The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes thereto appearing in Part I, Item 1 of this Quarterly
Report. Historical results and trends that might appear in this Quarterly Report
should not be interpreted as being indicative of future operations.
Overview
H-CYTE, Inc ("the Company") is intended to continue as a
hybrid-biopharmaceutical company dedicated primarily to developing new
treatments for patients with chronic respiratory and pulmonary disorders. During
the last three years, the Company has evolved into two separate divisions with
its entrance into the biologics and device development space ("Biotech
Division"). This division is complementary to the Company's Lung Health
Institute (LHI) autologous infusion therapy business ("Infusion Division") and
is focused on underserved disease states. H-CYTE is shifting its focus on
acquiring and developing early-stage companies or their technologies in the
areas of therapeutics, medical devices, and diagnostics. The goal is to develop
these companies and incubate their technologies to meaningful clinical
inflection points.
On June 3, 2022, the Company closed its clinic in Scottsdale, Arizona. The
Company has now closed all of its clinical operations in the autologous infusion
therapy business which delivered treatments for patients with chronic
respiratory and pulmonary disorders. The Company will continue to pursue
regulatory approval of the device that was utilized in the treatment provided at
the clinics. The Company also has a continued interest in the commercialization
of the DenerveX device. The Company has begun to transform itself into a
biologics and therapeutic device incubator to bring new technologies to market.
The consolidated results for H-CYTE include the following wholly-owned
subsidiaries: H-CYTE Management, LLC, Medovex Corp, Cognitive Health Institute,
LLC, and Lung Institute Tampa, LLC and the results include Lung Institute
Dallas, LLC ("LI Dallas"), Lung Institute Nashville, LLC ("LI Nashville"), Lung
Institute Pittsburgh, LLC ("LI Pittsburgh"), and Lung Institute Scottsdale, LLC
("LI Scottsdale"), as Variable Interest Entities ("VIEs"). Additionally, H-CYTE
Management, LLC is the operator and manager of the various Lung Health Institute
(LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and LI Scottsdale. The LI
Dallas and LI Pittsburgh clinics did not reopen in 2020 after the temporary
closure of all LI clinics due to COVID-19. These two clinics will remain
permanently closed. During the first quarter of 2022, the Company decided to
close the LI Tampa and LI Nashville clinics. During the second quarter of 2022,
the Company closed the LI Scottsdale clinic, the final LHI clinic.
On June 10, 2022, the Company amended (the "Amendment") its Articles of
Incorporation to effectuate a one-for-one thousand reverse stock split (the
"Reverse Split") of its common stock. The Reverse Split was approved by FINRA on
June 10, 2022 and effectuated on June 13, 2022. Pursuant to the Amendment, the
Company also reduced the authorized shares of common stock to 500,000,000. As a
result of the Reverse Split, as of June 30, 2022, the Company has approximately
257,282 shares of common stock outstanding and 494,579,119 shares of Series A
Preferred Stock outstanding. As a result of the Reverse Stock Split, the Series
A Preferred Stock is convertible at a ratio of one thousand shares of Series A
Preferred Stock into one share of common stock. Accordingly, the 494,579,119
outstanding shares of Series A Preferred Stock are now convertible into an
aggregate of 494,579 shares of common stock.
Impact of COVID-19
COVID-19 has adversely affected the Company's financial condition and results of
operations. The impact of the COVID-19 outbreak on businesses and the economy in
the United States is expected to continue to be significant. The extent to which
the COVID-19 outbreak will continue to impact businesses and the economy is
highly uncertain. Accordingly, the Company cannot predict the extent to which
its financial condition and results of operation will be affected.
On January 30, 2020, the World Health Organization ("WHO") announced a global
health emergency caused by a new strain of the coronavirus and advised of the
risks to the international community as the virus spread globally. In March
2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid
increase in exposure globally. The spread of COVID-19 coronavirus has caused
public health officials to recommend precautions to mitigate the spread of the
virus, especially as to travel and congregating in large numbers. In addition,
certain states and municipalities have enacted quarantining regulations which
severely limit the ability of people to move and travel.
In addition, the Company is uncertain of the full effect the pandemic will have
on it for the longer term since the scope and duration of the pandemic is
unknown, and evolving factors such as the level and timing of the distribution
of efficacious vaccines across the world and the extent of any resurgences of
the virus or emergence of new variants of the virus, such as the Delta variant
and the Omicron variant, will impact the stability of economic recovery and
growth. The Company may experience long-term disruptions to its operations
resulting from changes in government policy or guidance; quarantines of
employees, customers and suppliers in areas affected by the pandemic; and
closures of businesses or manufacturing facilities critical to its business.
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Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based on its consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of these consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and expenses
during the reporting periods.
The Company bases our estimates on historical experience and on various other
factors that it believes are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Results of Operations - Three and six months ended June 30, 2022 and 2021
Revenue and Gross Profit
The Company recorded revenue of approximately $74,000 and $453,000 for the three
and six months ended June 30, 2022, respectively. The Company recorded revenue
of approximately $450,000 and $827,000 for the three and six months ended June
30, 2021, respectively. The Company has closed all of the LHI Clinics as of June
30, 2022 which was the Company's only current source of revenue. The Company has
begun to transform into a biologics and therapeutic device incubator company to
bring new technologies to market.
For the three and six months ended June 30, 2022, the Company generated a gross
profit totaling approximately $44,000 and $337,000, respectively. The Company
generated gross profit of approximately $234,000 and $412,000 for the three and
six months ended June 30, 2021, respectively.
Operating Expenses
Salaries and Related Costs
For the three and six months ended June 30, 2022, the Company incurred
approximately $280,000 and $627,000 in salaries and related costs, respectively.
The Company incurred salaries and related costs of approximately $586,000 and
$1,248,000 for the three and six months ended June 30, 2021, respectively. The
decrease in salaries and related costs, as compared to the prior year, is due to
the adjustments to the Company's corporate structure by reducing expenses in
marketing, sales, and operations due to decreased patient volume and closing of
the LHI clinics.
Other General and Administrative
For the three and six months ended June 30, 2022, the Company incurred
approximately, $395,000 and $905,000, in other general and administrative costs,
respectively. The Company incurred other general and administrative costs of
approximately $700,000 and $1,619,000 for the three and six months ended June
30, 2021, respectively. The Company made adjustments to its corporate structure
by reducing expenses in marketing, sales, and operations due to decreased
patient volume and closing of the LHI clinics.
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Other Income/Expense
For the three and six months ended June 30, 2022, the Company incurred
approximately $0 and $3,025,000, respectively, in inducement expense related to
the warrant inducement (see Note 8). For the three and six months ended June 30,
2022, the Company incurred approximately $2,196,000 and $0, respectively,
related to the loss on extinguishment of convertible notes payable (see Note 4).
Appointment of New Board Members and Officers.
On January 17, 2022, Mr. Richard Rosenblum was appointed as a member of the
Board.
On January 17, 2022, Mr. Matthew Anderer was appointed as a member of the Board.
Funding Requirements
The Company has historically incurred losses from operations and expects to
continue to generate negative cash flows as the Company implements its business
plan to focus on the Biologics Division. The Company will need to raise cash
from debt and equity offerings to continue its operations. There can be no
assurance that the Company will be successful in doing so.
Going Concern
The Company incurred net losses of approximately $2,635,000 and $6,527,000 for
the three and six months ended June 30, 2022, respectively. The Company incurred
net losses of approximately $2,058,000 and $3,466,000 for the three and six
months ended June 30, 2021. The Company has historically incurred losses from
operations and expects to continue to generate negative cash flows as it
implements its plan around the Biosciences Division. The consolidated financial
statements are prepared using accounting principles generally accepted in the
United States ("U.S. GAAP") as applicable to a going concern.
COVID-19 has adversely affected the Company's financial condition and results of
operations. The impact of the outbreak of COVID-19 on the economy in the U.S.
and the rest of the world is expected to continue to be significant. The extent
to which the COVID-19 outbreak will continue to impact the economy is highly
uncertain and cannot be predicted. Accordingly, the Company cannot predict the
extent to which its financial condition and results of operations will be
affected.
The Company had cash on hand of approximately $46,000 as of June 30, 2022 and
approximately $3,000, as of August 12, 2022. The Company's cash is insufficient
to fund its operations over the next year and the Company is currently working
to obtain additional debt or equity financing to help support working capital
needs.
There can be no assurance that the Company will be able to raise additional
funds or that the terms and conditions of any future financings will be workable
or acceptable to the Company or its shareholders. If the Company is unable to
fund its operations from existing cash on hand, operating cash flows, additional
borrowings, or raising equity capital, the Company may not continue operations.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
19
Liquidity and Sources of Liquidity
With the Company historically having experienced losses, the primary source of
liquidity has been raising capital through debt and equity offerings, as
described below.
Debt
Convertible Notes Payable
On April 1, 2021, the Company, entered into a Secured Convertible Note Purchase
Agreement (the "April 2021 Note Purchase Agreement") with five (5) investors
(the "Holders"). Pursuant to the terms of the April 2021 Note Purchase
Agreement, the Company sold promissory notes in the aggregate principal amount
of $2,575,000 maturing on June 30, 2022 with an annual interest rate of 8%. The
Notes are convertible into shares of Common Stock at a discount of 20% to the
price paid for such New Securities in the next round of financing that meets the
definition of Qualified Financing as defined in the April 2021 Note Purchase
Agreement. The Notes are secured by the assets of the Company under a security
agreement with the Holders. The lead investor of the April 2021 Note Purchase
Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the
Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a
principal stockholder and related party of the Company. An additional affiliate
of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note
Purchase Agreement.
On October 14, 2021, the Company entered into the Second Closing Bring Down
Agreement (the "October 2021 Note Purchase Agreement") whereby the five (5)
investors who had entered into the April 2021 Note Purchase Agreement purchased
new notes in the Company in the aggregate principal amount of $750,000. The
Notes are due and payable on June 30, 2022 and bear interest at an annual rate
of 8%. The Notes are convertible into shares of Common Stock at a discount of
20% to the price paid for such New Securities in the next financing that meets
the definition of a Qualified Financing as defined in the Note Purchase
Agreement. The Notes are secured by all of the assets of the Company under a
security agreement with the Holders. The lead investor of the October 2021 Note
Purchase Agreement, FWHC Bridge, LLC, advanced $437,000 of the total amount to
the Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a
principal stockholder and related party of the Company. An additional affiliate
of FWHC, LLC provided an additional $7,000 as part of the October 2021 Note
Purchase Agreement.
On February 22, 2022, the Company entered into a Debt Conversion Agreement (the
"Amendment Agreement") which i) provided for an additional round of convertible
debt financing ("Tranche 2 Notes") of up to $500,000 and ii) amended the
conversion price on the convertible notes issued April 1, 2021 and October 8,
2021 (Tranche 1 Notes") from 80% of the price paid in a Qualified Financing
(proceeds of at least $15 million), to the lesser of (x) $0.002 and (y) the
price paid in a Qualified Financing (proceeds of at least $10 million). The
Amendment Agreement also provides the following Milestone Payments:
3) $1,000,000 after filing a premarket notification pursuant to Section 510(k) of
the Food, Drug and Cosmetic Act, of its intent to market its PRP cellular
therapy
4) Following the closing of a Qualified financing, 25% of all proceeds raised in
excess of $10 million (not to exceed $1 million)
The Milestone Payments are not to exceed $2 million, and the Amendment Agreement
also specifies that a Qualified Financing will not occur prior to the closing of
the acquisition of Jantibody, LLC.
The Company evaluated the Amendment Agreement under ASC 470-50, "Debt -
Modification and Extinguishment", and concluded that probability of having to
pay a Milestone payment was minimal and the change in the fair value of the
conversion feature was not material. Since the Amendment did not cause a
material change in cash flows, extinguishment accounting was not applicable.
On April 29, 2022, the Company entered into an Amended and Restated Note
Conversion Agreement (the "Note Conversion Agreement") with certain holders of
its Tranche 1 Notes (i) providing for a conversion price equal to the lesser of
(x) $0.002 per share (pre-split) and (y) the price per share paid by the
investors in a Qualified Financing for such New Securities purchased for cash
and not through conversion of Notes (as such terms are defined in the Note
Conversion Agreement), in each case subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
recapitalization, (ii) automatic conversion upon the occurrence of a Qualified
Financing, and (iii) amendment of the maturity date from March 31, 2022 to June
17, 2022 (the "New Notes"). Upon the effectiveness of the Company's 1,000-1
reverse split, the conversion price adjusted to the lesser of (a) the price in
the Qualified Financing or (b) $2.00 per share. The New Notes also provided the
investors with Royalty Payments equal to 15% of all net sales generated by the
Company with respect to the sale of products or services associated with the
510(k) Notification related to the Company's autologous cellular therapy
(PRP-PBMC) to treat chronic lung disorder. The Royalty Payments are in lieu of
the Milestone payments but are perpetual and there is no limit to the aggregate
amount of Royalty Payments that may be paid.
Due to changes in key provisions of the Tranche 1 Notes, the Company analyzed
the before and after cash flows between the (i) fair value of the New Notes and
(ii) reacquisition price of the Tranche 1 Notes prior to the (A) change in the
maturity date from March 31, 2022 to June 17, 2022, (B) change in the conversion
price to the lesser of (x) $2.00 and (y) the price paid in a Qualified
Financing, and (C) the fair value of the potential Royalty Payments, to
determine whether these changes resulted in a modification or extinguishment of
the Tranche 1 Notes.
The Company used a discounted cash flow method with Monte Carlo Simulation to
value the Royalty Payments. Future Royalty Payments were estimated based on
management's best estimate of future cash flows under various scenarios which
were discounted to present value using a risk-adjusted rate of 65%.
20
Based on the before and after cash flows of each note, the change was considered
significantly different. Consequently, the New Notes were accounted for as a
debt extinguishment of the Tranche 1 Notes and a new debt issuance of the New
Notes. The Company recorded a $2.1 million loss upon extinguishment of debt in
the three months ended June 30, 2022, which was comprised of the following:
Carrying value of Tranche 1 Notes $ 3,580,738
Less: Fair value of New Notes
(4,079,838 )
Less: Fair value of Royalty Payments (1,697,000 )
Loss on Extinguishment
$ (2,196,100 )
The Note Conversion Agreement also provided for the consummation of a Tranche 2
Financing (the "Tranche 2 Notes") subject to (i) the aggregate principal amount
of indebtedness represented by the Tranche 2 Notes being capped at $500,000 and
(ii) Tranche 2 Notes' being an unsecured obligation of the Company and expressly
subordinate in all respects to all indebtedness of the Company under the Notes
and including language in which the holders of such Tranche 2 Notes acknowledge,
confirm and agree to the foregoing subordination terms. Pursuant to the terms of
the Note Conversion Agreement, the Investors have agreed not to sell any capital
stock of the Company for a period of 12 months following the Qualified
Financing.
On June 9, 2022, the Company entered into a securities purchase agreement for a
total of $272,500 with two accredited investors. The notes issued are
convertible into common stock at a 35% discount to the lowest trading price in
the 20-day period prior to conversion. The notes bear interest at 10% and are
due one year from issuance. For the first six months, the Company has the right
to prepay the notes at a premium of between 25% and 35% depending on when it is
repaid.
The Company also issued a promissory note for $100,000 to another accredited
investor. This note bears interest at 15% (no matter when repaid) and converts
at a discount of 25% of the price of a public offering or a 25% discount to the
VWAP of the five (5) days prior to conversion.
The embedded features in the Tranche 2 Notes were analyzed under ASC 815 to
determine if they required bifurcation as derivative instruments. To be a
derivative, one of the criteria is that the embedded component must
be net-settleable. While the Company's Common Stock was traded on an exchange at
the time of the transaction, the underlying shares are not readily convertible
into cash since there is insufficient daily trading volume for the holders to
convert the Tranche 2 Notes into Common Stock without significantly affecting
the share price. Accordingly, the embedded derivatives, including the embedded
conversion feature, did not meet the definition of a derivative, and therefore,
did not require bifurcation from the host instrument. Certain default put
provisions, including a default put and default interest, were not considered to
be clearly and closely related to the host instrument but the Company concluded
that the value of these provisions was de minim us at inception. The Company
will reconsider the value of these provisions each reporting period to determine
if the value becomes material to the financial statements.
Equity
In January 2022, the Company offered certain warrant holders the opportunity to
receive an additional warrant to purchase the Company's Common Stock at $14.00
per share, for a period of five (5) years from issuance for the exercise of each
existing warrant originally issued in April 2020 prior to March 31, 2021. As of
June 30, 2022, the Company had eleven warrant holders exercise an aggregate of
83,579 warrants at $14.00 per share resulting in cash proceeds of $1,170,110 to
the Company.
The Company filed a Registration Statement on Form S-1 registering the resale of
the shares of common stock issuable upon exercise of the warrants issued in the
April 2020 financing. The registration statement was declared effective on
February 14, 2022.
Cash activity for the three months ended June 30, 2022 and December 31, 2021 is
summarized as follows:
Working Capital Deficit
As Of
June 30, 2022 December 31, 2021
Current Assets $ 223,174 $ 197,456
Current Liabilities 5,175,718 4,920,880
Working Capital Deficit $ (4,952,544 ) $ (4,723,424 )
Cash Flows
Cash activity for the three months ended June 30, 2022 and 2021 is summarized as
follows:
Six months Ended June 30,
2022 2021
Cash used in operating activities $ (1,527,380 ) $ (2,740,629 )
Cash used in investing activities
- (7,832 )
Cash provided by financing activities 1,478,085 2,624,338
Net increase (decrease) in cash $ (49,295 ) $ (124,123 )
As of June 30, 2022, the Company had approximately $46,000 of cash on hand.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as defined in
Regulation S-K Item 303(a)(4) during the periods presented, investments in
special-purpose entities or undisclosed borrowings or debt. Additionally, we are
not a party to any derivative contracts or synthetic leases.
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