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    HCYT   US4041241096

H-CYTE, INC.

(HCYT)
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H CYTE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/13/2020 | 04:15pm EDT

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



Overview


On October 18, 2018, H-CYTE (formerly named MedoveX) entered into an Asset Purchase Agreement with Regenerative Medicine Solutions, LLC, RMS Shareholder, LLC ("Shareholder"), Lung Institute LLC ("LI"), RMS Lung Institute Management LLC ("RMS LI Management") and Cognitive Health Institute Tampa, LLC ("CHIT"), (collectively "RMS"). On January 8, 2019, the Asset Purchase Agreement was amended, and the Company acquired certain assets and assumed certain liabilities of RMS as reported in the 8-K/A filed in March of 2019. Based on the terms of the Asset Purchase Agreement and its amendment, the former RMS members had voting control of the combined company as of the closing of the RMS acquisition. For accounting purposes, the acquisition transaction has been treated as a reverse acquisition whereby the Company is deemed to have been acquired by RMS and the historical financial statements prior to the acquisition date of January 8, 2019 now reflect the historical financial statements of RMS.

On June 21, 2019, H-CYTE entered into an exclusive product supply agreement with Rion, LLC ("Rion") to develop and distribute a FDA approved therapy (known as L-CYTE-01) for chronic obstructive pulmonary disease ("COPD"), the fourth leading cause of death in the U.S. Rion has established a novel technology to harness the healing power of the body. Rion's innovative exosome technology, based on science developed at Mayo Clinic, provides an off-the-shelf platform to enhance healing in soft tissue, musculoskeletal, cardiovascular and neurological organ systems. This agreement provides for a ten-year exclusive and extendable supply agreement with Rion to enable H-CYTE to develop proprietary biologics.

On October 9, 2019, the Company entered into a services agreement with Rion which provides the Company the benefit of Rion's resources and expertise for the limited purpose of (i) consulting with and assisting H-CYTE in the further research and development for the generation of a new cellular therapy (L-CYTE-01) and (ii) subsequently assisting H-CYTE in seeking and obtaining FDA Phase 1 IND clearance for L-CYTE-01. Rion also agrees to consult with H-CYTE in its arrangement for services from third parties unaffiliated with Rion to support research, development, regulatory approval, and commercialization of L-CYTE-01.

With these agreements, Rion will serve as the product supplier and co-developer of L-CYTE-01 with H-CYTE for the treatment of chronic lung diseases. H-CYTE will control the commercial development and facilitate the clinical trial investigation. After conducting joint research and development of these biologics, H-CYTE intends to pursue submission of an investigational new drug (IND) application for review by the FDA for treatment of COPD.

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

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



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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On a continual 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.

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

Results of Operations - Nine months Ended September 30, 2020 and 2019

Revenue, Cost of Sales and Gross Profit

The Company recorded revenue for the three and nine months ended September 30, 2020 of approximately $650,000 and $1,686,000, respectively. The Company recorded revenue for the three and nine months ended September 30, 2019 of approximately $2,742,000 and $6,498,000, respectively. The decrease in revenue for the three and nine months ended September 30, 2020, as compared to the prior year is attributable to suspending operations of the Biosciences division due to COVID-19 effective March 23, 2020 and not reopening until August and September 2020.

The Company recorded cost of sales for the three and nine ended September 30, 2020 of approximately $161,000 and $608,000, respectively. The Company recorded cost of sales for the three and nine months ended September 30, 2019 of approximately $550,000 and $1,539,000, respectively. The decrease in cost of sales for the three and nine months ended September 30, 2020, as compared to the prior year is attributable to suspending operations of the Biosciences division due to COVID-19 effective March 23, 2020. The Company'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, during normal operations, can be handled adequately with the Company's current level of personnel. The Company possesses the opportunity to increase the number of treatments performed without increasing personnel costs as it can leverage the current personnel's availability until the Company's treatment volume reaches critical mass. However, upon an increase in treatment volume beyond that capacity, the Company will need to hire additional personnel.

For the three and nine months ended September 30, 2020, the Company generated a gross profit totaling approximately $489,000 and $1,078,000, respectively. For the three months and nine months ended September 30, 2019, the Company generated a gross profit totaling approximately $2,192,000 and $4,959,000, respectively. The decrease in gross profit was due to suspending operations of the Biosciences division due to COVID-19 effective March 23, 2020 and not reopening until August and September 2020.



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Operating Expenses



Salaries and Related Costs



For the three and nine months ended September 30, 2020 the Company incurred approximately $606,000 and $2,425,000 in salaries and related costs, respectively. For the three and nine months ended September 30, 2019 the Company incurred approximately $1,914,000 and $7,079,000 in salaries and related costs, respectively. The decrease in salaries and related costs for the three months ended September 30, 2020 is mainly attributable to a 40% reduction in clinical and corporate staff due to LHI operations ceasing in March in response to COVID-19. The Company anticipates that salaries and related costs will be fairly consistent going forward as the Company shifts its business model in its pursuit of becoming a leading biomedical services company and due to its recent cost reduction measures effective in March 2020.

Other General and Administrative

For the three and nine months ended September 30, 2020, the Company incurred approximately, $863,000, and $3,128,000 in other general and administrative costs, respectively. For the three and nine months ended September 30, 2019, the Company incurred approximately, $2,026,000, and $5,310,000 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 and nine months ended September 30, 2020, professional fees were approximately $393,000 and $1,179,000, respectively. Total other general and administrative costs, for the three and nine months ended September 30, 2019, professional fees were approximately $523,000 and $1,379,000, respectively. Professional fees consist primarily of accounting, legal, patent and public company compliance costs as well as regulatory costs. Other general and administrative expenses will continue at a comparable rate in the future and include the continued costs of operating as a public company.



Research and Development


For the three and nine months ended September 30, 2020, the Company incurred approximately $200,000 and $1,150,000 in research and development expenses, respectively. For the three and nine months ended September 30, 2019, the Company did not incur research and development expenses. The $1,150,000 expense was in connection with the Rion services agreement. An additional $350,000 in expense will be incurred upon the achievement of certain milestones in the services agreement. At this time, the Company is not able to estimate when these milestones will occur.



Advertising


For the three and nine months ended September 30, 2020, the Company had approximately $52,000 and $222,000 respectively, in advertising costs. For the three and nine months ended September 30, 2019, the Company had approximately $1,468,000 and $4,188,000 respectively, in advertising costs. The decrease is attributable mainly to the Company determining that its marketing channels were not yielding the expected results for promoting the Company's Biosciences division. The Company expects advertising costs to increase back to first quarter 2020 levels over the remainder of the year as the Company begins to advertise again now that the LHI clinics are back in operation.

Depreciation and Amortization

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




Other Income (Expense)



Interest expense for the three and nine months ended September 30, 2020 was approximately $1,039,000 and $1,459,000, respectively. Interest expense for the three and nine months ended September 30, 2019 was approximately $80,000 and $259,000, respectively. The increase is attributable to the bridge loan financing that the Company received in April 2020 which converted to Series A Preferred Stock.



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The change in fair value of redemption put liability for the three and nine months ended September 30, 2020 was $98,000 and $273,000, respectively. There was no change in fair value of redemption put liability for the three and nine months ended September 30, 2019. The change in fair value of the derivative liability - warrants for the three and nine months ended September 30, 2020 was approximately $5,869,000 and $2,986,000, respectively. The change in fair value of the derivative liability - warrants for the three and nine months ended September 30, 2019 was approximately $884,000 and $884,000, respectively. The redemption put liability is related to the Series D Convertible Preferred Stock financing in the fourth quarter 2019. The Series B Convertible Preferred Stock's derivative liability-warrants was recorded as a measurement period adjustment to the purchase price allocation related to the Merger in the third quarter of 2019.

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 pertain 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.

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

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

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



Funding Requirements


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



Going Concern


The Company reported a net income of approximately $3,950,000 and a net loss of approximately $4,899,000 for the three and nine months ended September 30, 2020, respectively. The Company incurred net losses of approximately $2,624,000 and $11,616,000 for the three and nine months ended September 30, 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 its 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.



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

Liquidity and Sources of Liquidity

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



Debt


On April 17, 2020, the Company entered into the April SPA with the Purchasers pursuant to which the Company received an aggregate of $2,842,695 in gross proceeds through the sale to the Purchasers of the April Secured Notes and April Warrants to purchase shares of common stock of the Company in the April Offering. After taking into account subsequent closings occurring after April 17, 2020, an aggregate of thirty-three Purchasers participated in the April Offering by purchasing April Secured Notes and April Warrants. The 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 in an aggregate principal amount of $2,842,695. As part of the April Offering, the Notes previously issued by the Company to the Investor on March 27, 2020 and April 9, 2020 were amended and superseded by an April Secured Note in the amount of $1,000,000 issued to the Investor. Additionally, in connection with the April Offering, the Company entered into an amendment with the Investor with respect to the outstanding 12% Senior Secured Convertible Note due September 30, 2020, which was originally issued in 2018 and assumed in the Merger and which was purchased by the Investor from its original holder, George Hawes, on March 27, 2020 (the "Hawes Notes"). The Hawes Notes had a principal balance of $424,615 as of March 31, 2020 and December 31, 2019. The amendment to the Hawes Notes among other things, eliminates the requirement that the Company make monthly payments of accrued interest.

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

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

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



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



Equity


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

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

Cash activity for the nine months ended September 30, 2020 and 2019 is summarized as follows:

Working Capital Surplus/ (Deficit)



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




Cash Flows



Cash activity for the nine months ended September 30, 2020 and 2019 is
summarized as follows:



                                          Nine months Ended September 30,
                                              2020                 2019

Cash used in operating activities $ (5,461,140 ) $ (7,906,764 ) Cash used in investing activities

                 (2,285 )          (389,577 )
Cash provided by financing activities          7,476,576           8,594,590
Net increase in cash                    $      2,013,151       $     298,249



As of September 30, 2020, the Company had approximately $3,437,000 of cash on hand.

Off-Balance Sheet Arrangements

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



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Contractual Obligations and Commercial Commitments

Notes payable were assumed in the Merger and are due in aggregate monthly installments of approximately $5,800 and carry an interest rate of 5%. Each note originally had a maturity date of August 1, 2019. The Company finalized an eighteen-month extension to March 1, 2021. The promissory notes have an aggregate outstanding balance of approximately $67,000 and $78,000 at September 30, 2020 and December 31, 2019. The Company has not made payments on this note since February 10, 2020, due to COVID-19, resulting in accrued interest of $1,000.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 2,15 M - -
Net income 2020 -6,46 M - -
Net cash 2020 0,47 M - -
P/E ratio 2020 -0,27x
Yield 2020 -
Capitalization 4,65 M 4,65 M -
EV / Sales 2019 1,72x
EV / Sales 2020 0,75x
Nbr of Employees -
Free-Float 20,1%
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Managers and Directors
NameTitle
Robert Greif President & Chief Executive Officer
Jeremy Daniel Chief Financial & Accounting Officer
Raymond Monteleone Chairman
Tanya Rhodes Chief Technology Officer
William E. Horne Director
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