets of approximately $1,167,000 were recognized, based on the present value of the remaining minimum rental payments under the new leasing standards for existing operating leases.
The audited consolidated balance sheet at December 31, 2019 reflects current lease liabilities of approximately $454,000 and long-term liabilities of $302,000, with corresponding ROU assets of $738,000.
The components of lease expense for the years ended December 31, 2019 and 2018, respectively, are as follows:
Year ended December 31, | ||||||||
2019 | 2018 | |||||||
Operating lease expense | $ | 579,770 | $ | 533,035 |
Cash paid for amounts included in the measurement of lease liabilities for the years ended December 31, 2019 and 2018, respectively, are as follows:
Year ended December 31, | ||||||||
2019 | 2018 | |||||||
Operating cash flows from operating leases (1) | $ | 579,770 | $ | - |
F-17 |
Supplemental balance sheet and other information related to operating leases are as follows (1):
December 31, 2019 | ||||
Operating leases: | ||||
Operating leases right-of-use assets | $ | 738,453 | ||
Lease liability, current | 453,734 | |||
Lease liability, net of current portion | 302,175 | |||
Total operating lease liabilities | $ | 755,909 | ||
Weighted average remaining lease term | 2.2 years | |||
Weighted average discount rate | 7.75% |
(1) | There is no comparable information for operating leases at or for the year ended December 31, 2018 since the Company adopted ASU No. 2016-02 on January 1, 2019 and elected to recognize operating lease right-of-use assets and operating lease liabilities at the adoption date. |
Maturities of operating lease liabilities as of December 31, 2019 are as follows:
Operating leases | ||||
Operating leases: | ||||
Due in one year or less | $ | 492,141 | ||
Due after one year through two years | 154,559 | |||
Due after two years through three years | 102,891 | |||
Due after three years through four years | 69,333 | |||
Total lease payments | 818,924 | |||
Less interest | (63,015 | ) | ||
Total | $ | 755,909 |
Operating lease expense and cash flows from operating leases for year ended December 31, 2019 totaled approximately $580,000 and are included in the “Other general and administrative” section of the audited consolidated statement of operations.
The Company leases corporate office space in Tampa, FL and Atlanta, GA. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. Each location has its own expiration date ranging from April 30, 2020 to August 31, 2023.
Note 6 - Property and Equipment
Property and equipment, net, consists of the following:
Useful Life | June 30, 2014 | December 31, 2013 | |||||||
Furniture and fixtures | 7 years | $ | 4,622 | $ | 2,760 | ||||
Computers and software | 3 years | 3,654 | 1,175 | ||||||
8,276 | 3,935 | ||||||||
Less accumulated depreciation | (1,151 | ) | (472 | ) | |||||
Total | $ | 7,125 | $ | 3,463 |
Useful Life | December 31, 2019 | December 31, 2018 | ||||||||
Furniture and fixtures | 5-7 years | $ | 231,222 | $ | 149,285 | |||||
Computers and software | 3-7 years | 244,039 | 278,234 | |||||||
Leasehold improvements | 15 years | 157,107 | 156,133 | |||||||
632,368 | 583,652 | |||||||||
Less accumulated depreciation | (412,665 | ) | (316,736 | ) | ||||||
Total | $ | 219,703 | $ | 266,916 |
Depreciation expense amounted to $472was approximately $98,000 and $95,000, respectively, for the years ended December 31, 2019 and 2018. The Company uses the straight-line depreciation method to calculate depreciation expense.
F-18 |
Note 7 - Intangible Assets and Goodwill
The Company’s intangible assets are patents and related proprietary technology for the DenerveX System. For 2019, total amortization expense related to acquisition-related intangible assets was $736,000 included in operating expense in the accompanying consolidated statement of operations.
The Company decided to permanently suspend manufacture and sale of the DenerveX product for the foreseeable future, as it has been unsuccessful in its attempts to source cost effective alternative manufacturing and distributor options for the product. The Company has no future plans to commit any additional resources related to the future development or sales efforts for the product, as it has determined that the cost to relaunch the product back to market to be significant and indeterminable due to issues with the manufacturing and sterilization of the product. The DenerveX System no longer represents part of the Company’s core strategic plans for the future. The Company believes that it is more likely than not that the carrying value will not be recoverable. As a result, during the fourth quarter of 2019 the Company recorded a charge of $2,944,000 to impair the carrying value of the technology related intangible. This charge was recorded within the caption, “Loss on impairment” in the accompanying consolidated statements of operations.
The Company’s goodwill balance was determined to be impaired as of the balance sheet date due to the adverse financial results for 2019, the negative projected cash results for 2020 and a significant decline in its market capitalization. The Company concluded that the fair value of the reporting unit was less than the carrying amount in excess of goodwill. As a result, during the fourth quarter of 2019 the Company recorded a $12,546,000 impairment charge, which is presented within the caption, “Loss on impairment” in the accompanying consolidated statements of operations.
For the year ended December 31, 2018, the Company recognized approximately $607,000 in impairment loss related to the write-off of the capitalized costs for the design and development of an application to be sold on the iOS and Android store platforms.
Note 8 – Related Party Transactions
Consulting Expense
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 receives $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair in addition to regular quarterly board meeting fees. This arrangement has no specified termination date. For year ended December 31, 2019 and 2018, the Company has expensed approximately $125,000, and $0 in compensation to Mr. Monteleone, respectively. Effective March 25, 2020, the Company reduced the advisory services to $5,000 per month and the fees per quarter as the Audit Committee Chair to $2,500.
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For year ended December 31, 2019, the Company expensed approximately $68,000 in consulting fees to St. Louis Family Office.
F-19 |
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 will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by LHI, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the year ended December 31, 2019, the Company expensed approximately $71,000. The Company terminated this agreement in March 2020.
Board Members and Board Member Expenses
In July 2019, the Board appointed Dr. Andre Terzic and Dr. Atta Behfar to the Board. On November 18, 2019, Dr. Andre Terzic and Dr. Atta Behfar resigned from the Company’s Board of Directors to avoid any potential conflicts that could arise from the Company’s Service Agreement with Rion. Drs. Terzic and Behfar are co-founders of Rion.
For the year ended December 31, 2019, and December 31, 2018 the Company paid $5,000 and $0, respectively, each for Board of Director fees to Michael Yurkowsky and to Raymond Monteleone for a total of $10,000, and $0 respectively.
Debt and Other Obligations
The Company had various related party transactions in 2018. For the period of January 1, 2018 to March 13, 2018, the Company received approximately $528,000 from one of its shareholders (RMS members) and approximately $228,000 from its CEO (RMS CEO) as part of a line of credit that was established in 2017. On March 13, 2018, the entire $1,856,000 line of credit received from the RMS members and the CEO, including contributions from 2017, was transferred to the BioCell Capital, LLC debt instrument, (“BioCell Capital Line of Credit”).
The BioCell Capital Line of Credit also consisted of capital contributions from related parties totaling approximately $4,306,000, inclusive of the aforementioned $1,856,000, to RMS in 2018. The BioCell Capital Line of Credit was converted to RMS members’ equity and was excluded from the APA on January 8, 2019.
The Company also received a short-term advance from one of its shareholders (RMS members), who was also the CEO of H-CYTE, in the amount of $180,000 in December 2018 for working capital needs.This liability was not assumed in the Merger.
The short-term notes, related party as of December 31, 2019 of $1,635,000 is comprised of four loans made to the Company during 2019, by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes and had the terms as indicated below.
A loan for $900,000 was made on July 25, 2019. This loan accrues interest at 5.5% and is due and payable upon demand of the creditor.
A loan for $350,000 was made on September 26, 2019 with the following terms:
● | 12% interest rate with a maturity date of March 26, 2020. | |
● | The Company was unable to pay back the principal and interest by November 26, 2019; therefore, it issued to Lender a three-year warrant to purchase 400,000 shares of the Company’s common stock with a purchase price of $0.75 per share in accordance with the terms of the note. | |
● | The Company was unable to pay back the loan on March 26, 2020, therefore, the interest rate increased to 15%. |
F-20 |
A loan for $150,000 was made on October 28, 2019 with the following terms:
● | 12% interest rate with a maturity date of April 28, 2020. | |
● | The Company was unable to pay back the principal and interest by December 28, 2019; therefore, it issued to Lender a three-year warrant to purchase 171,429 shares of the Company’s common stock with a purchase price of $0.75 per share in accordance with the terms of the note. | |
● | If the Company is unable to pay the loan as of April 28, 2020, the interest rate increases to 15%. |
A loan for $235,000 was made on November 13, 2019 with the following terms:
● | 12% interest rate with a maturity date of May 13, 2020. | |
● | The Company was unable to pay back the principal and interest by January 13, 2020, therefore in January 2020 it issued to Lender a three-year warrant to purchase 268,571 shares of the Company’s common stock with a purchase price of $0.75 per share in accordance with the terms of the note. | |
● | If the Company is unable to pay the loan as of May 13, 2020, the interest rate increases to 15%. | |
In connection with the April Offering, Mr. Horne subordinated his notes to the April Secured Notes. |
Note 9 - Equity Transactions
For the consolidated statement of stockholders’ deficit as of December 31, 2018, the common stock, preferred stock and additional paid in capital reflect the accounting for the stock received by the RMS members as of the Merger as if it was received as of the beginning of the periods presented 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 (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the principal amount of $50,000 and a warrant (the “Warrant”) to purchase common stock (the “common stock”) of the Company at a purchase price of $0.75 per share. Pursuant to this SPA, the Company initially offered a minimum of $1,000,000 and a maximum of $6,000,000 of Units, and subsequently increased the maximum amount to $8,000,000 (the “Maximum Amount”) of Units at a price of $50,000 per Unit until the earlier of (i) the closing of the subscription of the Maximum Amount and (ii) March 31, 2019 (the “Termination Date”), subject to the Company’s earlier termination at its discretion. The SPA includes the customary representations and warranties from the Company and purchasers. Mr. Gorlin, the Company’s former Chairman of the Board, converted a $200,000 promissory note owed to him by the Company in exchange for four (4) Units on the same terms as all other Purchasers. Mr. Gorlin subsequently converted the promissory note underlying the Units into an aggregate of 500,000 shares of common stock, eliminating the Company’s debt obligation.
Each Convertible Note had an interest rate of 12% per annum, a principal amount of $50,000 maturity date of January 8, 2020, and are convertible into shares of common stock at a price of $0.40 subject to adjustment as provided for in the Convertible Note. Pursuant to the terms of the Convertible Note, each holder of the Convertible Note shall not own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of common stock issuable upon exercise of such Convertible Note. If defaulted, the penalty interest rate of the Convertible Note shall rise to 18% per annum. In addition, each Warrant is exercisable at a price of $0.75 per share (the “Exercise Price”), subject to adjustments stated therein. The holder of each Warrant may purchase the number of shares of common stock equal to the number of shares of common stock issuable upon conversion of each Convertible Note while the Warrant is exercisable. The Warrants have a term of three years and shall be exercised in cash or on a cashless basis as described in the Warrant agreement. All Convertible Notes were converted into an aggregate of 18,000,000 shares of common stock upon closing. 17,500,000 of these shares were issued for cash and 500,000 shares were issued for conversion of short-term debt. The issuance costs for this private placement were approximately $133,000. Additionally, in July 2019, the Company raised $100,000 by selling 200,000 shares of common stock at $0.50 per share in a separate private placement. The Company also issued the investors 100,000 warrants with an exercise price of $1.00 per share. For the year ended December 31, 2019, the Company sold a total of 17,700,000 shares of common stock through private placements for cash and another 500,000 shares for conversion of short-term debt.
F-21 |
As reported on Form 8-K filings on January 25, 2019, February 8, 2019, March 15, 2019 and April 5, 2019, the Company entered into other SPA’s with additional purchasers, which brought the aggregate amount of capital raised in all these offerings to $7,000,000, as of that latest date, excluding the shares issued for conversion of short-term debt, discussed below. In July 2019, the Company raised $100,000 by selling 200,000 shares of common stock at $0.50 per share in a separate private placement which brought the total of raised from all these offerings to $7,100,000.
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. 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.
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.
On April 25, 2019, the Company issued 4,225,634 shares of common stock valued at $0.40 per share to Mr. William E. Horne, the Company’s CEO, in a restricted stock award which was 100% vested when issued. The Company recognized approximately $1,690,000 of compensation expense during the year ended December 31, 2019 related to the restricted stock award. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this restricted stock award (as well as the incentive stock options issued in the quarter ended March 31, 2019) would be fully vested if not issued within fifteen days of the Merger. Neither award was issued within that time frame and both awards became fully vested when issued. The aggregate number of shares of common stock from these two awards is 4,475,634 and was calculated based on 7% of the Company’s issued and outstanding common stock as of the closing of the Merger.
During the year ended December 31, 2019, 715,279 shares were issued pursuant to conversions of 2,650 shares of Series B Convertible Preferred Stock and 50,367 shares for accrued dividends thereunder.
In conjunction with the Series D Preferred financing (See Note 14), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock. The Series B Warrants were adjusted to fair value on the date of the exchange with the change in fair value being recorded in earnings. The fair value of the common stock issued was $73,000 which approximated the fair value of the Series B Warrants exchanged.
F-22 |
Series B Preferred Stock Preferences
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’s 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 90% of that conversion price, or $0.36.
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. The Company also repurchased 500 shares of Series B Preferred Stock for $50,000 plus accrued dividends.
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.
Stock-Based Compensation Plan
The Company utilizes the Black-Scholes valuation method to recognize stock-based compensation expense over the vesting period. The expected life represents the period that the stock-based compensation awards are expected to be outstanding.
Including the expense of approximately $1,690,000 related to the restricted stock award to the Company’s CEO and approximately $95,000 of compensation expense with respect to vested stock options, total stock-based compensation expense for the year ended December 31, 2019 was approximately $1,785,000. The recognition of the $1,690,000 in compensation expense was the result of the stock award being 100% vested upon issuance. This restricted stock award was issued pursuant to his employment agreement with the Company, which stated that this grant would be fully vested if not issued within fifteen days of the reverse merger transaction. The restricted stock award was not issued within that time frame and was fully vested when issued.
F-23 |
Stock Option Activity
For the year ended December 31, 2019, the Company recognized approximately $95,000, as compensation expense with respect to vested stock options. Since these 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 year ended December 31, 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 were immediately vested upon issuance.
As of December 31, 2019, there were 3,750 shares of unvested stock options and unrecognized compensation expense totaled approximately $600. The remaining expense will be recognized as an expense on a straight-line basis over the remaining weighted average service period which is approximately 6.28 years.
The following is a summary of stock option activity for the year ending December 31, 2019:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
Outstanding at December 31, 2018 | — | $ | — | — | ||||||||
Assumed with the Merger | 557,282 | $ | 2.78 | 6.99 | ||||||||
Other activity since January 8, 2019: | ||||||||||||
Granted | 250,000 | $ | 0.40 | 9.02 | ||||||||
Cancelled | (382,282 | ) | $ | 2.86 | — | |||||||
Outstanding at December 31, 2019 | 425,000 | $ | 1.38 | 7.71 | ||||||||
Exercisable at December 31, 2019 | 421,250 | $ | 1.38 | 7.71 |
Non-Controlling Interest
For the year-ended December 31, 2019 and 2018, 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 entities own their respective clinics; however, the Company maintains control through their management role for each of the clinics, in accordance with each clinic’s respective management agreement. Based on these agreements, the Company (RMS and RMS Management and now H-CYTE) has the responsibility to run and make decisions on behalf of the clinics, except for medical procedures. Beginning in January 2018, the Company adopted the policy for all of the VIEs that the management fee charged by the Company would equal the amount of net income from each VIE on a monthly basis, bringing the amount of the net income each month for each VIE to a net of zero. Due to this change in policy, there was no change in the non-controlling interest for the years ended December 31, 2018 or 2019 related to the net income as it was $0 each month through the management fee charged by the Company. The only change in the non- controlling interest balance in 2018 was related to the acquisition of 100% interest of State in 2018; there was no change in non-controlling interest in 2019.
Note 10 – Commitments & Contingencies
Biotechnology Agreement
On June 21, 2019, the Company entered into a 10-year exclusive and extendable product supply agreement with Rion that will enhance its existing cytotherapy product line, developing a disruptive technology for COPD, the fourth leading cause of death in the U.S. Rion has established a unique exosome technology to harness the healing power of the body. Rion’s novel exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. With this agreement, Rion will serve as the product supplier and will co-develop a proprietary cellular platform with H-CYTE for the treatment of COPD. H-CYTE will control the commercial development and facilitate clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the FDA for treatment of COPD.
F-24 |
On October 9, 2019, the Company entered into a services agreement with Rion, LLC which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01. The description of services around the L-CYTE-01 product include research and development, process development, point of care GMP process, and investigational new drug (IND) generation for submission to the FDA. The total compensation under the agreement is $1,500,000. H-CYTE paid Rion $750,000 in November, 2019 per the agreement to start the services outlined which is recorded as a prepaid expense on the balance sheet as of December 31, 2019 as services did not begin until 2020. The remaining $750,000 is due and payable 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.
Regenerative Medical Equipment & Services Agreement
On December 1, 2019, H-CYTE entered into an agreement with Alliance Health Services S.C. to provide specialized equipment and supplies, medical practices, procedures and protocols for regenerative medicine. Additionally, certain related training, educational development, compliance, marketing, supply chain management, and support services are provided. H-CYTE is to receive as compensation for these services for a monthly fee of $5,000. Alliance Health Services also agrees to purchase the supplies needed for the regenerative medicine protocols at cost provided to H-CYTE from its manufacturer plus $450 per treatment utilization. H-CYTE prorated the initial monthly fee from $5,000 to $3,333 which were recorded as accounts receivable as of December 31, 2019. Due to the coronavirus pandemic, this agreement was suspended indefinitely on March 23, 2020.
Consulting Agreements
The Company entered into an agreement with Jesse Crowne, a former Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a fee of $5,000 per month. Additionally, 62,500 shares of common stock at $0.29 per share was issued in connection with a separate agreement on August 29, 2019. The Company incurred expense of approximately $83,000 for the year ended December 31, 2019 related to these agreements. Since these agreements 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 Company entered into a consulting agreement with LilyCon Investments, LLC effective February 1, 2019 for services related to evaluation and negotiation of future acquisitions, joint ventures, and site evaluations/lease considerations. The duration of the consulting agreement is for a period of twelve months in the amount of $12,500 per month with a $15,000 signing bonus. Either party may terminate this agreement with or without cause upon 30 days written notice. The agreement also provides LilyCon Investments with $35,000 in stock (to be calculated using an annual variable weighted average price from February 1, 2013 (inception)2019 through January 2020) to be granted on the one-year anniversary of this agreement, if the agreement has not been terminated prior to that date. For year ended December 31, 20132019, the Company expensed a total of approximately $153,000 in compensation to LilyCon Investments. In February 2020, the Company issued LilyCon Investments $35,000 in shares of H-CYTE stock at an average share price of $0.31 per share for a total of 106,061 shares per the terms of the agreement. In March 2020, this agreement was modified to lower the monthly payment amount to $5,000. This agreement was terminated effective April 1, 2020.
Effective February 1, 2019, the Company entered into an oral consulting agreement with Mr. Raymond Monteleone, Board Member and $679Chairman of the Audit Committee, in which Mr. Monteleone receives $10,000 per month for advisory services and $5,000 per quarter as Audit Committee Chair in addition to regular quarterly board meeting fees. This arrangement has no specified termination date. For year ended December 31, 2019 and 2018, the Company has expensed approximately $125,000, and $0 in compensation to Mr. Monteleone, respectively. Effective March 25, 2020, the Company reduced the fees for the advisory services to $5,000 per month and the fees per quarter that Mr. Monteleone was to receive as the Audit Committee Chair to $2,500.
F-25 |
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2019. For year ended December 31, 2019, the Company expensed approximately $68,000 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. The monthly fee started at $4,500 and increased to approximately $7,500 per month. Strategos will provide information to key policymakers in the legislature and executive branches of government on the benefits of the cellular therapies offered by the Lung Health Institute, advocate for legislation that supports policies beneficial to patient access and oppose any legislation that negatively impacts the Company’s ability to expand treatment opportunities, and position the Company and its related entities as the expert for information and testimony. For the year ended December 31, 2019, the Company expensed approximately $71,000. The Company terminated this agreement in March 2020.
The Company entered into a consulting agreement with Goldin Solutions, effective August 4, 2019, for media engagement and related efforts, including both proactive public relations and crisis management services. The agreement has a minimum term of six months, with a $34,650 monthly fee plus expenses payable each month, with the exception of a first month discount of $12,600. For year ended December 31, 2019, the Company expensed $162,000. The Company terminated this agreement in March 2020.
Distribution center and logistic services agreement
The Company has a non-exclusive distribution center agreement with a logistics service provider in Berlin, Germany pursuant to which they manage and coordinate the DenerveX System products which the Company exports to the EU through June 30, 2014.
Total expenses incurred for the six monthsdistribution center and logistics agreement were approximately $49,000 for the year ended June 30, 2014 is unaudited)
Patent Assignment and Contribution and Royalty Agreement
The terms of our founding stockholders and the originator of the DenerVex Technology, contributed the Intellectual Property to the Company. Dr. Haufe also entered into a Contribution and Royalty Agreement dated January 31, 2013.2013 with Dr. Scott Haufe, M.D was assumed in the Merger as of January 8, 2019. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerVexDenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.
The Company restated itsincurred approximately $1,100 in royalty expense under the Contribution and Royalty agreement for the year ended December 31, 2013 balance sheet2019, all of which was included in accounts payable at December 31, 2019. Since this agreement was assumed on January 8, 2019 as part of the Merger, there were no historical costs related to recordthis prior to January 8, 2019.
Due to the contributiondiscontinuance of the DenerveX product, no further expense from this agreement is expected.
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.
F-26 |
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. For year ended December 31, 2019 and 2018, payments totaling approximately $141,000 and $119,000, respectively, were made to these physicians’ legal entities. Due to the ramifications of the coronavirus pandemic, the Company ceased operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, and LI Tampa. The guaranteed payments for these clinics will be suspended until operations recommence at the historical cost incurred by Dr. Haufeaforementioned clinics.
Manufacturer Liability Dispute
The Company selected an FDA registered contract manufacturer, to manufacture the DenerveX product. In 2019, the Company became aware of events which resulted in the manufacturer not meeting certain contract performance requirements. As a result, the Company is in a dispute with the manufacturer. The Company intends to vigorously defend its position that the manufacturer did not meet its contract performance obligations. The Company believes the likelihood of incurring a material loss regarding the dispute with the manufacturer is reasonably possible but is unable to estimate the amount of the loss based on information available at this time. As such, the Company has not recorded a loss as of JanuaryDecember 31, 20132019. The Company is not aware of any legal action regarding this matter.
Note 11 –Debt
The Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in accordance with SAB Topic 5G, which states that nonmonetary assets received from promoters in exchange for stock or other consideration should be recorded at the promoters cost basis, which in this circumstance is nominal. Dr. Haufe as a founder and organizing member is deemed to have met the definition of a promoter under Rule 1-02(s) of Regulation S-X.
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, 2019, and the conversion price 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.
F-27 |
On February 6, 2019, $100,000 of the Company’s $750,000 outstanding Convertible Notes, plus accrued interest, was converted into an aggregate of 251,667 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the SPA subsequent to the trigger of the down round feature.
The convertible notes had maturity dates between August and September 2019. In November 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 recognized an additional $80,225 in penalties and late fees in relation to these notes for the year ended December 31, 2019.
The Company also reached an extension with the remaining noteholder which extended the maturity date of the grant.loan for one year, until September 30, 2020. This note had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of approximately $425,000 for the year ending December 31, 2019. Additionally, approximately 424,000 warrants were issued in connection with the extension of the note. The Plan gives full authority for granting options, determining the type of options granted, and determining the fair market value of the optionswarrants on September 18, 2019, the day the warrants were issued, was approximately $106,000, which the Company recognized as an expense for the year ending December 31, 2019.
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 $78,000 at December 31, 2019. The Company incurred interest expense related to the Plan Administrator.
Note 12 – Derivative Liability- Warrants and Redemption Put Liability
Financial assets and liabilities carried at fair value as of December 31, 2019 are classified in the table below in one of the three categories described in Note 3:
Fair Value Measurement at December 31, 2019 (1) | ||||||||
Using Level 3 | Total | |||||||
Liability: | ||||||||
Derivative Liability - Warrants | $ | 315,855 | $ | 315,855 | ||||
Derivative Put Liability | $ | 267,399 | $ | 267,399 |
(1) The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of December 31, 2018 or 2019.
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.
F-28 |
The following is a reconciliation of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2019:
Derivative Liability- Warrants | ||||
January 8, 2019 - date of dilutive financing | $ | 1,215,678 | ||
Exchange for common stock | (72,563 | ) | ||
Fair value adjustments | (827,260 | ) | ||
Balance at December 31, 2019 | $ | 315,855 |
Redemption Put Liability | ||||
November 15, 2019 - date of issuance | $ | 614,095 | ||
Fair value adjustments | (346,696 | ) | ||
Balance at December 31, 2019 | $ | 267,399 |
F-29 |
Derivative Liability- 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, has been recorded as a derivative liability in the right, but not obligation,purchase price allocation. The derivative liability has been remeasured to repurchase any sharesfair value at the end of each reporting period and the cumulative change in fair value, approximately $827,000, has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the year ended December 31, 2019. The fair value of the derivative liability included on the consolidated balance sheet was approximately $316,000 as of December 31, 2019.
Fair values for the Series B Warrants were determined using a Lattice model which considered randomly generated stock-price paths obtained through exercise of an option from terminated Plan participants. The Company has 90 days from the date of termination to exercise its repurchase right. The Company must pay the Fair Market Value (“FMV”) of the shares if the termination was for any reason other than for cause, or the optiona Geometric Brownian Motion stock price (if less than FMV of the shares) if the termination is for cause. The FMV is determined by the Plan Administrator on the date of termination.
The Company estimated the fair value of these optionsthe warrant derivative liability as of the date they were accounted for as liabilities (assumed in Merger as of January 8, 2019) and December 31, 2019, respectively, using the Black-Scholes option pricing model withfollowing assumptions:
January 8, 2019 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.40 | $ | 0.13 | ||||
Exercise price | $ | 0.40 | $ | 0.40 | ||||
Risk free rate | 2.57 | % | 1.58-1.59% | |||||
Expected term (years) | 3.00 | 1.34-2.02 | ||||||
Stock price volatility | 115 | % | 143-154% | |||||
Expected dividend yield | — | — |
Due to the following assumptions: risk free interest rate of 2.75% (based on US Treasury note yield), expected term of 6 years (based on guidance provided by the SEC under Staff Accounting Bulletin 107, which allows issuers to use the simplified method for “plain vanilla” options for this calculation), expected volatility of 81% (based on the historical stock volatilities of several publicly traded companiesdown round provision contained in the medical device industry overwarrants, which could provide for the issuance of additional warrant shares as well as a period equalreduction in the exercise price, the model also considered subjective assumptions related to the expected term ofshares that would be issued in a down-round financing and the options (as the Company has no trading history to estimate volatility of its own common stock) and an exercise price equalpotential adjustment to the grant date fair value of the stock of $2.50 per share.exercise price. The fair value of the warrants will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the down-round provisions.
On November 15, 2019, the Company redeemed a shareholder’s Series B Preferred shares for its initial face value, plus accrued dividends.
In conjunction with the Series D Preferred financing (See Note 14), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock with a fair value of approximately $73,000. On the date of the exchange, the Series B Warrants were first adjusted to fair value with the change in fair value being recorded in earnings.
F-30 |
Redemption Put Liability
As described in Note 14, the redemption put provision embedded in the Series D financing required bifurcation and measurement at fair value as a derivative. If the redemption put provision is triggered, it allows either payment in cash or the issuance of “Trigger Event Warrants”. Accordingly, the fair value of the Redemption put liability considered management’s estimate of the probability of cash payment versus payment in Trigger Event Warrants and was determinedvalued using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision will be significantly influenced by referencethe fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the private placement commenced byredemption factor. The Company estimated the Companyfair value of the Trigger Event Warrant portion of the redemption put liability using the following assumptions on the closing date of November 15, 2019 and December 31, 2019:
November 15, 2019 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.118 | $ | 0.056 | ||||
Exercise price | $ | 0.20409 | $ | 0.20409 | ||||
Risk free rate | 1.84 | % | 1.92 | % | ||||
Expected term (in years) | 10.0 | 9.9 | ||||||
Stock price volatility | 90 | % | 92 | % | ||||
Expected dividend yield | — | — | ||||||
Likelihood of redemption | 50 | % | 50 | % |
The fair market value of the redemption put liability at inception was approximately $614,000 which has been recorded as a liability and is remeasured to fair value at the end of each reporting period. The cumulative change in September 2013 and completedfair value, approximately $347,000, has been recorded as a component of other income (expense) in December 2013, which was a cash transaction conducted at arm’s length with an unrelated groupthe Company’s consolidated statement of investors. For the periodoperations for year ended December 31, 2013 and2019. The fair value of the three months ended June 30, 2014,redemption put liability included on the Company recognized $36,252 and $18,072, respectively, as compensation expense with respect to these options.
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at 02/01/2013 (Inception) | -- | |||||||||||||||
Granted | 60,000 | $ | 2.50 | 9.8 | $ | -- | ||||||||||
Exercised | -- | |||||||||||||||
Cancelled | -- | -- | ||||||||||||||
Outstanding at 12/31/2013 | 60,000 | $ | 2.50 | 9.8 | $ | -- | ||||||||||
Exercisable at 12/31/2013 | 15,000 | $ | 2.50 | 9.8 | $ | -- | ||||||||||
Granted | -- | |||||||||||||||
Exercised | -- | |||||||||||||||
Cancelled | -- | |||||||||||||||
Outstanding at 6/30/2014 | 60,000 | $ | 2.50 | 9.6 | $ | -- | ||||||||||
Exercisable at 6/30/2014 | 15,000 | $ | 2.50 | 9.6 | $ | -- |
Note 13 - Common Stock Warrants
Fair value measurement valuation techniques, to the extent possible, should maximize the use of observable inputs and June 30, 2014, respectively,minimize the use of unobservable inputs. The Company’s fair value measurements of all warrants are designated as Level 1 since all of the significant inputs are observable and willquoted prices used for volatility were available in an active market.
F-31 |
A summary of the Company’s warrant issuance activity and related information for the year ended December 31, 2019:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Assumed as of the January 8, 2019 merger | 12,108,743 | $ | 1.38 | 1.53 | ||||||||
Exchanged | (1,007,813 | ) | 0.40 | — | ||||||||
Expired | (2,183,478 | ) | 2.73 | — | ||||||||
Issued | 35,888,624 | $ | 0.73 | 5.36 | ||||||||
Outstanding and exercisable at 12/31/19 | 44,806,076 | 0.78 | 4.59 |
The fair value of all warrants issued are determined by using the Black-Scholes valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued. The inputs used in the Black-Scholes valuation technique to value each of the warrants issued at December 31, 2019 as of their respective issue dates are as follows:
Event Description | Date | Number of Warrants | H-CYTE Stock Price | Exercise Price of Warrant | Grant Date Fair Value | Life of Warrant | Risk Free Rate of Return (%) | Annualized Volatility Rate (%) | ||||||||||||||||||||
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 |
(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.
The methods described above may produce a fair value calculation that may not be recognized as an expense overindicative 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 remaining servicedifferent fair value measurement at the reporting date.
F-32 |
Note 14- Mezzanine Equity AND SERIES D CONVERTIBLE PREFERRED STOCK
Series D Convertible preferred Stock
On November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered (i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants are exercisable for a period of 310 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional equity restructurings and reorganizations.
On November 21,2019, the grant date.
The Company determined that the nature of the Series D Shares was more analogous to an equity instrument, and that the economic characteristics and risks of the embedded conversion option was clearly and closely related to the Series D Shares. As such, the conversion option was not required to be bifurcated from the host under ASC 815, Derivatives and Hedging. The Company recognized a beneficial conversion feature related to the Series D Shares of approximately $623,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series D Shares can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders. Since the Series D Shares are redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, they have been classified as mezzanine equity in the Consolidated Balance Sheets.
The Company determined that the economic characteristics and risks of the embedded redemption provision were not clearly and closely related to the Series D Shares. The Company assessed the embedded redemption provision further, and determined it met the definition of a derivative and required classification as a derivative liability at fair value. The redemption put liability as of inception and December 31, 2019, was approximately $614,000 and $267,000, respectively.
The Company’s approach to the allocation of the proceeds to the financial instruments was to first allocate basis to the redemption put liability at its fair values and the residual to the Series D Shares and the Series D Warrants. Based upon the amount allocated to the Series D Shares the Company was required to pay six months of severancedetermine if a beneficial conversion feature (“BCF”) was present. A BCF represents the intrinsic value in the eventconvertible 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 (i)shares to which it is indexed. However, a BCF is limited to the Company’s terminationbasis initially allocated. After allocating a portion of an executive’s employment without cause, (ii) the resignation by an executive for good reason, (iii)proceeds to the other instruments, the effective conversion price was $0.24 compared to the share price of $0.28, resulting in a changeBCF of $623,045 or $0.04 per share.
F-33 |
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 controlthe table below:
October 18, 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.
The Company recorded $60,493 in deemed dividends on the Series D Convertible Preferred stock in accordance with the 8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,060,493 at December 31, 2019.
Series D CONVERTIBLE Preferred Stock Preferences
Voting Rights
Holders of our Series D Preferred Stock (“Series D Holders”) have the right to receive notice of any meeting of holders of common stock or Series D Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series D Preferred Stock. Each Series D Holder shall vote on each matter submitted to them with the holders of common stock.
Liquidation
Upon the liquidation, dissolution or winding up of the Company, (iv) a material reduction in an executive’s duties,whether voluntary or (v) a requirement that an executive move their primary work location more than 50 miles.
F-34 |
Note 15 - Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”. Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the basis difference reverses. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowances is recorded when it is more likely than not that a tax benefit will not be realized. In exchangedetermining the need for these servicesvaluation allowances the Company considers projected future taxable income and the availability of tax planning strategies.
The Company’s policy is obligated to pay Dr. Andrewsrecord interest and penalties on uncertain tax positions as a royaltycomponent of 2%income tax expense. As of revenues earned from applicable product sales over a period 5 years. If Dr. Andrews is listed as inventor of any Improvement Patent during the 5 year term, he would continue to receive a 1% royalty after the 2% royalty expires for the duration of the effectiveness of the Improvement Patent.
For the period from February 1, 2013 (inception) to June 30, 2014,years ended December 31, 2019 and 2018, the Company has incurred net losses and, therefore, has no current income tax liability.liability and recognized no income tax expense. The net deferred tax asset generated by these losses, which principally consist of start-up costsoperating losses deferred for income tax purposes, is fully reserved as of December 31, 20132019 and June 30, 2014,2018 since it is currently more likely than not that the benefit will not be realized in future periods.
A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows:
2019 | 2018 | |||||||
Statutory rate – federal | 21.0 | % | 21.0 | % | ||||
Effect of: | ||||||||
State income tax, net of federal benefit | 3.0 | 5.0 | ||||||
State NOL true-up | (2.0 | ) | - | |||||
Goodwill impairment | (9.0 | ) | - | |||||
Other permanent differences | - | (1.0 | ) | |||||
Change in valuation allowances | (13.0 | ) | (25.0 | ) | ||||
Income taxes | 0.0 | % | 0.0 | % |
The Company’s financial statements contain certain deferred tax assets which have arisen primarily as a result of losses incurred that are considered startup costs for tax purposes, as well as net deferred income tax assets resulting from other temporary differences related to certain reserves and differences between book and tax depreciation and amortization. The Company records a valuation allowance against our net deferred tax assets when we determine that based on the weight of available evidence, it is more likely than not that the net deferred tax assets will not be realized.
Management of the Company evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and determined that it is more likely than not that the Company will not recognize the benefits of the deferred tax assets. As a result, a full valuation allowance was recorded as of December 31, 2019 and 2018.
Deferred tax assets and liabilities consist of the following at:
December 31, 2013 | |||
(Restated) | |||
Deferred Tax Assets: | |||
Start-up costs | $ | 240,000 | |
Share-based compensation | 14,000 | ||
Total Deferred Tax Assets | 254,000 | ||
Valuation Allowance | (254,000 | ) | |
Net Deferred Tax Asset | $ | -- |
2019 | 2018 | |||||||
Deferred Tax Assets: | ||||||||
Federal and state net operating loss carryforwards | $ | 7,302,375 | $ | 666,888 | ||||
Capitalized start-up costs | 2,483,736 | 154,791 | ||||||
Capitalized research and development costs | 424,390 | - | ||||||
Patents | 57,907 | - | ||||||
Share-based compensation | 242,437 | - | ||||||
Other | 25,405 | 81,801 | ||||||
Total gross deferred tax assets | 10,536,250 | 903,480 | ||||||
Valuation Allowance | (10,536,250 | ) | (903,480 | ) | ||||
Net deferred tax assets | $ | — | — |
The Company is required to file federal income tax returns and state income tax returns in the states of Florida, Georgia and Minnesota. There are no uncertain tax positions at December 31, 2013 or June 30, 2014.2019. The Company has not undergone any tax examinations since inception and is therefore not subject to examination by any applicable tax authorities.
F-35 |
Note 16 - Related-Party Transactions
COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the COVID-19 outbreak on the businesses and the economy in the U.S. and the rest of the world is, and is expected to continue to be, significant. The extent to which COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected. The Company chartersrecently has taken steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through at least the end of July. This decision has put significant financial strain on the Company. The Company made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, and Dallas. The Company will reevaluate when operations will recommence at these clinics as more information about COVID-19 becomes available.
The Company believes these expense reductions are necessary during the unexpected COVID-19 pandemic. Due to COVID-19, the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled these patients to August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s fourth quarter 2019 revenue was approximately $1.8 million. The Company expects that the first quarter will be substantially less than the fourth quarter 2019 and future quarters’ revenue is dependent on the timing for being able to treat patients again. 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. The Company is currently evaluating if its protocol has the potential to help people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached.
With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and 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.
In January 2020, the Company closed on an additional $100,000 in the Series D SPA.
On March 27, 2020 and April 9, 2020, the Company issued a Note, each one in the principal amount of $500,000 to the Investor for a total of $1,000,000 in exchange for loans in such amount to cover working capital needs. Each Note bears simple interest at a rate of 8% per annum. The Investor is an affiliate of a pre-existing shareholder of the Company having been the lead investor in the Company’s recent Series D Convertible Preferred Stock Offering.
On April 17, 2020, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with an aggregate of 32 investors (the “Purchaser(s)”) pursuant to which the Company received an aggregate of $2,812,445 in gross proceeds (the “April Offering”). The proceeds of the April Offering will be used for working capital and general aviation aircraft from TAG Aviationcorporate purposes. The April Offering resulted in the issuance of an aggregate of $2,812,445 in Secured Convertible Promissory Notes (the “April Secured Notes’). The April Secured Notes bear interest at 12% per annum and have a maturity date of October 31, 2020. The April Secured Notes are secured by all of the Company’s assets pursuant to a security agreement and an intellectual Property Security Agreement which are included as Exhibits to this Annual report on Form 10-K. The conversion price of the April Secured Notes shall be equal to the lesser of (i) the price per share paid by an investor, in the Qualified Financing (as defined below) for such new securities and (ii) the price per share obtained by dividing (x) $3,000,000 by the number of fully diluted shares outstanding immediately prior to the Qualified Financing. Qualified Financing is defined as an offering of preferred stock of at least $3.6 million, exclusive of the conversion of any April Secured Note or the Backstop Commitment (as defined below), at a price of at least $0.01279 per share. The obligations on the April Secured Notes are guaranteed by each of the Company’s subsidiaries. FWHC Bridge, LLC, (“TAG”),which is an affiliate of FWHC, who has acted as our lead investor in the last several financing transactions and was the lender of the $1,000,000 loaned to the Company in March and April, was the lead investor in the April Offering purchasing $1,535,570 of April Secured Notes. YPH Holdings, LLC, which is an affiliate of Michael Yurkowsky, who is a company owned Mr. Gorlin. TheDirector of the Company, purchased $25,000 of April Secured Notes on the same terms as all other investors.
Each Purchaser received a warrant to purchase 100% of the aggregate number of shares of common stock into which such Purchaser’s April Secured Note may ultimately be converted, except that the holders of the Notes issued in March and April in the total amount of general aviation expense paid$1,000,000 received warrants to TAG amountedpurchase up to approximately $34,000200% of the aggregate number of shares of Common stock into which such Note may ultimately be converted The April Warrants have an exercise price equal to the purchase price in the Qualified Offering.
The April SPA provides a commitment on the part of each Purchaser to agree to invest an identical amount (as purchased in the April Offering) in the Qualified Offering as a backstop commitment (the “Backstop Commitment”). The Qualified Offering is contemplated to be made in the form of a rights offering to holders of all of the Company’s common stock. Accordingly, in the event that any stockholders do not participate in the Qualified Offering, their purchase would be filled by the Purchasers on a pro rata basis. In the event that any Purchaser fails to fulfil its Backstop Commitment then the April Warrants issued to such Purchaser in the April Offering will be cancelled.
In connection with the April Offering, the Company’s CEO Bill Horne entered into an amendment letter to his employment agreement which provides that his salary will be reduced to $0 per month; provided that on the date that the Company receives FDA approval to commence clinical trials for its products, Mr. Horne’s salary will be increased to a total of $18,750 per month (i.e. $225,000 per annum. Mr. Horne also agreed to subordinate the promissory notes owed to him by the Company to the April Secured Notes.
As part of the April Offering, the holders of certain existing warrants which contained anti- dilution price protection and $11,000other objectionable features that would have been triggered by the April Offering agreed to a one-time adjustment of their exercise price to $.015 per share and to gross up the number of warrants issuable. In consideration, the holders of such pre-existing warrants waived all future anti-dilution price protection.
In addition, in 2013connection with the April Offering, the Company entered into an amendment with the Investor for the remaining convertible notes which were originally issued in 2018 and assumed in the Merger. These notes have a principal amount of $424,615 as of December 31, 2019. The amendment provides that the conversion price of the notes will be equal to the purchase price in the Qualified Offering. The holder waived all future anti-dilution price protection.
The description of the April SPA, the April Secured Note, the April Warrant, the Security Agreement, the Intellectual Property Security Agreement and the sixAmendment to William Horne Employment Agreement and the First Amendment to Hawes Secured Convertible Promissory Note, are each qualified in their entirety by the full text of such agreements which are filed as Exhibits to this Annual Report on Form 10k.
F-36 |
INDEX TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2020
F-37 |
CONSOLIDATED BALANCE SHEETS
(Unaudited) March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 122,400 | $ | 1,424,096 | ||||
Accounts receivable | 11,333 | 22,667 | ||||||
Other receivables | 11,701 | 18,673 | ||||||
Prepaid expenses | 216,048 | 810,143 | ||||||
Total Current Assets | 361,482 | 2,275,579 | ||||||
Right-of-use asset | 606,897 | 738,453 | ||||||
Property and equipment, net | 197,596 | 219,703 | ||||||
Other assets | 36,042 | 36,877 | ||||||
Total Assets | $ | 1,202,017 | $ | 3,270,612 | ||||
Liabilities, Mezzanine Equity and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Interest payable | $ | 92,561 | $ | 53,198 | ||||
Accounts payable | 1,676,532 | 1,471,688 | ||||||
Accrued liabilities | 393,499 | 324,984 | ||||||
Other current liabilities | 357,689 | 189,035 | ||||||
Short-term notes, related parties | 2,135,000 | 1,635,000 | ||||||
Short-term convertible note payable | 424,615 | 424,615 | ||||||
Notes payable, current portion | 67,444 | 66,836 | ||||||
Dividend payable | 126,941 | 108,641 | ||||||
Deferred revenue | 770,031 | 1,046,156 | ||||||
Lease liability, current portion | 402,876 | 453,734 | ||||||
Total Current Liabilities | 6,447,188 | 5,773,887 | ||||||
Long-Term Liabilities | ||||||||
Lease liability, net of current portion | 221,710 | 302,175 | ||||||
Notes payable, net of current portion | — | 11,545 | ||||||
Derivative liability - warrants | 140,877 | 315,855 | ||||||
Redemption put liability | 79,045 | 267,399 | ||||||
Total Long-Term Liabilities | 441,632 | 896,974 | ||||||
Total Liabilities | 6,888,820 | 6,670,861 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Mezzanine Equity | ||||||||
Series D Convertible Preferred Stock - $.001 par value: 238,871 shares authorized, 149,448 and 146,998 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 6,281,433 | 6,060,493 | ||||||
Total Mezzanine Equity | 6,281,433 | 6,060,493 | ||||||
Stockholders’ Deficit | ||||||||
Series A Convertible Preferred Stock - $.001 par value: 500,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019 | — | — | ||||||
Series B Convertible Preferred Stock - $.001 par value: 10,000 shares authorized, 6,100 shares issued and outstanding at March 31, 2020 and December 31, 2019 | 6 | 6 | ||||||
Series C Convertible Preferred Stock - $.001 par value: 45,000 shares authorized, no shares issued and outstanding at March 31, 2020 and December 31, 2019 | — | — | ||||||
Common stock - $.001 par value: 199,000,000 shares authorized, 99,878,079 and 99,768,704 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 99,878 | 99,769 | ||||||
Additional paid-in capital | 28,117,978 | 28,172,146 | ||||||
Accumulated deficit | (39,815,966 | ) | (37,362,531 | ) | ||||
Non-controlling interest | (370,132 | ) | (370,132 | ) | ||||
Total Stockholders’ Deficit | (11,968,236 | ) | (9,460,742 | ) | ||||
Total Liabilities, Mezzanine Equity and Stockholders’ Deficit | $ | 1,202,017 | $ | 3,270,612 |
See accompanying notes to the consolidated financial statements
F-38 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | 1,016,776 | $ | 1,324,240 | ||||
Cost of Sales | (376,816 | ) | (559,319 | ) | ||||
Gross Profit | 639,960 | 764,921 | ||||||
Operating Expenses | ||||||||
Salaries and related costs | 1,224,353 | 1,532,789 | ||||||
Other general and administrative | 1,230,135 | 1,487,720 | ||||||
Research and development | 750,000 | — | ||||||
Advertising | 144,618 | 1,135,546 | ||||||
Depreciation and amortization | 22,108 | 211,218 | ||||||
Total Operating Expenses | 3,371,214 | 4,367,273 | ||||||
Operating Loss | (2,731,254 | ) | (3,602,352 | ) | ||||
Other Income (Expense) | ||||||||
Other income (expense) | 2,538 | (205 | ) | |||||
Interest expense | (56,149 | ) | (92,259 | ) | ||||
Change in fair value of redemption put liability | 193,659 | — | ||||||
Change in fair value of derivative liability - warrants | 174,978 | — | ||||||
Total Other Income (Expense) | 315,026 | (92,464 | ) | |||||
Net Loss | $ | (2,416,228 | ) | $ | (3,694,816 | ) | ||
Accrued dividends on outstanding Series B Convertible Preferred Stock | 18,300 | 24,639 | ||||||
Deemed dividend on adjustment to exercise price on certain warrants | — | 404,384 | ||||||
Deemed dividend on Series D Convertible Preferred Stock | 158,147 | — | ||||||
Deemed dividend on Beneficial Conversion Features | — | 32,592 | ||||||
Net loss attributable to common stockholders | $ | (2,592,675 | ) | $ | (4,156,431 | ) | ||
Loss per share - Basic and Diluted | $ | (0.03 | ) | $ | (0.05 | ) | ||
Weighted average outstanding shares - basic and diluted | 99,839,617 | 85,513,024 |
See accompanying notes to the consolidated financial statements
F-39 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the three months ended JuneMarch 31, 2020 and March 31, 2019
(Unaudited)
Series B Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-controlling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
Balances - January 1, 2019 | — | $ | — | 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 | 6,442,182 | — | — | 6,466,908 | ||||||||||||||||||||||||
Adjustment for assets and liabilities not included in purchase transaction | — | — | — | — | — | 5,244,780 | — | 5,244,780 | ||||||||||||||||||||||||
Issuance of common stock in connection with private placement offering from January 8, 2019 through March 31, 2019 | — | — | 17,000,000 | 17,000 | 4,200,946 | — | — | 4,217,946 | ||||||||||||||||||||||||
Issuance of warrants in connection with private placement offering from January 8, 2019 through March 31, 2019 | — | — | — | — | 2,565,638 | — | — | 2,565,638 | ||||||||||||||||||||||||
Issuance of common stock pursuant to conversion of short-term debt | — | — | 750,000 | 750 | 225,187 | — | — | 225,937 | ||||||||||||||||||||||||
Issuance of warrants pursuant to conversion of short-term debt in January 2019 | — | — | — | — | 74,063 | — | — | 74,063 | ||||||||||||||||||||||||
Issuance of additional exchange shares | 17,263,889 | 17,264 | (17,264 | ) | — | — | ||||||||||||||||||||||||||
Issuance of common stock pursuant to conversion of Preferred Series B Stock conversions | (2,050 | ) | (2 | ) | 512,500 | 513 | (511 | ) | — | — | — | |||||||||||||||||||||
Issuance of common stock pursuant to conversion of short-term debt and accrued interest | — | — | 1,667 | 2 | 665 | — | — | 667 | ||||||||||||||||||||||||
Issuance of common stock in March 2019 in exchange for consulting fees incurred in Q1 2019 | — | — | 130,085 | 130 | 51,904 | — | — | 52,034 | ||||||||||||||||||||||||
Adjustment of exercise price on certain warrants | — | — | — | — | 404,384 | (404,384 | ) | — | — | |||||||||||||||||||||||
Beneficial conversion on Preferred Series B Stock | — | — | — | — | 32,592 | (32,592 | ) | — | — | |||||||||||||||||||||||
Stock based compensation | — | — | — | — | 89,043 | — | — | 89,043 | ||||||||||||||||||||||||
Dividends payable | — | — | — | — | (24,639 | ) | — | — | (24,639 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (3,694,816 | ) | — | (3,694,816 | ) | ||||||||||||||||||||||
Balances - March 31, 2019 | 7,200 | $ | 7 | 94,036,746 | $ | 94,037 | $ | 17,610,529 | $ | (8,183,420 | ) | $ | (370,132 | ) | $ | 9,151,021 | ||||||||||||||||
Balances - January 1, 2020 | 6,100 | $ | 6 | 99,768,704 | $ | 99,769 | $ | 28,172,146 | $ | (37,362,531 | ) | $ | (370,132 | ) | $ | (9,460,742 | ) | |||||||||||||||
Issuance of common stock in exchange for consulting fees incurred | — | — | 109,375 | 109 | 34,891 | — | — | 35,000 | ||||||||||||||||||||||||
Issuance of warrants pursuant to short-term notes, related party | — | — | — | — | 17,636 | — | — | 17,636 | ||||||||||||||||||||||||
Deemed dividend on Series D Convertible Preferred Stock | — | — | — | — | (120,940 | ) | (37,207 | ) | — | (158,147 | ) | |||||||||||||||||||||
Issuance of warrants pursuant to private placement of Series D Convertible Preferred Stock | — | — | — | — | 31,902 | — | — | 31,902 | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 643 | — | — | 643 | ||||||||||||||||||||||||
Accrued dividends on Series B Convertible Preferred Stock | — | — | — | — | (18,300 | ) | — | — | (18,300 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | (2,416,228 | ) | — | (2,416,228 | ) | ||||||||||||||||||||||
Balances – March 31, 2020 | 6,100 | $ | 6 | 99,878,079 | $ | 99,878 | $ | 28,117,978 | $ | (39,815,966 | ) | $ | (370,132 | ) | $ | (11,968,236 | ) |
See accompanying notes to the consolidated financial statements
F-40 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (2,416,228 | ) | $ | (3,694,816 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 22,108 | 211,218 | ||||||
Amortization of debt discount | 912 | 63,578 | ||||||
Issuance of warrants pursuant to short-term notes, related party | 17,636 | — | ||||||
Stock based compensation | 643 | 89,043 | ||||||
Loss on write-off of inventory | — | 2,191 | ||||||
Common stock issued for consulting services | 35,000 | 52,032 | ||||||
Change in fair value of derivative liability – warrants and redemption put liability | (368,637 | ) | — | |||||
Bad debt expense | 3,000 | 8,025 | ||||||
Changes in operating assets and liabilities, net of purchase transaction: | ||||||||
Accounts receivable | 8,334 | 76,811 | ||||||
Other receivables | 6,972 | (76,504 | ) | |||||
Prepaid expenses and other assets | 594,251 | (260,065 | ) | |||||
Interest payable | 39,363 | (78,987 | ) | |||||
Accounts payable | 204,843 | (187,697 | ) | |||||
Accrued liabilities | 211,221 | (202,412 | ) | |||||
Other current liabilities | 25,948 | 49,696 | ||||||
Deferred revenue | (276,125 | ) | 69,750 | |||||
Net Cash Used in Operating Activities | (1,890,759 | ) | (3,878,137 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | — | (4,730 | ) | |||||
Purchase of business, net of cash acquired | — | (302,710 | ) | |||||
Cash excluded in Merger | — | (69,629 | ) | |||||
Net Cash Used in Investing Activities | — | (377,069 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Proceeds from short-term notes, related parties | 500,000 | — | ||||||
Payment of dividends | — | (6,137 | ) | |||||
Payment on debt obligations | (10,937 | ) | — | |||||
Proceeds from common stock, net of issuance costs | — | 4,217,946 | ||||||
Proceeds from warrants, net of issuance costs | — | 2,565,638 | ||||||
Proceeds from issuance of Series D Convertible Preferred stock | 100,000 | — | ||||||
Net Cash Provided by Financing Activities | 589,063 | 6,777,447 | ||||||
Net (Decrease) Increase in Cash | (1,301,696 | ) | 2,522,241 | |||||
Cash - Beginning of period | 1,424,096 | 69,628 | ||||||
Cash - End of period | $ | 122,400 | $ | 2,591,869 | ||||
Supplementary Cash Flow Information | ||||||||
Cash paid for interest | $ | 15,874 | $ | 9,320 | ||||
Non-cash investing and financing activities | ||||||||
Deemed dividend on adjustment to exercise price on certain warrants | — | 404,384 | ||||||
Deemed dividend on beneficial conversion features | — | 32,592 | ||||||
Issuance of common stock pursuant to conversion of debt obligations | — | 225,937 | ||||||
Issuance of warrants pursuant to conversion of short-term debt | — | 74,063 | ||||||
Deemed dividend on Series D Convertible Preferred Stock | 158,147 | — | ||||||
Issuance of Warrants in connection with Series D Convertible Preferred Stock | 31,902 | — | ||||||
Dividends accrued on Series B Convertible Preferred Stock | 18,300 | 24,638 | ||||||
Right-of-use asset additions | — | 1,092,102 | ||||||
Right-of-use liability additions | — | 1,113,646 |
See accompanying notes to the consolidated financial statements
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of the Company
On July 11, 2019, MedoveX Corp. (“MedoveX”) changed its name to H-CYTE, Inc. (“H-CYTE” or the “Company”) by filing a Certificate of Amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of the State of Nevada. The name change and the Company’s new symbol, HCYT, became effective with FINRA on July 15, 2019. H-CYTE was incorporated in Nevada on July 30, 2014, respectively.
On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement (“APA”) with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC (“Shareholder”), Lung Institute LLC (“LI”), RMS Lung Institute Management LLC (“RMS LI Management”) and Cognitive Health Institute Tampa, LLC (“CHIT”), (collectively “RMS”). On January 8, 2019, the APA was amended, and the Company pays TAG Aviation, a company owned by Mr. Gorlin, for month-to-month rentalacquired certain assets and assumed certain liabilities of office space at Dekalb-Peachtree AirportRMS as reported in Atlanta Georgia, plus costthe 8-K/A filed in March of utilities (see “Commitments”). The total amount paid to TAG under this agreement amounted to approximately $7,000 and $15,000 in 2013 and the six months ended June 30, 2014, respectively.
As of the merger, the consolidated results for H-CYTE include the following wholly-owned subsidiaries: H-CYTE Management, LLC (formerly Blue Zone Health Management, LLC), MedoveX Corp, Cognitive Health Institute, LLC, and Lung Institute Tampa, LLC (formerly Blue Zone Lung Tampa, LLC) and the results included Lung Institute Dallas, PLLC (“LI Dallas”), Lung Institute Nashville, PLLC (“LI Nashville”), Lung Institute Pittsburgh, PLLC (“LI Pittsburgh”), and Lung Institute Scottsdale, LLC (“LI Scottsdale”), as Variable Interest Entities (“VIEs”). 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.
In 2019, the Company had two divisions: the healthcare medical biosciences division (“Biosciences division”) and the DenerveX medical device division (“DenerveX division”). In the first quarter of 2020, the Company decided to focus its available resources on the Biosciences division as it represents a significantly greater opportunity than the DenerveX division as explained below. The Company is no longer manufacturing or selling the DenerveX device.
Healthcare Medical Biosciences Division (Biosciences division)
The Company’s Biosciences division is a medical biosciences company that develops and implements innovative treatment options in regenerative medicine to treat an array of debilitating medical conditions. Committed to an individualized patient-centric approach, this division consistently provides oversight and management of the highest quality care while producing positive medical outcomes.
On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC (“Rion”) to develop and distribute a FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease (“COPD”), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion’s innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a ten-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.
On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion’s resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.
With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the FDA for treatment of COPD.
Proprietary Medical Device Business (DenerveX medical device division)
The Company’s business of designing and marketing proprietary medical devices for commercial use in the U.S. and Europe began operations in late 2013. The Company received CE marking in June 2017 for the DenerveX System, and it became commercially available throughout the European Union and several other countries that accept CE marking. In addition to the DenerveX device itself, the Company has developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device. Commercial production has been suspended since the first quarter of 2019. There was less than $100,000 in revenue from the product in 2019.
In the first quarter of 2020, the Company made the decision to stop any further efforts to source alternative manufacturing and distributor options or other product monetizing relationships for the DenerveX product. Although the Company believes the DenerveX technology has value, the Company does not believe it will realize the value in the foreseeable future. The Company recorded an impairment charge for intangibles associated with the DenerveX intellectual property and wrote off related inventory balances as of December 31, 2019.
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Note 2 - Liquidity, Going Concern and Management’s Plans
COVID-19 has adversely affected the Company’s financial condition and results of operations. In the first quarter of 2020, the Company took steps to protect its vulnerable patient base (elderly patients suffering from chronic lung disease) by cancelling all treatments effective March 23, 2020 through at least the end of July. The Company made the decision in late March, to layoff approximately 40% of its employee base, including corporate and clinical employees, and to cease operations at the LHI clinics in Tampa, Scottsdale, Pittsburgh, and Dallas. The Company will reevaluate when operations will recommence at these clinics as more information about COVID-19 becomes available.
The Company incurred net losses of approximately $2,416,000 and $3,695,000 for the three months ended March 31, 2020 and 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue activities are suspended and as the Company implements its business plan. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company will incur losses until sufficient revenue is attained utilizing the infusion of capital resources to expand marketing and sales initiatives along with the development of a L-CYTE-01 protocol and taking that protocol through the FDA process. Due to the coronavirus outbreak (“COVID-19”), the Company is not expecting to be able to generate revenue until, at the earliest, August 2020. The Company has contacted its patients that are scheduled to come in for treatment, both first time patients and recurring patients, and have rescheduled these patients to August 2020. There is no guarantee that the Company will be able to treat patients as soon as August 2020; as such, the Company cannot estimate when it will be safe to treat patients and generate revenue. The Company’s first quarter revenue 2020 was approximately $1,000,000 compared to fourth quarter 2019 revenue of approximately $1,800,000. The Company expects revenue for the second quarter of 2020 will be nominal if any, and future quarters’ revenue is dependent on the timing of being able to treat patients again. 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. The Company is currently evaluating if its protocol has the potential to help people affected by COVID-19, but more research will need to be completed before a definitive conclusion can be reached.
The Company incurred net losses of approximately $2,416,000 and $3,695,000 for the three months ended March 31, 2020 and 2019, respectively. The Company has historically incurred losses from operations and expects to continue to generate negative cash flows as the Company’s revenue activities are suspended and as the Company implements its business plan. The consolidated financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) as applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
With the Company’s revenue-generating activities suspended, the Company will need to raise cash from debt and equity offerings to continue with its efforts to take the L-CYTE-01 protocol to the FDA for treatment of chronic lung diseases. There can be no assurance that the Company will be successful in doing so.
On March 27, 2020, the Company issued a demand note (the “Note”) in the principal amount of $500,000 to FWHC Bridge, LLC (the “Investor”) in exchange for a loan made by the Investor in such amount to cover the Company’s working capital needs. Subsequently on April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company to further cover the Company’s working capital needs, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further below in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor.
Note Purchase Agreement
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,835,195. This sum included the issuance by the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.
As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.
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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.
The other short-term notes, related parties were issued by the Company during 2019, and as of March 31, 2020 and December 31, 2019 consist of five loans, totaling $1,635,000, made to the Company by Horne Management, LLC, controlled by Chief Executive Officer, William E. Horne. These were advanced for working capital purposes and had the terms as indicated below. The loans bear interest ranging from 5.5% to 12%, in some cases increasing to 15% if not paid by the respective maturity date ranging from March 26, 2020 to May 13, 2020. Some of these loans provided for the issuance of warrants at 114% warrant coverage if the loan was not repaid within two months. None of these loans have been repaid and 840,000 warrants have been issued at an exercise price of $0.75 per share. On April 23, 2020, Horne Management, LLC agreed to convert the related notes plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing, which such price has not yet been established, and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of the warrant will be equal to the price per share obtained by dividing $3,000,000 by the number of fully diluted shares of the Company outstanding on October 31, 2020.
As of March 31, 2020, the Company had cash on hand of $122,400. Cash on hand at May 15, 2020 was approximately $3,117,000. The Company’s cash is insufficient to fund its operations over the next year and the Company will need to raise additional capital through debt or equity offerings to continue operations.
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. In the manufacturerevent the Company is unable to cancelfund its operations from existing cash on hand, operating cash flows, additional borrowings or raising equity capital, the development workCompany may be forced to reduce expenses or discontinue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – 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 10-days’ notice.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 incurredfiled audited consolidated financial statements as of and for the fiscal years ended December 31, 2019 and December 31, 2018 which included all information and notes necessary for such complete presentation in conjunction with its 2019 Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 2020 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, which are contained in the Company’s 2019 Annual Report on Form 10-K. For further discussion of the Company’s significant accounting policies, refer to Note 3 – “Basis Of Presentation And Summary of Significant Accounting Policies” to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Certain reclassifications have been made to amounts previously reported and some disclosures for prior periods have been added to conform with the current period presentation.
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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 $81,00055% of the outstanding voting shares of the Company.
Under the terms of the APA, the Company issued additional “Exchange Shares” to the shareholders of RMS to maintain the 55% ownership and 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 researchthe 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 development expensethese 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 agreementacquisition method of accounting for business combinations in 2013accordance with U.S. GAAP. The assets acquired and the liabilities assumed of which $16,000RMS 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 included in accounts payableas 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 accompanyingmerger 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.
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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 5 – Right-of-use Asset And Lease Liability
On January 9, 2019, the Company adopted ASU No. 2016-02 (as amended), and additional current liabilities of approximately $475,000 and long-term liabilities of approximately $713,000 with corresponding ROU assets of approximately $1,167,000 were recognized, based on the present value of the remaining minimum rental payments under the new leasing standards for existing operating leases.
The consolidated balance sheet at March 31, 2020 reflects current lease liabilities of approximately $403,000 and long-term liabilities of $222,000, with corresponding ROU assets of $607,000.
The audited consolidated balance sheet at December 31, 2013. During2019 reflects current lease liabilities of approximately $454,000 and long-term liabilities of $302,000, with corresponding ROU assets of $738,000.
The components of lease expense for the sixthree months ended JuneMarch 31, 2020 and 2019, respectively, are as follows:
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating lease expense | $ | 150,564 | $ | 136,943 |
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Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2020 and 2019, respectively, are as follows:
Three months ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating cash flows from operating leases | $ | 150,564 | $ | 136,943 |
Supplemental balance sheet and other information related to operating leases are as follows:
March 31, 2020 | December 31, 2019 | |||||||
Operating leases right-of-use assets | $ | 606,897 | $ | 738,453 | ||||
Lease liability, current portion | 402,876 | 453,734 | ||||||
Lease liability, net of current portion | 221,710 | 302,175 | ||||||
Total operating lease liabilities | $ | 624,586 | $ | 755,909 | ||||
Weighted average remaining lease term | 2.16 years | 2.25 years | ||||||
Weighted average discount rate | 7.75 | % | 7.75 | % |
Future maturities of operating lease liabilities as of March 31, 2020 are as follows:
Operating leases | ||||
Remainder of 2020 | $ | 353,601 | ||
2021 | 154,559 | |||
2022 | 102,891 | |||
2023 | 69,333 | |||
Total lease payments | 680,384 | |||
Less interest | (55,798 | ) | ||
Total | $ | 624,586 |
Operating lease expense and cash flows from operating leases for the three months ended March 31, 2020 and 2019, totaled approximately $150,000 and $137,000, respectively, and are included in the “Other general and administrative” section of the consolidated statement of operations.
The Company leases corporate office space in Tampa, FL and Atlanta, GA. The Company also leases medical clinic space in Tampa, FL, Nashville, TN, Scottsdale, AZ, Pittsburgh, PA, and Dallas, TX. The leasing arrangements contain various renewal options that are adjusted for increases in the consumer price index or agreed upon rates. Each location has its own expiration date ranging from April 30, 2014,2020 to August 31, 2023. In May 2020, due to COVID-19, the Company incurredentered into a three-month extension for the lease that expired on April 30, 2020.
Note 6 - Property And Equipment
Property and equipment, net, consists of the following:
Useful Life | March 31, 2020 | December 31, 2019 | ||||||||
Furniture and fixtures | 5-7 years | $ | 231,222 | $ | 231,222 | |||||
Computers and software | 3-7 years | 244,039 | 244,039 | |||||||
Leasehold improvements | 15 years | 157,107 | 157,107 | |||||||
632,368 | 632,368 | |||||||||
Less accumulated depreciation | (434,772 | ) | (412,665 | ) | ||||||
Total | $ | 197,596 | $ | 219,703 |
Depreciation expense was approximately $284,000$22,000 and $27,000 for the three months ended March 31, 2020 and 2019, respectively. The Company uses the straight-line depreciation method to calculate depreciation expense.
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Note 7 - Intangible Assets And Goodwill
The Company’s intangible assets are patents and related proprietary technology for the DenerveX System for which an impairment charge was made in the fourth quarter of 2019 writing off this asset as of December 31, 2019.
For the three months ended March 31, 2020 and 2019, total amortization expense pursuantrelated to this agreement, of which $30,000acquisition-related intangible assets was $0 and $184,000, respectively, and is included in accounts payable atoperating expense in the accompanying consolidated statement of operations.
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 8 – Related Party Transactions
Consulting Expense
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 per month for advisory services and $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 per month and the fees per quarter as the Audit Committee Chair to $2,500. For the three months ended March 31, 2020 and 2019, the Company has expensed approximately $30,000, and $35,000 in compensation to Mr. Monteleone, respectively.
The Company entered into an oral consulting arrangement with St. Louis Family Office, LLC, controlled by Jimmy St. Louis, former CEO of RMS, in January 2019 in the amount of $10,000 per month plus benefits reimbursement for advisory services. The Company terminated this agreement effective June 30, 2014.2019. For three months ended March 31, 2019, the Company expensed approximately $27,000 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 months ended March 31, 2020 and 2019, the Company expensed approximately $15,000 and $0, respectively.
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; provided that on the date that the Company receives FDA approval to commence clinical trials for its products, Mr. Horne’s salary will be increased to a total of $18,750 per month, or $225,000 per annum.
For the three months ended March 31, 2020 and 2019, the Company paid $0 in Board of Director fees to Michael Yurkowsky and to Raymond Monteleone.
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Debt and Other Obligations
The short-term notes, related parties are detailed in Note 2 - “Liquidity, Going Concern and Management’s Plans” in this Form 10-Q.
Note 9 - 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 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.
F-49 |
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 in shares of the Company’s common stock at a weighted average share price of $0.32 per share for a total of 109,375 shares per the terms of the consulting agreement executed in February 2019.
Series B Preferred Stock Preferences
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’s 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.
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.
Stock-Based Compensation Plan
The Company utilizes the Black-Scholes valuation method to recognize stock-based compensation expense over the vesting period. The expected life represents the period that the stock-based compensation awards are expected to be outstanding.
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Stock Option Activity
For the three months ended March 31, 2020 and 2019, the Company recognized approximately $600 and $89,000, respectively, as compensation expense with respect to vested stock options. Since these 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 three months ended March 31, 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 were immediately vested upon issuance.
As of March 31,2020, all outstanding stock options were fully vested, and related compensation expense recognized.
The following is a summary of stock option activity for the quarters ending March 31, 2019 and March 31, 2020:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | ||||||||||
Outstanding at December 31, 2018 | — | — | — | |||||||||
Assumed with the RMS merger transaction | 557,282 | $ | 2.78 | 6.99 | ||||||||
Granted | 250,000 | 0.40 | — | |||||||||
Expired | (80,725 | ) | 1.52 | — | ||||||||
Outstanding at March 31, 2019 | 726,557 | $ | 1.95 | 7.74 | ||||||||
Exercisable at March 31, 2019 | 695,418 | $ | 1.96 | 7.74 | ||||||||
Outstanding at December 31, 2019 | 425,000 | $ | 1.38 | 7.71 | ||||||||
Granted | — | — | — | |||||||||
Expired | — | — | — | |||||||||
Outstanding and exercisable at March 31, 2020 | 425,000 | $ | 1.38 | 7.46 |
Non-Controlling Interest
For the three months ended March 31, 2020 and 2019, the Company consolidated the results for LI Dallas, LI Nashville, LI Pittsburgh and LI Scottsdale as VIEs. The Company owns no portion of any of these four entities which own their respective clinics; however, the Company maintains control through their management role for each of the clinics, in accordance with each clinic’s respective management agreement. Based on these agreements, the Company (RMS and RMS Management and now H-CYTE) has the responsibility to run and make decisions on behalf of the clinics, except for medical procedures. Beginning in January 2018, the Company adopted the policy for all of the VIEs that the management fee charged by the Company would equal the amount of net income from each VIE on a monthly basis, bringing the amount of the net income each month for each VIE to a net of zero. Due to this change in policy, there was no change in the non-controlling interest for the three months ended March 31, 2020 or 2019 related to the net income as it was $0 each month through the management fee charged by the Company.
Net Loss Per Share
Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are antidilutive due to the Company’s net losses.
For the periods presented, there is no difference between the basic and diluted net loss per share: 45,319,643 warrants and 425,000 common stock options outstanding were considered anti-dilutive and excluded for the three months ended March 31, 2020. At March 31, 2020, the only potentially dilutive shares would be from the conversion of the convertible debt and the conversion of preferred stock, Series B and Series D totaling 38,308,600 of common stock to be issued upon conversion of all these securities. There were no option or warrant exercises that would have been potentially dilutive.
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Note 10 – 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 March 31, 2020, the Company had no litigation matters which required any accrual or disclosure.
Guarantee
The Company has guaranteed payments based upon the terms found in the management services agreements to affiliated physicians related to LI Dallas, LI Nashville, LI Pittsburgh, LI Scottsdale, and LI Tampa. For three months ended March 31, 2020 and 2019, payments totaling approximately $22,000 and $22,000, respectively, were made to these physicians’ legal entities. Due to the Company ceasing operations effective March 23, 2020 in LI Dallas, LI Pittsburgh, LI Scottsdale, and LI Tampa, the guaranteed payments for these clinics will be suspended until operations recommence at the aforementioned clinics.
Manufacturer Liability Dispute
The Company selected an FDA registered contract manufacturer, to manufacture the DenerveX product. In 2019, the Company became aware of events which resulted in the manufacturer not meeting certain contract performance requirements. As a result, the Company is in a dispute with the manufacturer. The Company intends to vigorously defend its position that the manufacturer did not meet its contract performance obligations. The Company believes the likelihood of incurring a material loss regarding the dispute with the manufacturer is reasonably possible but is unable to estimate the amount of the loss based on information available at this time. As such, the Company has not recorded a loss as of March 31, 2020 or December 31, 2019. The Company is not aware of any legal action regarding this matter.
Note 11 – Short-term Debt
Convertible note
The Convertible Notes payable represents a securities purchase agreement with select accredited investors, which was assumed in the Merger. The debt assumed by the Company consisted of $750,000 of units (the “Units”) with a purchase price of $50,000 per Unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants were initially exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. The Convertible Notes are 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, 2019, and the conversion price 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.
F-52 |
On February 6, 2019, $100,000 of the Company’s $750,000 outstanding Convertible Notes, plus accrued interest, was converted into an aggregate of 251,667 shares of common stock, eliminating $100,000 of the Company’s debt obligation. The debt was converted into shares at $0.36 per share, which was the conversion price per the SPA subsequent to the trigger of the down round feature. 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 loan for one year, until September 30, 2020. This note had a principal balance of $300,000 plus penalties of approximately $85,000 and accrued interest of approximately $40,000 for a total adjusted principal balance upon renewal of approximately $425,000 as of March 31, 2020 and December 31, 2019. Additionally, approximately 424,000 warrants were issued on September 15, 2019 in connection with the extension of the note.
Notes Payable
Notes payable were assumed in the Merger and are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. Each note originally had a maturity date of August 1, 2019. The 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 March 31, 2020 and December 31, 2019.
On March 27, 2020, the Company issued a Note in the principal amount of $500,000 to the Investor for a total of $500,000 in exchange for a loan in such amount to cover working capital needs. The Note bears an interest rate of 8.0% per annum and is due on demand. If any amounts payable under this Note are not paid within ten days after they are due, the interest rate shall accrue on the Principal in the amount of 18.0% per annum. The Investor is an affiliate of a pre-existing shareholder of the Company having been the lead investor in the Company’s recent Series D Convertible Preferred Stock Offering.
Note 12 – Derivative Liability - Warrants
Financial assets and liabilities carried at fair value as of March 31, 2020 and December 31, 2019 are classified in the tables below in one of the three categories:
Fair Value Measurement at March 31, 2020 (1) | ||||||||
Using Level 3 | Total | |||||||
Liability: | ||||||||
Derivative Liability - Warrants | $ | 140,877 | $ | 140,877 | ||||
Derivative Put Liability | $ | 79,045 | $ | 79,045 |
Fair Value Measurement at December 31, 2019 (1) | ||||||||
Using Level 3 | Total | |||||||
Liability: | ||||||||
Derivative Liability - Warrants | $ | 315,855 | $ | 315,855 | ||||
Derivative Put Liability | $ | 267,399 | $ | 267,399 |
(1) The Company did not have any assets or liabilities measured at fair value using Level 1 or 2 of the fair value hierarchy as of March 31, 2020 and December 31, 2019.
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The Company’s derivative liabilities are classified within Level 3 of the fair value hierarchy because certain unobservable inputs were used in the valuation models. These assumptions included estimated future stock prices, potential down-round financings for the Warrants, and potential redemptions for the Redemption Put Liability.
The following is a reconciliation of the beginning and ending balances for the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2020 and the year ended December 31, 2019:
Derivative Liability - Warrants | ||||
Balance at December 31, 2019 | $ | 315,855 | ||
Fair value adjustments | (174,978 | ) | ||
Balance at March 31, 2020 | $ | 140,877 |
Redemption Put Liability | ||||
Balance at December 31, 2019 | $ | 267,399 | ||
Issuance of Series D Convertible Preferred Stock | 5,305 | |||
Fair value adjustments | (193,659 | ) | ||
Balance at March 31, 2020 | $ | 79,045 |
Derivative Liability- 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. The derivative liability has been remeasured to fair value at the end of each reporting period and the change in fair value, of approximately $175,000 and $0, has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months ended March 31, 2020 and 2019, respectively. The fair value of the derivative liability included on the consolidated balance sheet was approximately $141,000 and $316,000 as of March 31, 2020 and December 31, 2019, respectively.
Fair values for the Series B Warrants were determined using a Lattice model which considered randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation.
The Company estimated the fair value of the warrant derivative liability as of March 31, 2020 and December 31, 2019, respectively, using the following assumptions:
March 31, 2020 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.051 | $ | 0.13 | ||||
Exercise price | $ | 0.40 | $ | 0.40 | ||||
Risk free rate | 0.17 – 0.23 | % | 1.58 – 1.59 | % | ||||
Expected term (in years) | 1.09 – 1.77 | 1.34 – 2.02 | ||||||
Stock price volatility | 156 – 166 | % | 143 - 154 | % | ||||
Expected dividend yield | — | — |
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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. The fair value of the warrants will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the down-round provisions.
On November 15, 2019, the Company redeemed a shareholder’s Series B Preferred shares for its initial face value, plus accrued dividends.
In conjunction with the Series D Preferred financing (See Note 14), the Company offered the Series B warrant holders the option to exchange their warrants on the basis of 1 warrant for 0.40 common shares. Warrant holders chose to exchange 1,007,813 warrants with a fair value of approximately $75,000 for 403,125 shares of common stock with a fair value of approximately $73,000. On the date of the exchange, the Series B Warrants were first adjusted to fair value with the change in fair value being recorded in earnings.
Redemption Put Liability
As described in Note 14, the redemption put provision embedded in the Series D financing required bifurcation and measurement at fair value as a derivative. If the redemption put provision is triggered, it allows either payment in cash or the issuance of “Trigger Event Warrants”. Accordingly, the fair value of the Redemption put liability considered management’s estimate of the probability of cash payment versus payment in Trigger Event Warrants and was valued using a Monte Carlo Simulation which uses randomly generated stock-price paths obtained through a Geometric Brownian Motion stock price simulation. The fair value of the redemption provision will be significantly influenced by the fair value of the Company’s stock price, stock price volatility, changes in interest rates and management’s assumptions related to the redemption factor. The Company estimated the fair value of the Trigger Event Warrant portion of the redemption put liability using the following assumptions on March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | |||||||
Fair value of underlying stock | $ | 0.019 | $ | 0.056 | ||||
Exercise price | $ | 0.20409 | $ | 0.20409 | ||||
Risk free rate | 0.70 | % | 1.92 | % | ||||
Expected term (in years) | 9.7 | 9.9 | ||||||
Stock price volatility | 95 | % | 92 | % | ||||
Expected dividend yield | — | — |
The fair market value of the redemption put liability at inception was approximately $614,000 which has been recorded as a liability and is remeasured to fair value at the end of each reporting period. The change in fair value of approximately $194,000 and $0 has been recorded as a component of other income (expense) in the Company’s consolidated statement of operations for the three months ended March 31, 2020 and 2019, respectively. The fair value of the redemption put liability included on the consolidated balance sheet was approximately $79,000 and $267,000 as of March 31, 2020 and December 31, 2019, respectively.
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Note 13 - Common Stock Warrants
A summary of the Company’s warrant issuance activity and related information for the quarters ended March 31, 2020 and March 31, 2019:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Assumed as of the January 8, 2019 merger | 12,108,743 | $ | 1.38 | 2.60 | ||||||||
Issued | 17,500,000 | 0.75 | 2.84 | |||||||||
Outstanding and exercisable at March 31, 2019 | 29,608,743 | $ | 1.00 | 2.63 | ||||||||
Outstanding and exercisable at December 31, 2019 | 44,806,076 | $ | 0.78 | 4.59 | ||||||||
Issued | 513,567 | 0.75 | 6.13 | |||||||||
Outstanding and exercisable at March 31, 2020 | 45,319,643 | $ | 0.78 | 4.61 |
The fair value of all warrants issued are determined by using the Black-Scholes valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued. The inputs used in the Black-Scholes valuation technique to value each of the warrants as of their respective issue dates are as follows:
Event Description | Date | Number of Warrants | H-CYTE Stock Price | Exercise Price of Warrant | Grant Date Fair Value | Life of Warrant | Risk Free Rate of Return (%) | Annualized Volatility Rate (%) | ||||||||||||||||||||
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 |
(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.
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.
F-56 |
Note 14- Mezzanine Equity and Series D Convertible Preferred Stock
Series D Convertible preferred Stock
On November 15, 2019, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered (i) up to 238,871 shares of Series D Convertible Preferred Stock the (“Series D Shares”) at a price of $40.817 per share and (ii) a ten-year warrant (the “Series D Warrant”) to purchase 14,669,757 shares of common stock. The Series D Warrants are exercisable for a period of 10 years from issuance at an initial exercise price of $0.75 per share, subject to adjustment for traditional equity restructurings and reorganizations.
On November 21,2019, the Company entered into a securities purchase agreement with FWHC HOLDINGS, LLC (“FWHC”) an accredited investor for the purchase of 146,998 shares of Series D Preferred Stock, par value $0.001 per share and the Series D Warrant resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). For further discussion of the Series D Shares, refer to Note 14 - “Mezzanine Equity and Series D Convertible Preferred Stock” on the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019.
The Company determined that the nature of the Series D Shares was more analogous to an equity instrument, and that the economic characteristics and risks of the embedded conversion option was clearly and closely related to the Series D Shares. As such, the conversion option was not required to be bifurcated from the host under ASC 815, Derivatives and Hedging. The Company recognized a beneficial conversion feature related to the Series D Shares of approximately $623,000, which was credited to additional paid-in capital, and reduced the income available to common shareholders. Because the Series D Shares can immediately be converted by the holder, the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders. Since the Series D Shares are redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, they have been classified as mezzanine equity in the Consolidated Balance Sheets.
The Company determined that the economic characteristics and risks of the embedded redemption provision were not clearly and closely related to the Series D Shares. The Company assessed the embedded redemption provision further, and determined it met the definition of a derivative and required classification as a derivative liability at fair value. The redemption put liability as of March 31, 2020 and December 31, 2019, was approximately $79,000 and $267,000, respectively.
The Company’s approach to the allocation of the proceeds to the financial instruments was to first allocate basis to the redemption put liability at its fair values and the residual to the Series D Shares and the Series D Warrants. Based upon the amount allocated to the Series D Shares the Company was required to determine if a beneficial conversion feature (“BCF”) was present. A BCF represents the intrinsic value in the convertible instrument, adjusted for amounts allocated to other financial instruments issued in the financing. The effective conversion price is calculated as the amount allocated to the convertible instrument divided by the number of shares to which it is indexed. However, a BCF is limited to the basis initially allocated. After allocating a portion of the proceeds to the other instruments, the effective conversion price was $0.24 compared to the share price of $0.28, resulting in a BCF of $623,045 or $0.04 per share.
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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 | $ | (5,305 | ) | |
Redeemable preferred stock: | ||||
Series D Convertible Preferred Stock | (62,793 | ) | ||
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 three months ended March 31, 2020, the Company recorded $158,147 in deemed dividends on the Series D Convertible Preferred stock in accordance with the 8% stated dividend resulting in a total balance of Series D Convertible Preferred stock of $6,281,433 at March 31, 2020.
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Series D CONVERTIBLE Preferred Stock Preferences
Voting Rights
Holders of our Series D Preferred Stock (“Series D Holders”) have the right to receive notice of any meeting of holders of common stock or Series D Preferred Stock and to vote upon any matter submitted to a vote of the holders of common stock or Series D Preferred Stock. Each Series D Holder shall vote on each matter submitted to them with the holders of common stock.
Liquidation
Upon the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, each Series D 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 D Holders in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company’s to the holders of the Company’s Series B and common stock. The Company accrues these dividends as they are earned each period.
Note 15 - Subsequent Events
On April 9, 2020, in exchange for an additional loan of $500,000 made by the Investor to the Company to further cover the Company’s working capital needs, the Company amended and restated the Note to reflect a new principal amount of $1,000,000 (the “A&R Note”). The A&R Note bears simple interest at a rate of 12% per annum. The Investor is an affiliate of FWHC Holdings, LLC, a pre-existing shareholder of the Company, which served as lead investor in the Company’s recent Series D Convertible Preferred Stock Offering. As discussed further below in “Note Purchase Agreement”, this A&R Note was further amended and superseded by an April Secured Note in the amount of $1,000,000 issued by the Company to the Investor.
Note Purchase Agreement
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,835,195 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,835,195. This sum included the issuance by the Company to the Investor of an April Secured Note in the amount of $1,000,000 to amend and supersede the A&R Note previously issued by the Company to the Investor on April 9, 2020. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the “Hawes Note”). The Hawes Notes had a principal amount of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Note among other things, eliminates the requirement that the Company make monthly payments of accrued interest. The Hawes Note is expected to convert into shares of preferred stock of the Company offered for purchase at the Qualified Financing at the closing of the Qualified Financing.
As part of the April Offering, the holders of certain existing warrants issued by the Company which contained anti-dilution price protection entered into agreements terminating all anti-dilution price protection in their warrants. The Company intends to implement a one-time reduction of the exercise price of such warrants to be equal to the price per share at which shares of preferred stock are offered for purchase at the Qualified Financing once that price has been established.
Debt and Other Obligations
On April 23, 2020, Horne Management, LLC agreed to convert the short-term notes, related parties totaling $1,635,000 as of March 31, 2020 plus accrued interest into (i) 4,368,278 shares of common stock of the Company and (ii) a ten-year warrant to purchase up to an equivalent number of shares of the Company’s common stock with such conversion to be effective as of April 17, 2020. This warrant will have an exercise price equal to the price per share at which securities are offered to investors for purchase at the Qualified Financing, which such price has not yet been established, and is exercisable beginning on the day immediately following the earlier to occur of (x) the closing of the Qualified Financing and (y) November 1, 2020. If the Qualified Financing does not occur on or prior to October 31, 2020, the exercise price of the warrant will be equal to the price per share obtained by dividing $3,000,000 by the number of fully diluted shares of the Company outstanding on October 31, 2020.
The description of the April SPA, the April Secured Note, the April Warrant, the Security Agreement, the Intellectual Property Security Agreement and the Amendment to William Horne Employment Agreement and the Hawes Note, are each qualified in their entirety by the full text of such agreements which are filed as Exhibits to the Annual Report on Form 10-K.
On April 29, 2020, the Company issued a promissory note in the principal amount of $809,082 to the Bank of Tampa in connection with a loan in such amount made under the Payroll Protection Program (“PPP Loan”). The PPP Loan bears interest at a rate of 1% per annum and is payable in eighteen monthly payments of $45,533 commencing six months from the date of the note on November 29, 2020. While the note is dated April 29, 2020, the loan was not formally approved and funded until May 7, 2020.
The Company can apply for loan forgiveness in an amount equal to the sum of the following costs incurred by the Company:
1) payroll costs;
2) any payment of interest on covered mortgage obligations;
3) any payment on a covered rent obligation; and
4) any covered utility payment
The amount forgiven will be calculated (and may be reduced) in accordance with the Paycheck Protection Program. Not more than 25% of the amount forgiven can be attributed to non-payroll costs.
On May 7, 2020, William Horne, the Company’s CEO and Chairman resigned as CEO effective when the Company finds a suitable replacement who has more FDA experience. Until such successor is retained, Mr. Horne will remain as the CEO. Mr. Horne’s resignation does not go to his position as Chairman of the Board or as a Director. The resignation was not as a result of any disagreement with the Company or its policies and practices.
The Company has evaluated subsequent events have been evaluatedoccurring through the date that the consolidated financial statements were issued. All appropriate subsequent event disclosures, if any, have been madeavailable to be issued for events requiring recording or disclosure in the notes to theMarch 31, 2020 consolidated financial statements.
F-59 |
Non-transferable Rights Offering to Purchase
Up to 366,418,296 Series A Preferred Shares
Convertible into Common Stock
PROSPECTUS
[_____________], 2020
PART II –
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates thesets forth all expenses to be incurredpaid by the Registrant, other than estimated placement agent fees and commissions, in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us.our public offering. All amounts shown are estimatedestimates except for the SecuritiesSEC registration fee:
SEC registration fee | $ | 665.86 | ||
Legal fees and expenses | * | |||
Accounting fees and expenses | * | |||
Transfer agent and registrar fees | * | |||
Printing and engraving expenses | * | |||
Miscellaneous fees and expenses | * | |||
Total | $ | 75,000 |
* To be filed by amendment.
Item 14. Indemnification of Directors and Exchange Commission registration fee,Officers.
Neither our amended and restated articles of incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee andextent permitted under the NASDAQ Capital Market listing fee.
Amount | ||||
Securities and Exchange Commission registration fee | $ | 4,588.68 | ||
FINRA filing fee | 2,130.13 | |||
NASDAQ Capital Stock Market listing fee | 55,000.00 | |||
Accountants’ fees and expenses | 15,000.00 | |||
Legal fees and expenses | 180,000.00 | |||
Transfer Agent’s fees and expenses | * | |||
Printing and engraving expenses | * | |||
Miscellaneous | 10,000.00 | |||
Total expenses | $ | * |
NRS 78.7502(1) provides that we willa corporation may indemnify eachany person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, (other thanexcept an action by or in the right of us)the corporation, by reason of the fact that he or she is or was a director, officer, employee or has agreed to become, our director or officer,agent of the corporation, or is or was serving or has agreed to serve, at ourthe request of the corporation as a director, officer, partner, employee or trusteeagent of or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, (all such persons being referred to as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses, (includingincluding attorneys’ fees),fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with suchthe action, suit or proceeding and any appeal therefrom, if such Indemniteehe: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to ourthe best interests of the corporation, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful.
NRS Section 78.7502(2) provides that we willa corporation may indemnify any Indemniteeperson who was or is a party or is threatened to anbe made a party to any threatened, pending or completed action or suit by or in the right of usthe corporation to procure a judgment in ourits favor by reason of the fact that the Indemniteehe is or was a director, officer, employee or has agreed to become, our director or officer,agent of the corporation, or is or was serving or has agreed to serve, at ourthe request of the corporation as a director, officer, partner, employee or trustee or, or in a similar capacity with,agent of another corporation, partnership, joint venture, trust or other enterprise or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses, (including attorneys’ fees) and, to the extent permitted by law,including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with suchthe defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or proceeding, and any appeal therefrom, if the Indemnitee(b) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to ourthe best interests except that no indemnification shallof the corporation. Indemnification may not be made with respect tofor any claim, issue or matter as to which such a person shall havehas been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to us,the corporation or for amounts paid in settlement to the corporation, unless aand only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that despite such adjudication but in view of all the circumstances of the circumstances, he or shecase, the person is fairly and reasonably entitled to indemnificationindemnity for such expenses as the court deems proper.
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NRS Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of such expenses. Notwithstandinga corporation is individually liable for a debt or liability of the foregoing, to the extent that any Indemnitee has been successful, on the merits or otherwise, he or she will be indemnified by us against all expenses (including attorneys’ fees) actually and reasonably incurred by him or her or on his or her behalf in connection therewith. If we don’t assume the defense, expenses must be advanced to an Indemnitee under certain circumstances.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Our amended and restated Bylaws, effective November 15, 2019, provide that the Company may indemnify and advance litigation expenses to its directors, officers, employees and agents to the extent permitted by law, the Company’s articles of incorporation or Bylaws, and shall indemnify and advance litigation expenses to its directors, officers, employees and agents to the extent required by law, the Company’s articles of incorporation or Bylaws. The Company’s obligations of indemnification, if any, shall be conditioned on the Company receiving prompt notice of the claim and the opportunity to settle and defend the claim. The Company may, to the extent permitted by law, purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee or agent of the Company.
Item 15. Recent Sales of Unregistered Securities.
On November 15, 2019, the Company entered into a securities purchase agreement (the “Series D SPA”) with FWHC Holdings, LLC (“FWHC”), an accredited investor for the purchase of 146,998 shares of Series D preferred stock, par value $0.001 per share (the “Shares”) and a ten-year warrant to purchase up to 14,669,757 shares of common stock at an exercise price of $0.75 per share (the “FWHC Warrant”) resulting in $6.0 million in gross proceeds to the Company (the “FWHC Investment”). The shares of Series D preferred stock were sold at a price of $40.817 per share and each share of Series D preferred stock is convertible into 100 shares of common stock. Accordingly, the conversion price into our common stock is $0.40817 per share. Please see the current report on Form 8-K filed with the SEC on November 21, 2020. In connection with the April Offering, the exercise price under the FWHC Warrant was reduced from $0.75 per share to the Subscription Price.
During the three months ended March 31, 2020, the Company received proceeds of $100,000 and issued 2,449.96 shares of preferred stock at a price of $40.817 per share, and a ten-year warrant to purchase 244,996 shares of common stock at an exercise price of $0.75 per share. Please see the quarterly report on Form 10-Q filed with the SEC on May 21, 2020.
On April 17, 2020, and in subsequent April closings, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement (the “April SPA”) with thirty three investors (the “Purchasers”) pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale to the Purchasers of Secured Convertible Promissory Notes (the “April Secured Notes”) and warrants (the “April Warrants”) to purchase shares of common stock of the Company (the “April Offering”). The proceeds of the April Offering will be used for working capital and general corporate purposes. The April Offering resulted in the issuance of April Secured Notes to Purchasers in an aggregate principal amount of $3,842,695. This sum included the issuance by the Company to FWHC Bridge of an April Secured Note in the amount of $1,000,000 to amend and supersede a note previously issued by the Company to FWHC Bridge on April 9, 2020.
On July 28, 2020, the Company issued an aggregate of 17,893,076 shares of common stock upon the conversion of the Series B and Series D Preferred Stock.
The issuances of our capital stock stated above were made in reliance on an exemption from registration set forth in section 4(2) of the Securities Act of 1933, as amended.
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Item 16. Exhibits and Financial Statement Schedules.
* Filed in Form S-1 on July 2, 2020.
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Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B (§230.430B of this chapter):
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) (§230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) (§230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
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(ii) If the registrant is subject to Rule 430C (§230.430C of this chapter), each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange CommissionSEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York,Tampa, State of New York,Florida on this 5ththe 30th day of September, 2014.
H-CYTE, INC. | |||
By: | /s/ | ||
William Horne | |||
President and Chief Executive Officer | |||
(Principal executive officer) | |||
By: | |||
Jeremy Daniel | |||
Chief | |||
(Principal Financial and Accounting officer) |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statementregistration statement has been signed by the following persons in the capacities heldand on the dates indicated.
Date | ||||
/s/ William Horne | Chief Executive Officer | July 30, 2020 | ||
William Horne | (Principal Executive Officer) | |||
/s/ | Chief Financial Officer | July 30, 2020 | ||
( | ||||
/s/ | Director | July 30, 2020 | ||
Michael Yurkowsky | ||||
/s/ | Director | July 30, 2020 | ||
Raymond Monteleone |
* By power of attorney:
By: | /s/ Jeremy Daniel | ||||
Jeremy Daniel, Attorney in fact |
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