NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Description of the Company
DESCRIPTION
OF THE COMPANY
H-CYTE,
Inc (“the Company”) has shifted its focus to 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 company 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 was 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 September 30, 2022, the Company has 477,610 shares of common stock outstanding and 438,776,170 shares of Series
A Preferred Stock outstanding. As a result of the Reverse Stock Split, the Series A Preferred Stock conversion ratio is now one thousand
shares of Series A Preferred Stock converts into one share of common stock. Accordingly, the 438,776,170 outstanding shares of Series
A Preferred Stock are now convertible into an aggregate of 438,776 shares of common stock.
On September 7, 2022, the Company acquired all of
the membership interests of Jantibody LLC (“Jantibody”), a Nevada limited liability company. Jantibody is focused on the development
of novel proprietary immunotherapies targeted towards ovarian cancer, pancreatic cancer, and mesothelioma (see Note 9).
Impact
of COVID-19
The
coronavirus outbreak (“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.
Autologous
Infusion Therapy (“Infusion Division”)
The
Company’s Infusion Division develops and implements innovative treatment options in autologous cellular therapy (PRP-PBMC) to treat
chronic lung disorders. Committed to an individualized patient-centric approach, this division consistently provides oversight and management
of the highest quality care to the LHI clinics located in Tampa, Nashville, and Scottsdale, while producing positive medical outcomes
following the strictest CDC guidelines. During the first quarter of 2022, the Company decided to close the clinics in Tampa and Nashville.
During the second quarter of 2022, the Company closed its clinic in Scottsdale. The Company has now closed all of its clinical operations
in the autologous infusion therapy division which delivered treatments for patients with chronic respiratory and pulmonary disorders.
Biotech
Development (“Biotech Division”)
During
the year ended December 31, 2021, the Company completed a review of the R&D status regarding the exclusive product supply and services
agreements with Rion, LLC (“Rion”) to develop and distribute (post U.S. Food & Drug Administration, the “FDA”,
approval) a biologic combining its PRP-PBMC (“PRP”) technology with Rion’s exosomes (“EV”) technology for
the treatment of chronic obstructive pulmonary disease (“COPD”). The Company has determined a single entity biologic from
an alternative commercial source will be a more viable solution. The Company has decided to move away from Rion’s PRP technology
and is progressing towards alternate biologics and therapeutic devices to meet the needs of the business.
As
of June 30, 2022, the Company has closed all of the LHI clinics and has moved away from the Infusion Division as part of its future plans.
The Company has also decided that the Biotech Division will begin to transform into a medical biosciences incubator division focusing
on bringing new biologics and therapeutic device technologies to market for various health conditions.
Note
2 – Basis of presentation
BASIS
OF PRESENTATION
The
accompanying interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that
permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for
a complete presentation of the Company’s financial position, results of operations and cash flows, in conformity with generally
accepted accounting principles. The Company filed audited consolidated financial statements as of and for the fiscal years ended December
31, 2021 and 2020, which included all information and notes necessary for such complete presentation in conjunction with its 2021 Annual
Report on Form 10-K.
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
The
results of operations for the interim period ended September 30, 2022 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, 2021, which are contained in the Company’s 2021 Annual Report
on Form 10-K. For further discussion refer to Note 2 – “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, 2021.
Note
3 - Liquidity, Going Concern and Management’s Plans
LIQUIDITY,
GOING CONCERN AND MANAGEMENT’S PLANS
The
Company incurred net losses of approximately $2,279,000 and $8,806,000 for the three and nine months ended September 30, 2022. 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 $37,000 as of September 30, 2022, and approximately $30,000 as of November 14, 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.
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 September 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 approximately $1,170,000 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.
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 (6) months, the Company has the right to prepay the
notes at a premium of between 25% and 35% depending on when it is repaid.
On
June 9, 2022, 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 volume-weighted
average price (VWAP) of the five (5) days prior to conversion.
On
August 9, 2022, the Company entered into a securities purchase agreement for a total of $65,000 with an accredited investor. The note
issued is convertible into common stock at a 35% discount to the lowest trading price in the 20-day period prior to conversion. The
note bears interest at 10% and is due one year from issuance. For the first six (6) months, the Company has the right to prepay the
notes at a premium of between 25% and 35% depending on when it is repaid.
On
September 29, 2022, the Company entered into a securities purchase agreement with two accredited investors
for the sale of shares of Common Stock and warrants (the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Company
sold an aggregate of 112,500 shares of common stock and warrants to purchase 56,250 shares of Common Stock exercisable at $2.50 per share
for gross proceeds of $225,001. All of the shares described in this Current Report on Form 8-K are being offered and issued to accredited
investors in reliance upon exemptions from the registration requirements under Section 4(a)(2) under the Securities Act of 1933, as amended
(“Securities Act”), and Rule 506 of Regulation D promulgated thereunder.
Note
4 –Related Party Transactions
RELATED
PARTY TRANSACTIONS
Officers
and Board Members and Related Expenses
On
January 12, 2021, Mr. Raymond Monteleone was appointed as Chairman of the Board, Audit Committee Chair, and Compensation Committee Chair.
There are understandings between the Company and Mr. Monteleone for him to receive $5,000 per month to serve on the Board of Directors
and an additional $2,500 per quarter to serve as Chairman of the Board, Audit Committee Chair, and Compensation Committee Chair. Effective
January 1, 2022, Mr. Monteleone receives $7,500 per month to serve on the Board of Directors and an additional $2,500 per quarter to
serve as Chairman of the Board, Audit Committee Chair, and Compensation Committee Chair. Effective July 1, 2022, due to lack of working
capital, Mr. Monteleone receives $3,750 per month to serve on the Board of Directors and to serve as Chairman of the Board, Audit Committee
Chair, and Compensation Committee Chair. For the three and nine months ended September 30, 2022, the Company expensed $13,750 and $63,750,
respectively, for board of director fees to Mr. Monteleone. For the three and nine months ended September 30, 2021, the Company expensed
$18,000 and $53,000 respectively, for board of director fees to Mr. Monteleone.
Mr.
Michael Yurkowsky entered into an oral agreement with the Company on October 1, 2020, in which Mr. Yurkowsky will receive $4,167 per
month to serve on the Board of Directors. For the three and nine months ended September 30, 2021, the Company expensed $13,000 and $38,000
respectively, for board of director fees to Michael Yurkowsky. On December 1, 2021, the Board of Directors of the Company appointed Michael
Yurkowsky to serve as the Company’s Chief Executive Officer. Upon Mr. Yurkowsky’s appointment as CEO in December 2021, the
Company terminated his payments for serving on the Board of Directors.
On
January 12, 2021, Mr. William Horne stepped down as Chairman of the Board. Mr. Horne will remain a member of the Board. Effective March
1, 2021, the Company entered into an oral agreement with Mr. Horne in which Mr. Horne will receive $4,167 per month to serve on the Board
of Directors. Mr. Horne agreed to continue to defer the $108,000 in base salary deferred by him in 2018 until such time as there is a
positive cash flow to meet the Company’s financial obligations and then the Company and Mr. Horne will work together in good faith
to negotiate a payment plan for such deferred salary. Effective December 1, 2021, Mr. Horne will receive $5,000 per month to serve on
the Board of Directors. Effective July 1, 2022, due to lack of working capital, Mr. Horne receives $2,500 per month to serve on the Board
of Directors. For the three and nine months ended September 30, 2022, the Company expensed $7,500 and $42,500, respectively, in board
of director fees to Mr. Horne. For the three and nine months ended September 30, 2021, the Company expensed $13,000 and $29,000, respectively,
for board of director fees to Mr. Horne.
Mr.
Richard Rosenblum entered into an oral agreement with the Company effective January 17, 2022, in which Mr. Rosenblum will receive $5,000
per month to serve on the Board of Directors.
Effective July 1, 2022, due to lack of working capital, Mr. Rosenblum receives $2,500
per month to serve on the Board of Directors.
For the three and nine months ended September 30, 2022, the Company expensed $7,500
and $35,000,
respectively.
Mr.
Matthew Anderer entered into an oral agreement with the Company effective January 17, 2022, in which Mr. Anderer will receive $5,000
per month to serve on the Board of Directors.
Effective July 1, 2022, due to lack of working capital, Mr. Anderer receives $2,500
per month to serve on the Board of Directors.
For the three months and nine months ended September 30, 2022, the Company expensed $7,500
and $35,000, respectively.
Debt
and Other Obligations
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 17, 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.
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:
|
1) |
$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 |
|
2) |
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%.
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 $2.2 million
loss upon extinguishment of debt in the nine months ended September 30, 2022, which was comprised of the following:
SCHEDULE OF LOSS UPON EXTINGUISHMENT
| |
| | |
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 minimus 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.
The
Company chose to early adopt effective January 1, 2021, ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging - Contract in Entity’s Own Equity. Thus, the April 2021 and October 2021 Note Purchase Agreements did
not require consideration of a beneficial conversion feature and were accounted for solely as debt on the balance sheets.
On
August 9, 2022, the Company entered into a securities purchase agreement for a total of $65,000 with an accredited investor. The note
issued is convertible into common stock at a 35% discount to the lowest trading price in the 20-day period prior to conversion. The
note bears interest at 10% and is due one year from issuance. For the first six (6) months, the Company has the right to prepay the
notes at a premium of between 25% and 35% depending on when it is repaid.
Note
5 - Equity Transactions
EQUITY TRANSACTIONS
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 by March 31, 2022 of each existing warrant
originally issued in April 2020. As of September 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 approximately $1,170,000 to the Company.
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, the Company has approximately 477,610 shares of common stock outstanding and 438,776,170 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 438,776,170 outstanding shares of Series A Preferred Stock
are now convertible into an aggregate of 438,776 shares of common stock.
The
following table summarizes the Company’s common and preferred stock outstanding by class. The number of common stock shares has
been adjusted to reflect a one-for-one thousand reverse stock split that became effective on June 13, 2022.
SCHEDULE
OF COMMON AND PREFERRED STOCK OUTSTANDING
| |
September 30, 2022 | | |
December 31, 2021 | |
Common Stock | |
| 477,610 | | |
| 166,394 | |
Series A Preferred Stock | |
| 438,776,170 | | |
| 501,887,534 | |
Series
A Preferred Stock
During
the three and nine months ended September 30, 2022, 55,802,949
and 63,111,364
shares of Series A Preferred Stock were converted
to 55,805
and 63,114
shares of Common Stock at the request of certain
Series A Preferred Shareholders, respectively.
Voting
Rights
Holders
of Series A Preferred Stock (“Series A Holders”) have the right to receive notice of any meeting of holders of common stock
and to vote upon any matter submitted to a vote of the holders of common stock. Each Series A Holder shall vote on each matter on an
as converted basis submitted to them with the holders of common stock.
Conversion
Series
A Preferred Stock converts to common stock at a one-for-one thousand ratio immediately upon request of the Series A Holder.
Liquidation
Series
A Preferred Stock does not have preferential treatment over common stock shareholders if the Company liquidates or dissolves.
Share-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.
Stock
Option Activity
On
April 1, 2021, the Board of Directors of the Company approved and granted to certain directors and officers of the Company an aggregate
of 54,750 stock options of which 4,750 were immediately vested on the date of grant. Each option granted has an exercise price of $70.00
per share and an expiration date of ten years from the date of grant. These options are not included in the Company’s current stock
option plan as they were granted outside of the plan.
The
Board of Directors decided not to renew the former CEO’s (Robert Greif) employment contract; therefore, the unvested shares were
forfeited resulting in a reduction of share-based compensation of approximately $205,000 for the period ended September 30, 2021 that
was recognized during the period ended June 30, 2021.
On
June 10, 2022, the Company amended its Articles of Incorporation to effectuate a one-for-one thousand reverse stock split of its common
stock. The Reverse Split was approved by FINRA on June 10, 2022 and effectuated on June 13, 2022.
At
September 30, 2022, 29,635
options were outstanding and 20,510
were vested. At September 30, 2021, 29,635
options were outstanding and 14,802
were vested. For the three months and nine months ended September 30, 2022, the Company recognized approximately $61,000
and $246,000
in stock-based compensation expense, respectively, which is included in share based compensation. For the three months and nine months ended September 30, 2021, the Company recognized approximately $162,000
and $1,024,000 in
stock-based compensation expense, respectively, which is included in share based compensation. At September 30, 2022, the Company
has approximately $206,000
of unrecognized compensation costs related to non-vested stock options, which is expected to the recognized over a weighted average
period of approximately 2.17 years.
Inputs
used in the valuation models are as follows:
SCHEDULE
OF ASSUMPTIONS USED TO CALCULATE FAIR VALUE OF STOCK OPTIONS
2021 Grants |
Option value | |
$ | 54.00 | | |
| to | | |
$ | 56.00 | |
Risk Free Rate | |
| 0.90 | % | |
| to | | |
| 1.37 | % |
Expected Dividend- yield | |
| - | | |
| to | | |
| - | |
Expected Volatility | |
| 173.99 | % | |
| to | | |
| 176.04 | % |
Expected term (years) | |
| 5 | | |
| to | | |
| 7 | |
The
following is a summary of stock option activity for the nine months ended September 30, 2021 and 2022:
SUMMARY
OF STOCK OPTION ACTIVITY
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Term (Years) | |
Outstanding at December 31, 2020 | |
| 410 | | |
$ | 1,390.00 | | |
| 6.72 | |
Granted | |
| 54,750 | | |
| 70.00 | | |
| 9.50 | |
Expired/Cancelled | |
| (25,525 | ) | |
| 70.00 | | |
| — | |
Outstanding at September 30, 2021 | |
| 29,635 | | |
$ | 100.00 | | |
| 9.41 | |
| |
| | | |
| | | |
| | |
Exercisable at September 30, 2021 | |
| 14,802 | | |
$ | 100.00 | | |
| 9.41 | |
| |
| | | |
| | | |
| | |
Outstanding at December 31, 2021 | |
| 29,635 | | |
$ | 86.48 | | |
| 9.20 | |
Granted | |
| — | | |
| — | | |
| — | |
Outstanding at September 30, 2022 | |
| 29,635 | | |
$ | 86.48 | | |
| 8.46 | |
| |
| | | |
| | | |
| | |
Exercisable at September 30, 2022 | |
| 20,510 | | |
$ | 93.81 | | |
| 8.44 | |
The
following is a summary of the Company’s non-vested shares for the nine months ended September 30, 2021 and 2022:
SUMMARY
OF STOCK OPTION ACTIVITY NON-VESTED
| |
Shares | | |
Weighted Average Grant Date Fair Value | |
Non-vested at December 31, 2020 | |
| - | | |
$ | - | |
Granted | |
| 54,750 | | |
| 30.00 | |
Vested | |
| (14,417 | ) | |
| 50.00 | |
Forfeited | |
| (25,500 | ) | |
| 70.00 | |
Non-vested at September 30, 2021 | |
| 14,833 | | |
$ | 110.00 | |
| |
| | | |
| | |
Non-vested at December 31, 2021 | |
| 14,250 | | |
$ | 60.00 | |
Vested | |
| (5,125 | ) | |
| 54.56 | |
Non-vested at September 30, 2022 | |
| 9,125 | | |
$ | 55.61 | |
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 and if-converted methods, as applicable. Any potentially dilutive securities are antidilutive due to the Company’s
net losses.
The
Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been
antidilutive:
SCHEDULE
OF ANTI-DILUTIVE SECURITIES OF BASIC AND DILUTED NET LOSS PER SHARE
| |
2022 | | |
2021 | |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Warrants to purchase common stock (in the money) | |
| 56,250 | | |
| 385,033 | |
Series A Preferred Stock convertible to common stock | |
| 438,776 | | |
| 515,874 | |
Total | |
| 495,026 | | |
| 900,907 | |
Excluded
from the above table are 384,788 warrants and 29,635 stock options for the nine months ended September 30, 2022 and 22,608 warrants and
29,635 stock options for the nine months ended September 30, 2021 as they are out of the money (exercise price greater than the stock
price). Inclusion of such would be anti-dilutive. 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 438,776,170 outstanding
shares of Series A Preferred Stock are convertible into an aggregate of 438,776 shares of common stock at September 30, 2022.
Note
6 – Commitments & Contingencies
COMMITMENTS
& CONTINGENCIES
CEO
Compensation Agreement
On
December 23, 2021, the Company entered into an employment agreement (the “Employment Agreement”) with Michael Yurkowsky,
the Company’s Chief Executive Officer, to continue to serve as the Chief Executive Officer of the Company. Under the Employment
Agreement, which commenced on December 1, 2021 (the “Effective Date”) and has a term of one year from the Effective Date
(the “Employment Period”), Mr. Yurkowsky will receive a base salary of $180,000 per year. Upon the expiration of the Employment
Period, Mr. Yurkowsky’s employment with the Company will be on an at-will basis.
In
addition to his base salary, Mr. Yurkowsky may receive a one-time cash bonus in gross amount equal to $100,000 if (i) the Company’s
stock is listed and quoted on the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, or the New York Stock
Exchange; or (ii) the Company secures and receives financing of at least $10,000,000.
As
additional compensation, Mr. Yurkowsky shall receive shares of common stock of the Company representing 1% of the Company’s fully
diluted equity as of the grant date if the Company achieves a market capitalization of at least $250 million for 60 consecutive days
during the Employment Period (the “Equity Award”). If the Company achieves a market capitalization of at least $500 million
for 60 consecutive days during the Employment Period, the executive shall receive an additional Equity Award of 1%, such that he has
in the aggregate received shares of common stock of the Company representing 2% of the Company’s fully diluted equity as of the
date of grant. These market conditions were reflected in the grant date fair value of the award as required under ASC 718 Compensation-Stock
Compensation.
The
Equity Award was measured at fair value on its grant date using a Monte Carlo simulation model. The Monte Carlo simulation model includes
assumptions for the expected term, volatility, and dividend yield, each of which are determined in reference to the Company’s historical
results. The Company will recognize aggregate stock-based compensation expense of approximately $328,000 related to the Equity Award
on a straight-line basis over the derived service period determined by the Monte Carlo simulation model, which was 0.71 years. During
the three and nine month period ending September 30, 2022, the Company recognized approximately $60,000 and $290,000, respectively, in
compensation expense related to the Equity Award. If the market capitalization targets are met sooner than the derived service period,
the Company will adjust its stock-based compensation to reflect the cumulative expense associated with the vested Equity Award. The Company
will recognize expense if the requisite service is provided, regardless of whether the market conditions are achieved.
Consulting
Agreements
The
Company entered into a consulting agreement with Tanya Rhodes of Rhodes & Associates, Inc, effective June 15, 2020, to serve as the
Chief Science Officer of the Company. The agreement has a minimum term of six months with an average fee of $21,000 per month plus expenses
which increases 5% per month on January 1 of each calendar year unless an alternative retainer amount is negotiated and agreed upon by
both parties. The Company extended the contract on January 1, 2021, resulting in monthly expenses of $22,500 plus expenses for services
rendered. As of January 1, 2022, Ms. Rhodes is continuing to receive $22,500 and is engaged on a month-to-month basis.
The
Company entered into a consulting agreement with Alpha IR Group on March 1, 2022, to provide investor relations to the Company. The agreement
is for twelve months with an average service fee of $9,750 per month.
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.
The
Company is involved in a lawsuit with Sinclair Broadcast Group, Inc. (“Sinclair”) which was filed on September 8, 2020, in
the Circuit Court for the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. Sinclair has filed suit alleging breach
of contract for advertising services in the amount of approximately $75,000 plus interest and costs. The Company has retained legal counsel
for its defense against the suit. The amount is recorded in accounts payable as of September 30, 2022.
The
Company is involved in a lawsuit with ITN Networks, LLC (“ITN”) which was filed on July 22, 2021, in the Circuit Court for
the Thirteenth Judicial Circuit in and for Hillsborough County, Florida. ITN has filed suit alleging breach of contract for advertising
services in the amount of approximately $75,000 plus interest and costs. The Company has retained legal counsel for its defense against
the suit. The amount is recorded in accounts payable as of September 30, 2022.
Note
7 – Debt
DEBT
Notes
Payable
Notes
payable were assumed in the Merger (for further discussion, see Note 1 - “Overview” to the consolidated financial statements
in the Company’s 2020 Annual Report on Form 10-K) 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 $69,000 at June 30, 2022 and December 31,
2021. The Company has not made payments on these notes since February 10, 2020, due to COVID-19. On April 19, 2022, the Company entered
into a promissory note modification agreement with the Lender extending the maturity date of the notes to April 1, 2024. The modification
agreement also reduces the interest rate from 5% to 3% and requires a monthly payment of $1,000 per month with a balloon payment at the
end of the modified term.
Paycheck
Protection Program
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 Paycheck Protection Program (“PPP Loan”). The PPP Loan bears an interest rate of 1% per annum
and matures on April 29, 2022. The Company elected to use a 24-week Covered Period, per the SBA Paycheck Protection Program guidelines,
which ended on October 14, 2020.
The
Company did 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
Company received notification from the Small Business Administration (“SBA”), dated August 17, 2021, notifying it that $689,974
in principal and $8,847 in interest was forgiven under the guidelines of the Paycheck Protection Program. As of September 30, 2022, the PPP
loan was paid in full.
Note
8 - Common Stock Warrants
COMMON
STOCK WARRANTS
A
summary of the Company’s warrant issuance activity and related information for the nine months ended September 30, 2021 and
2022 is as follows:
SCHEDULE
OF ISSUANCE OF WARRANTS
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | |
Outstanding and exercisable at December 31, 2020 | |
| 413,424 | | |
$ | 15.00 | | |
| 10.30 | |
Expired | |
| (5,783 | ) | |
| 33.00 | | |
| — | |
Outstanding and exercisable at September 30, 2021 | |
| 407,641 | | |
| 58.00 | | |
| 8.42 | |
| |
| | | |
| | | |
| | |
Outstanding and exercisable at December 31, 2021 | |
| 406,301 | | |
$ | 34.88 | | |
| 8.17 | |
Expired | |
| (22,513 | ) | |
| 373.85 | | |
| — | |
Exercised | |
| (83,579 | ) | |
| 14.00 | | |
| — | |
Granted | |
| 140,829 | | |
| 9.41 | | |
| 4.63 | |
Outstanding and exercisable at September 30, 2022 | |
| 441,038 | | |
$ | 12.52 | | |
| 6.84 | |
The
fair value of all warrants issued are determined by using the Black-Scholes valuation technique. The inputs used in the Black-Scholes
valuation technique to value each of the warrants as of their respective issue dates are as follows:
SCHEDULE
OF ISSUANCE OF WARRANTS VALUATION TECHNIQUE
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 (%) | |
Granted for inducement agreement | |
| 1/19/2022 | | |
| 3,732 | | |
$ | 63.25 | | |
$ | 14.00 | | |
$ | 62.00 | | |
| 5 years | | |
| 1.62 | | |
| 187.79 | |
Granted for inducement agreement | |
| 1/20/2022 | | |
| 372 | | |
$ | 64.50 | | |
$ | 14.00 | | |
$ | 64.00 | | |
| 5 years | | |
| 1.62 | | |
| 187.85 | |
Granted for inducement agreement | |
| 1/20/2022 | | |
| 187 | | |
$ | 64.50 | | |
$ | 14.00 | | |
$ | 64.00 | | |
| 5 years | | |
| 1.62 | | |
| 187.85 | |
Granted for inducement agreement | |
| 1/24/2022 | | |
| 374 | | |
$ | 48.00 | | |
$ | 14.00 | | |
$ | 47.00 | | |
| 5 years | | |
| 1.53 | | |
| 188.01 | |
Granted for inducement agreement | |
| 1/25/2022 | | |
| 3,744 | | |
$ | 49.10 | | |
$ | 14.00 | | |
$ | 48.00 | | |
| 5 years | | |
| 1.56 | | |
| 188.00 | |
Granted for inducement agreement | |
| 2/02/2022 | | |
| 3,741 | | |
$ | 44.55 | | |
$ | 14.00 | | |
$ | 44.00 | | |
| 5 years | | |
| 1.60 | | |
| 188.25 | |
Granted for inducement agreement | |
| 2/04/2022 | | |
| 6,935 | | |
$ | 44.38 | | |
$ | 14.00 | | |
$ | 43.00 | | |
| 5 years | | |
| 1.78 | | |
| 188.33 | |
Granted for inducement agreement | |
| 2/04/2022 | | |
| 13,870 | | |
$ | 44.38 | | |
$ | 14.00 | | |
$ | 43.00 | | |
| 5 years | | |
| 1.78 | | |
| 188.33 | |
Granted for services provided | |
| 2/09/2022 | | |
| 1,000 | | |
$ | 32.00 | | |
$ | 14.00 | | |
$ | 31.00 | | |
| 5 years | | |
| 1.82 | | |
| 188.69 | |
Granted for inducement agreement | |
| 2/22/2022 | | |
| 41,609 | | |
$ | 32.88 | | |
$ | 14.00 | | |
$ | 32.00 | | |
| 5 years | | |
| 1.85 | | |
| 188.59 | |
Granted for inducement agreement | |
| 2/22/2022 | | |
| 693 | | |
$ | 32.88 | | |
$ | 14.00 | | |
$ | 32.00 | | |
| 5 years | | |
| 1.85 | | |
| 188.59 | |
Granted for inducement agreement | |
| 3/21/2022 | | |
| 8,322 | | |
$ | 28.00 | | |
$ | 14.00 | | |
$ | 27.00 | | |
| 5 years | | |
| 2.33 | | |
| 194.01 | |
Granted for securities purchase agreement | |
| 9/27/2022 | | |
| 56,250 | | |
$ | 6.00 | | |
$ | 2.50 | | |
$ | 5.94 | | |
| 5 years | | |
| 4.21 | | |
| 213.54 | |
The
fair value of warrants issued during the three and nine months ended September 30, 2022 totaled approximately $334,000 and
is included in warrant expense. The fair value of warrants issued as a result of the warrant inducement during the three and nine
months ended September 30, 2022 totaled approximately $0
and $3,024,000,
respectively, and is included in inducement expense. The methods described above may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are
appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair
value of certain financial instruments could result in a different fair value measurement at the reporting date.
Note
9 – Acquisition
The
Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted
for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the
fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the
screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required
as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the definition
of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business
combination or an acquisition of assets.
If
an acquisition is determined to be a business combination as indicated in ASC 805, Business Combinations, the assets acquired,
and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. The Company recognizes
and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the
identified net assets acquired.
If
an acquisition is determined to be an asset acquisition, the Company accounts for the transaction under ASC 805-50, which requires
the cost of the asset acquisition, including transaction costs, to be allocated to identifiable assets acquired and liabilities
assumed based on a relative fair value basis. Assets acquired as part of an asset acquisition that
are considered to be in-process research and development (IPR&D) are immediately expensed unless there is an alternative future
use in other research and development projects. Goodwill is not recognized in an asset acquisition and any excess consideration
transferred over the fair value of the net assets acquired is allocated to the identifiable assets based on relative fair values (excluding
non-qualifying assets). If the cost of the asset acquisition is less than the fair value of the net assets acquired, no gain
is recognized in earnings.
Contingent
consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes
payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis
in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired
asset or group of assets.
Pursuant
to the Jantibody Agreement, the Company issued the equity holders of Jantibody an aggregate of 52,023 shares of the Company’s common
stock which represented 15% of the Company’s common stock on a fully diluted basis at the time of the transaction. In addition,
for every share of the Company’s common stock issued as a result of the future conversion of the Company’s dilutive instruments,
including Series A preferred stock, warrants, stock options, and convertible notes, the Jantibody members will receive 15% of the aggregate
number of shares issued (the “Anti-Dilution” shares). The Anti-Dilution shares will be issued before the end of each fiscal
quarter.
The
Company has agreed to issue the Jantibody holders an additional 2.0% of the Company’s common stock then outstanding upon the enrollment
of the first patient in a Phase I FDA trial and additional 3.0% of the Company’s then outstanding common stock on a fully diluted
basis upon the enrollment of the first patient in a Phase [III] FDA trial. The Company determined the contingent consideration was not
subject to derivative accounting and will be recognized when the contingency is resolved, and the consideration is paid or becomes payable
as outlined in ASC 450, Contingencies.
The
Company determined this transaction represented an asset acquisition as defined by ASC 805, Business Combinations, as
substantially all of the value was in a single in-process research and development (“IPR&D”) group, which included the
small molecule drug CXCR4 inhibitor, AMD3100, and/or checkpoint inhibitors (CPI) for anti-cancer immune modulation. As a result, the
consideration transferred was allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on
their relative fair values resulting in approximately $1,240,000
being assigned to the IPR&D asset and approximately
$1,000,000
to assumed liabilities. The liabilities assumed were current accounts payable and as such were recorded a book value.
The
purchase price of approximately $247,000 represented 52,023 shares of the Company’s common stock, 344,159 Anti-Dilution shares,
and direct transaction costs of $21,600. The purchase
price was allocated, on a relative fair value basis, to the acquired intellectual property, and the acquired net assets as follows:
SCHEDULE
OF NET IDENTIFIABLE ASSETS ACQUIRED
Consideration: | |
| | |
Common stock | |
$ | 29,557 | |
Common stock (anti-dilution shares, to be issued – included in other current liabilities) | |
| 195,532 | |
Direct transaction costs | |
| 21,600 | |
Total costs of the asset acquisition | |
$ | 246,689 | |
Assets acquired | |
| | |
Cash | |
$ | 469 | |
Liabilities assumed – legal and administrative costs | |
| (999,728 | ) |
Intangible assets: IPR&D | |
| 1,245,948 | |
Net identifiable assets acquired | |
$ | 246,689 | |
The
IPR&D had not yet reached technological feasibility and had no alternative future use; thus, the purchased IPR&D asset and related
costs were expensed immediately subsequent to the acquisition within the consolidated statements of operations.
Note
10 - Subsequent Events
Pursuant to the Purchase Agreement, the Company
sold an aggregate of 15,000 shares of common stock and warrants to purchase 7,250 shares of Common Stock exercisable at $2.50 per share
for gross proceeds of $30,000.