The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes thereto appearing in Part I, Item 1 of this Quarterly
Report. Historical results and trends that might appear in this Quarterly Report
should not be interpreted as being indicative of future operations.
Overview
H-CYTE, Inc ("the Company") is a hybrid-biopharmaceutical company dedicated to
developing and delivering new treatments for patients with chronic respiratory
and pulmonary disorders. During the last two years, the Company has evolved into
two separate divisions with its entrance into the biologics and device
development space ("Biotech Division"). This division is complementary to the
Company's current Lung Health Institute (LHI) autologous infusion therapy
business ("Infusion Division") and is focused on underserved disease states. On
September 8, 2021, the Company announced that its Lung Health Institute
facilities changed their names to Centers for Respiratory Health as the clinics
continue to deliver treatments for patients with chronic respiratory and
pulmonary disorders.
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, PLLC ("LI Dallas"), Lung Institute Nashville, PLLC ("LI Nashville"),
Lung Institute Pittsburgh, PLLC ("LI Pittsburgh"), and Lung Institute
Scottsdale, LLC ("LI Scottsdale"), as Variable Interest Entities ("VIEs").
Additionally, H-CYTE Management, LLC is the operator and manager of the various
Lung Health Institute (LHI) clinics: LI Dallas, LI Nashville, LI Pittsburgh, and
LI Scottsdale. The LI Dallas and LI Pittsburgh clinics did not reopen in 2020
after the temporary closure of all LI clinics due to COVID-19. These two clinics
will remain permanently closed. During the first quarter of 2022, the Company
decided to close the LI Tampa and LI Nashville clinics, the LI Scottsdale clinic
will remain open.
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 months Ended March 31, 2022 and 2021
Revenue, Cost of Sales and Gross Profit
The Company recorded revenue of approximately $380,000 and $376,000 for the
three months ended March 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022 and 2021, the Company generated a
gross profit totalling approximately $293,000 and $178,000, respectively. The
increase in gross profit, as compared to the prior quarter, is attributable to
the Company using part-time staff on an as needed basis in the Scottsdale and
Tampa clinics along with the closing of the Nashville clinic in February 2022.
Operating Expenses
Salaries and Related Costs
For the three months ended March 31, 2022 and 2021, the Company incurred
approximately $347,000 and $662,000 in salaries and related costs, respectively.
The decrease in salaries and related costs for the three months ended March 31,
2022, 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.
Other General and Administrative
For the three months ended March 31, 2022 and 2021, the Company incurred
approximately, $510,000 and $919,000, in other general and administrative costs,
respectively. The decrease, as compared to the prior year, is attributable to
the economic impact that COVID-19 has had on the Company. The decrease is
attributable to cost saving measures in response to the COVID-19 pandemic. The
Company made adjustments to its corporate structure by reducing expenses in
marketing, sales, and operations due to decreased patient volume. The Company
also closed the Dallas and Pittsburgh clinics permanently in 2020 and reduced
the Tampa and Scottsdale clinics to part-time in 2021.
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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 $3,892,000 and $1,408,000 for
the three months ended March 31, 2022 and 2021, respectively. 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 $341,000 as of March 31, 2022 and
approximately $92,000, as of April 25, 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 short-term 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 be forced to discontinue
operations. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
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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 March 31, 2022 with an annual interest rate of 8%. The
Notes are convertible into shares of Common Stock at a discount of 20% to the
price paid for such New Securities in the next round of financing that meets the
definition of Qualified Financing as defined in the April 2021 Note Purchase
Agreement. The Notes are secured by the assets of the Company under a security
agreement with the Holders. The lead investor of the April 2021 Note Purchase
Agreement, FWHC Bridge, LLC, advanced $1,500,000 of the total amount to the
Company. FWHC Bridge, LLC is an affiliated entity of FWHC, LLC, which is a
principal stockholder and related party of the Company. An additional affiliate
of FWHC, LLC provided an additional $25,000 as part of the April 2021 Note
Purchase Agreement.
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 March 31, 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. Management is currently working with the noteholders on the
extension of the maturity of the outstanding notes.
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 $0.014
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
March 31, 2022, the Company had eleven warrant holders exercise an aggregate of
83,579,296 warrants at $0.014 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 March 31, 2022 and December 31, 2021 is
summarized as follows:
Working Capital Surplus/ (Deficit)
As Of
March 31, 2022 December 31, 2021
Current Assets $ 578,017 $ 197,456
Current Liabilities 4,796,457 4,920,880
Working Capital Deficit $ (4,218,440 ) $ (4,723,424 )
Cash Flows
Cash activity for the three months ended March 31, 2022 and 2021 is summarized
as follows:
Three months Ended March 31,
2022 2021
Cash used in operating activities $ (884,259 ) $ (1,306,813 )
Cash used in investing activities
- (1,522 )
Cash provided by financing activities 1,130,371 -
Net increase (decrease) in cash $ 246,112 $ (1,308,335 )
As of March 31, 2022, the Company had approximately $341,000 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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