| ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Overview
H-CYTE,
Inc (“the Company”) has evolved from focusing on treating chronic lung conditions after the closure of its lung treatment
clinics due to COVID-19. The Company is currently focusing on acquiring and developing early-stage companies or their technologies in
the areas of therapeutics, medical devices, and diagnostics. The goal is to develop these companies and incubate their technologies to
meaningful clinical inflection points.
On
June 3, 2022, the Company closed its clinic in Scottsdale, Arizona. The Company has now closed all of its clinical operations in the
autologous infusion therapy business which delivered treatments for patients with chronic respiratory and pulmonary disorders. The Company
will continue to pursue Food and Drug Administration (“FDA”) 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 through a joint venture. The
Company has implemented the transition 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 prior to their
closure. All LHI clinics are closed as of December 31, 2022.
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 December 31, 2022, the Company has 618,506 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 8).
On
December 22, 2022, the Company acquired all of the membership interests in Scion Solutions, LLC (“Scion”). Scion is a
life sciences company that has developed a new technology in regenerative medicine specifically for limb salvage. Their proprietary
product SkinDisc (patent pending) is a combination of stem cells and several other molecular components that stimulate tissue
regeneration (see Note 8).
Impact
of COVID-19
COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the Company continues to monitor the impact
on its operations of the COVID-19 pandemic and its aftermath. The Company believes the effect of the COVID-19 pandemic and certain public
and governmental responses to it have negatively affected its results since the pandemic’s inception.
During the COVID-19 pandemic and its aftermath, the Company experienced material reductions in demand and net revenues at its lung treatment
centers. This reduction in demand led to the Company shifting its focus from treating chronic lung disease to acquiring and developing
early-stage companies or their technologies in the areas of therapeutics, medical devices, and diagnostics.
Results
of Operations – For the years ended December 31, 2022 and 2021
H-CYTE,
Inc
Statement
of Operations
| | |
2022 | | |
2021 | | |
Change | | |
Change % | |
| Revenues | |
$ | 453,460 | | |
$ | 1,611,518 | | |
$ | (1,158,058 | ) | |
| -72 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Gross Profit | |
| 335,859 | | |
| 906,813 | | |
| (570,954 | ) | |
| -63 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Operating Expenses | |
| 5,441,632 | | |
| 6,192,417 | | |
| (750,839 | ) | |
| -12 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Operating Loss | |
| (5,105,773 | ) | |
| (5,285,604 | ) | |
| 179,831 | | |
| 3 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Other (Expense) Income | |
| (5,193,807 | ) | |
| 486,297 | | |
| (5,680,104 | ) | |
| -1168 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Net Loss | |
$ | (10,299,580 | ) | |
$ | (4,799,307 | ) | |
$ | (5,500,273 | ) | |
| -115 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Net Loss attributable to common stockholders | |
$ | (10,299,580 | ) | |
$ | (4,799,307 | ) | |
$ | (5,500,273 | ) | |
| -115 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Loss per share - Basic and diluted | |
$ | (35.06 | ) | |
$ | (32.93 | ) | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted average outstanding shares - basic and diluted (1) | |
| 293,788 | | |
| 145,736 | | |
| | | |
| | |
| (1) |
The
number of outstanding shares of common stock have been adjusted for all periods presented to reflect a one-for-one thousand reverse
stock split that became effective on June 13, 2022. The amounts in common stock and additional paid-in capital were adjusted as of
the effective date of the one-for-one thousand reverse stock split. See Note 1 for additional information. |
Revenue
and Gross Profit
The
Company recorded revenue of approximately $453,000 and $1,612,000 for the years ended December 31, 2022, and 2021, respectively. The
Company has closed all of the LHI Clinics as of December 31, 2022 which was the Company’s only current source of revenue. The Company
has continued to transform itself into a biologics and therapeutic device incubator company to bring new technologies to market.
For
the years ended December 31, 2022 and 2021, the Company generated a gross profit totaling approximately $336,000 and $907,000, respectively.
Operating
Expenses
Salaries
and Related Costs
For
the years ended December 31, 2022 and 2021, the Company incurred approximately $1,054,000 and $2,214,000 in salaries and related costs,
respectively. The decrease in salaries and related costs, as compared to the prior year, is due to the adjustments to the Company’s
corporate structure by reducing expenses in marketing, sales, and operations due to decreased patient volume and closing of the LHI clinics.
As of December 31, 2022, due to lack of financial resources, the Company has incurred $294,000 in unpaid salaries and wages.
Other
General and Administrative
For
the years ended December 31, 2022 and 2021, the Company incurred approximately $1,392,000 and $2,700,000 in other general and administrative
costs, respectively. The Company adjusted its corporate structure by reducing expenses in marketing, sales, and operations due to decreased
patient volume and closing of the LHI clinics.
Other
Income/Expense
For
the years ended December 31, 2022 and 2021, interest expense was approximately $368,000 and $177,000 respectively. The increase was related to the Company issuing additional convertible
notes in 2022 compared to 2021. For the year ended
December 31, 2021 the Company received forgiveness of the PPP loan in the amount of approximately $699,000.
For
the year ended December 31, 2022, the Company incurred approximately $3,133,000 in inducement expense related to the warrant inducement
(see Note 9). For the year ended December 31, 2022, the Company incurred approximately $377,000 in warrant expense related to the securities
purchase agreements. For the year ended December 31, 2022, the Company incurred approximately $2,196,000, related to the
loss on extinguishment of convertible notes payable (see Note 4).
Liquidity, Going Concern, and Sources of Liquidity
The Company had a negative cash balance of approximately $4,000 as of December 31, 2022, which is included in current liabilities, and cash on hand of approximately $3,000 as of
May 8, 2023. 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.
The
Company has historically incurred losses from operations and expects to continue acquisitions and generate negative cash flows as the Company implements its updated strategic business plan. 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 $10,300,000 and $4,799,000 for the years ended December 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. Accordingly, the Company cannot predict the extent to which
its financial condition and results of operations will be affected.
There
can be no assurance that the Company will be able to raise additional funds or that the terms and conditions of any future financing
will be workable or acceptable to the Company or its shareholders. If the Company is unable to fund its acquisitions and 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.
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) related party 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 17, 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) related party 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.
On
February 22, 2022, the Company entered into a Debt Conversion Agreement (the “Amendment Agreement”) which i) provided for
an additional round of convertible debt financing (“Tranche 2 Notes”) of up to $500,000 and ii) amended the conversion price
on the convertible notes issued April 1, 2021 and October 8, 2021 (Tranche 1 Notes”) from 80% of the price paid in a Qualified
Financing (proceeds of at least $15 million), to the lesser of (x) $0.002 and (y) the price paid in a Qualified Financing (proceeds of
at least $10 million). The Amendment Agreement also provides the following Milestone Payments:
| |
3) |
$1,000,000
after filing a premarket notification pursuant to Section 510(k) of the Food, Drug and Cosmetic Act, of its intent to market its
PRP cellular therapy |
| |
4) |
Following
the closing of a Qualified financing, 25% of all proceeds raised in excess of $10 million (not to exceed $1 million) |
The
Milestone Payments are not to exceed $2 million, and the Amendment Agreement also specifies that a Qualified Financing will not occur
prior to the closing of the acquisition of Jantibody, LLC.
The
Company evaluated the Amendment Agreement under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that
probability of having to pay a Milestone payment was minimal and the change in the fair value of the conversion feature was not material.
Since the Amendment did not cause a material change in cash flows, extinguishment accounting was not applicable.
On
April 29, 2022, the Company entered into an Amended and Restated Note Conversion Agreement (the “Note Conversion Agreement”)
with certain holders of its Tranche 1 Notes (i) providing for a conversion price equal to the lesser of (x) $0.002 per share (pre-split)
and (y) the price per share paid by the investors in a Qualified Financing for such New Securities purchased for cash and not through
conversion of Notes (as such terms are defined in the Note Conversion Agreement), in each case subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar recapitalization, (ii) automatic conversion upon the occurrence
of a Qualified Financing, and (iii) amendment of the maturity date from March 31, 2022 to June 17, 2022 (the “New Notes”).
Upon the effectiveness of the Company’s 1,000-1 reverse split, the conversion price adjusted to the lesser of (a) the price in
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 70%.
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 approximately
a $2,200,000 loss upon extinguishment of debt in the nine months ended December 31, 2022, which was comprised of the following:
| Carrying value of Tranche 1
Notes | |
$ | 3,580,738 | |
| Less: Fair value of New Notes | |
| (4,079,838 | ) |
| Less: Fair value
of Royalty Payments | |
| (1,697,000 | ) |
| Loss on Extinguishment | |
$ | (2,196,100 | ) |
The
Note Conversion Agreement also provided for the consummation of a Tranche 2 Financing (the “Tranche 2 Notes”) subject to
(i) the aggregate principal amount of indebtedness represented by the Tranche 2 Notes being capped at $500,000 and (ii) Tranche 2 Notes’
being an unsecured obligation of the Company and expressly subordinate in all respects to all indebtedness of the Company under the Notes
and including language in which the holders of such Tranche 2 Notes acknowledge, confirm and agree to the foregoing subordination terms.
Pursuant to the terms of the Note Conversion Agreement, the Investors have agreed not to sell any capital stock of the Company for a
period of 12 months following the Qualified Financing. The Company is currently working with the noteholders on the extension of the maturity of the outstanding notes.
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 65% 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, on June 9, 2022, 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 convertible notes were analyzed under Accounting Standards Codification 815-“Derivatives and Hedging” (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 convertible 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.
On
August 8, 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 65% 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 40% depending on when it is repaid.
On
February 24, 2023, the Company and certain investors entered into a Securities Purchase Agreement (the
“SPA”), whereby the Company sold and issued to the certain investors an aggregate of three hundred thousand dollars ($300,000)
of the Company’s convertible promissory notes (the “Note” or “Notes”), which are convertible into the Company’s
Common Stock, $0.001 par value (“Common Stock”). In connection with the aforementioned Notes, the Company
also issued to the investors a warrant to purchase (the “Purchase Warrant”) a certain number of shares of Common Stock, which
are equal to 20% of the shares of Common Stock issuable upon conversion of the Note, based on a price of $2.00 per share. These warrants
have a term of five (5) years, with an exercise price of $2.00 per share. Unless the Company chooses to terminate earlier, the offering
and the sale of the Notes shall terminate on the sooner of the sale of the maximum offering amount or April 30, 2023. However, the Company
has the option to extend this offering to June 30, 2023.
The
Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified offering. Interest on
the Note shall accrue on the unpaid principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated
on an actual/365-day basis. In the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder
may convert the unpaid and outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock
at a conversion price equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company, dated February 24, 2023. The Company issued Warrants to purchase an aggregate
of 30,000 shares of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
On
February 28, 2023, the Company entered into a securities purchase agreement for a total of $128,250 with an accredited investor. The
notes issued are convertible into common stock at a 65% 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 40% depending on when it is repaid.
On
March 27, 2023, H-Cyte, Inc., (the “Company”) and three related party investors entered into a Securities Purchase
Agreement (the “SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of one hundred twenty
five thousand dollars ($125,000) of the Company’s convertible promissory notes (the “Note” or
“Notes”), which are convertible into the Company’s Common Stock, $0.001 par value (“Common Stock”). On
April 12, 2023, the Company and an additional investor entered into the SPA, whereby, the Company sold and issued an aggregate of
thirty five thousand dollars ($35,000) of the Company’s Notes. In connection with the aforementioned Notes, the Company
also issued to the investors a warrant to purchase (the “Purchase Warrant”) a certain number of shares of Common Stock,
which are equal to 20% of the shares of Common Stock issuable upon conversion of the Note, based on a price of $2.00 per share.
These warrants have a term of five (5) years, with an exercise price of $2.00 per share. Unless the Company chooses to terminate
earlier, the offering and the sale of the Notes shall terminate on the sooner of the sale of the maximum offering amount or April
30, 2023. However, the Company has the option to extend this offering to June 30, 2023.
The
March 27, 2023 Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified
offering. The April 12, 2023 Note has a maturity date 60 days from issuance. Interest on the Note shall accrue on the unpaid
principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated on an actual/365-day basis. In
the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder may convert the unpaid and
outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock at a conversion price
equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company. The Company issued Warrants to purchase an aggregate of 13,500 shares
of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
Other
Obligations
During
the year ending December 31, 2022, Michael Yurkowsky, CEO, advanced the Company approximately $40,000 as a non-interest-bearing note
with no established repayment terms. The balance owed is approximately $35,000 as of December 31, 2022.
Equity
In
January 2022, the Company offered certain warrant holders the opportunity to receive an additional warrant to purchase the Company’s
Common Stock at $14.00 per share, for a period of five (5) years from issuance for the exercise of each existing warrant originally issued
in April 2020 prior to March 31, 2021. As of December 31, 2022, the Company had eleven warrant holders exercise an aggregate of 83,579
warrants at $14.00 per share resulting in cash proceeds of $1,170,110 to the Company.
The
Company filed a Registration Statement on Form S-1 registering the resale of the shares of common stock issuable upon exercise of the
warrants issued in the April 2020 financing. The registration statement was declared effective on February 14, 2022.
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 approximately $225,000. 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.
On
November 14, 2022, 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.
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.
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. Due to
lack of financial resources, the Company was unable to pay Ms. Rhodes for her services totaling $95.175, which has been accrued as part
of accrued liabilities for the year ended December 31, 2022.
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, which is included in Accounts Payable. During 2023, the Company paused this service for a three month period.
Indemnification
We
have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or
was serving, at our request, in such capacity, to the maximum extent permitted under the laws of the State of Nevada.
The
maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However,
we maintain directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid
for indemnification of directors and officers. We believe the estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal. Historically, we have not incurred any losses or recorded any liabilities related to performance under
these types of indemnities.
Additionally,
in the normal course of business, we have made certain guarantees, indemnities, and commitments under which we may be required to make
payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to our customers
and distribution network partners in connection with the sales of our products and therapies, and indemnities to various lessors in connection
with facility leases for certain claims arising from such facility or lease.
It
is not possible to determine the maximum potential loss under these guarantees, indemnities, and commitments due to our limited history
of prior indemnification claims and the unique facts and circumstances involved in each particular provision.
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 U.S. GAAP. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods.
On an ongoing basis, we evaluate our estimates and judgments, including
those described in greater detail below. The
Company bases its 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.
While our significant accounting policies are described in more detail
in the notes to our consolidated financial statements included elsewhere in this report, we believe that the following accounting policies
are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
Fair
Value Measurements
The
Company measures certain non-financial assets, liabilities, and equity issuances at fair value on a non-recurring basis. These non-recurring
valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value
to assets in an acquired asset group; and applying accounting for business combinations.
The
Company classifies its stock warrants as either liability or equity instruments in accordance with ASC 480, “Distinguishing Liabilities
from Equity” (ASC 480) and ASC 815, “Derivatives and Hedging” (ASC 815), depending on the specific terms of the warrant
agreement.
The
Company uses the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded,
adjusted above, or written down.
The
fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure
fair values in their broad levels. These levels from highest to lowest priority are as follows:
| |
● |
Level 1: Quoted prices
(unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; |
| |
|
|
| |
● |
Level 2: Quoted prices
in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but
corroborated by market data; and |
| |
|
|
| |
● |
Level 3: Unobservable inputs
or valuation techniques that are used when little or no market data is available. |
The
determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations
often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation
methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the
asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions
of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors
to assist in determining fair value, as appropriate.
The
Company evaluates its financial instruments subject to fair value measurements on a recurring basis to determine the appropriate
level in which to classify them for each reporting period. This determination requires significant judgments to be made. Although
the Company believes that the recorded fair value of our financial instruments is appropriate at December 31, 2022, these fair
values may not be indicative of net realizable value or reflective of future fair values.
Revenue
Recognition
The
Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606, Revenue From Contracts with Customers,
which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer;
(ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price;
and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company records revenue under ASC 606 as services
are performed for the customer.
The
Company uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price
accounts for medical, surgical, facility, and office services rendered by the Company for consented procedures and is recorded as revenue.
The Company recognizes revenue when the terms of a contract with a patient are satisfied.
The
Company offers two types of cellular therapy treatments to their patients:
| |
1) |
The first type of treatment
includes medical services rendered typically over a two-day period in which the patient receives cellular therapy. For this treatment
type, revenue is recognized in full at time of service. |
| |
|
|
| |
2) |
The Company also offers
a four-day treatment in which medical services are rendered typically over a two-day period and then again, approximately three months
later, medical services are rendered for an additional two days of treatment. Payment is collected in full for both service periods
at the time the first treatment is rendered. Revenue is recognized when services are performed based on the estimated standalone
selling price of each service. |
The
Company’s policy is to not offer refunds to patients. However, in limited instances the Company may make exceptions to this policy
for extenuating circumstances. These instances are evaluated on a case-by-case basis and may result in a patient refund. Management performed
an analysis of its customer refund history for refunds issued related to prior year’s revenue. Management used the results of this
historical refund analysis to record a reserve for anticipated future refunds related to recognized revenue, which is not significant at December 31, 2022 and 2021. 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.
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.
Recently
Adopted Accounting Standards
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which amends the approaches
and methodologies in accounting for income taxes during interim periods and makes changes to certain income tax classifications. The
new standard allows exceptions to the use of the incremental approach for intra-period tax allocation, when there is a loss from continuing
operations and income or a gain from other items, and to the general methodology for calculating income taxes in an interim period, when
a year-to date loss exceeds the anticipated loss for the year. The standard also requires franchise or similar taxes partially based
on income to be reported as income tax and the effects of enacted changes in tax laws or rates to be included in the annual effective
tax rate computation from the date of enactment. Lastly, in any future acquisition, the Company would be required to evaluate when the
step-up in the tax basis of goodwill is part of the business combination and when it should be considered a separate transaction. The
Company adopted ASU 2019-12, as required, on January 1, 2021 and the adoption did not have a material impact on our consolidated financial
statements.
In
August 2020, the FASB issued ASU 2020-06. Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity. Specifically, ASU 2020-06 revises the requirements to separately account for conversion features as a derivative
under ASC Topic 815 and it removes the requirement to account for beneficial conversion features on such instruments. The Company chose
early adoption of ASU 2020-06 effective January 1, 2021, related to the April 2021 and October 2021 Note Purchase Agreements. Thus, the
Notes did not require consideration for a beneficial conversion feature under ASC 470-20 and the Notes were accounted for solely as debt
on the balance sheet.
| ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
TABLE
OF CONTENTS FOR THE FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and Board of Directors of H-CYTE, Inc.
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of H-CYTE, Inc. (the “Company”) as of December 31, 2022 and 2021,
and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended, and the related
notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations
and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Substantial
Doubt About the Company’s Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 3 to the financial statements, the Company has negative working capital, has an accumulated deficit, has a history of significant
operating losses and has a history of negative operating cash flow that raise substantial doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matters
Critical
audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required
to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit
matters.
/s/
Frazier & Deeter, LLC
Tampa,
Florida
May
10, 2023
We
have served as the Company’s auditor since 2018.
H-CYTE,
INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (1) | The number of outstanding
shares of common stock have been adjusted for all periods presented to reflect a one-for-one thousand reverse stock split that became
effective on June 13, 2022. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the
one-for-one thousand reverse stock split. See Note 1 for additional information. |
See
accompanying notes to consolidated financial statements.
H-CYTE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| (1) |
The
number of outstanding shares of common stock have been adjusted for all periods presented to reflect a one-for-one thousand reverse
stock split that became effective on June 13, 2022. The amounts in common stock and additional paid-in capital were adjusted as of
the effective date of the one-for-one thousand reverse stock split. See Note 1 for additional information. |
See
accompanying notes to consolidated financial statements.
H-CYTE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | |
| |
Deficit | | |
Deficit | |
| | |
Preferred
Series A Stock | | |
Common
Stock | | |
Additional
Paid-in | |
| |
Accumulated | | |
Stockholders’ | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | |
| |
Deficit | | |
Deficit | |
| Balances - December
31, 2021 | |
| 501,887,534 | | |
$ | 501,887 | | |
| 166,394 | | |
$ | 164,199 | | |
$ | 43,700,084 | |
| |
$ | (49,028,413 | ) | |
$ | (4,662,243 | ) |
| Balance | |
| 501,887,534 | | |
$ | 501,887 | | |
| 166,394 | | |
$ | 164,199 | | |
$ | 43,700,084 | |
| |
$ | (49,028,413 | ) | |
$ | (4,662,243 | ) |
| Conversion of Series A Preferred
Stock to Common Stock | |
| (63,111,364 | ) | |
| (63,114 | ) | |
| 63,114 | | |
| 7,364 | | |
| 55,750 | |
| |
| - | | |
| - | |
| Issuance of Common Stock pursuant
to securities purchase agreement | |
| - | | |
| - | | |
| 127,500 | | |
| 128 | | |
| 254,871 | |
| |
| - | | |
| 254,999 | |
| Adjustment for 1-for-1000
reverse stock split (1) | |
| | | |
| | | |
| | | |
| (254,831 | ) | |
| 254,831 | |
| |
| - | | |
| - | |
| Issuance of Common Stock pursuant
to Jantibody acquisition | |
| - | | |
| - | | |
| 52,023 | | |
| 52 | | |
| 29,505 | |
| |
| - | | |
| 29,557 | |
| Inducement expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,133,055 | |
| |
| - | | |
| 3,133,055 | |
| Warrant expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| 376,934 | |
| |
| - | | |
| 376,934 | |
| Exercised warrants to Common Stock | |
| - | | |
| - | | |
| 83,579 | | |
| 83,580 | | |
| 1,086,530 | |
| |
| - | | |
| 1,170,110 | |
| Share based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| 585,712 | |
| |
| - | | |
| 585,712 | |
| Issuance of anti-dilution Common Stock pursuant to Jantibody acquisition | |
| - | | |
| - | | |
| 2,743 | | |
| 3 | | |
| (3 | ) |
| |
| - | | |
| - | |
| Issuance of Common Stock pursuant
to SkinDisc acquistion | |
| - | | |
| - | | |
| 123,153 | | |
| 123 | | |
| 53,947 | |
| |
| - | | |
| 54,070 | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| (10,299,580 | ) | |
| (10,299,580 | ) |
| Balances
- December 31, 2022 | |
| 438,776,170 | | |
$ | 438,773 | | |
| 618,506 | | |
$ | 618 | | |
$ | 49,531,216 | |
| |
$ | (59,327,993 | ) | |
$ | (9,357,386 | ) |
| Balance | |
| 438,776,170 | | |
$ | 438,773 | | |
| 618,506 | | |
$ | 618 | | |
$ | 49,531,216 | |
| |
$ | (59,327,993 | ) | |
$ | (9,357,386 | ) |
| (1) |
The
number of outstanding shares of common stock have been adjusted for all periods presented to reflect a one-for-one thousand reverse
stock split that became effective on June 13, 2022. The amounts in common stock and additional paid-in capital were adjusted as of
the effective date of the one-for-one thousand reverse stock split. See Note 1 for additional information. |
See
accompanying notes to consolidated financial statements.
H-CYTE,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See
accompanying notes to consolidated financial statements.
Notes
to consolidated financial statements
Note
1 - Description of the Company
DESCRIPTION
OF THE COMPANY
H-CYTE,
Inc (“the Company”) has evolved from focusing on treating chronic lung conditions after the closure of its lung treatment
clinics due to COVID-19. The Company is currently focusing on acquiring and developing early-stage companies or their technologies in
the areas of therapeutics, medical devices, and diagnostics. The goal is to develop these companies and incubate their technologies to
meaningful clinical inflection points.
On
June 3, 2022, the Company closed its clinic in Scottsdale, Arizona. The Company has now closed all of its clinical operations in the
autologous infusion therapy business which delivered treatments for patients with chronic respiratory and pulmonary disorders. The Company
will continue to pursue Food and Drug Administration (“FDA”) 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 through a joint venture. The
Company has implemented the transition 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 prior to their
closure. All LHI clinics are closed as of December 31, 2022.
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 December 31, 2022, the Company has 618,506 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 8).
On December 22, 2022, the Company acquired all of the membership interests in Scion Solutions, LLC (“Scion”). Scion is a life sciences company
that has developed a new technology in regenerative medicine specifically for limb salvage. Their proprietary product SkinDisc (patent
pending) is a combination of stem cells and several other molecular components that stimulate tissue regeneration. (see Note 8).
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 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 And Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 prior to their
closure.
Principles
of Consolidation
PRINCIPLES
OF CONSOLIDATION
U.S.
GAAP requires that a related entity be consolidated with a company when certain conditions exist. An entity is considered to be a VIE
when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient
to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by the Parent would
be required if it is determined that the Parent will absorb a majority of the VIE’s expected losses or residual returns if they
occur, retain the power to direct or control the VIE’s activities, or both.
The
accompanying consolidated financial statements include the accounts of the Parent, its wholly owned subsidiaries, and its VIEs. All intercompany
accounts and transactions have been eliminated in consolidation.
Reclassification
of Prior Year Presentation
RECLASSIFICATION
OF PRIOR YEAR PRESENTATION
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.
Use
of Estimates
USE
OF ESTIMATES
In
preparing the financial statements, U.S. GAAP requires disclosure regarding estimates and assumptions used by management that affect
the amounts reported in financial statements and accompanying notes. Significant estimates were made around the valuation of embedded
derivatives, which impacts gains or losses on such derivatives, the carrying value of debt, interest expense, and deemed dividends. Actual
results could differ from those estimates.
Cash
CASH
The
Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s
cash balances at December 31, 2022 and 2021 consists of funds deposited in checking accounts with commercial banks.
Accounts
Receivable
ACCOUNTS
RECEIVABLE
Accounts
receivable represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral
or any other security to support its receivables. Trade accounts receivable are stated net of an estimate made for doubtful accounts,
if any. Management evaluates the adequacy of the allowance for doubtful accounts regularly to determine if any account balances will
potentially be uncollectible. Customer account balances are considered past due or delinquent based on the contractual agreement with
each customer. Accounts are written off when, in management’s judgment, they are considered uncollectible. At December 31, 2022
and 2021, management believes no allowance is necessary. For the year ended December 31, 2022 and 2021, the Company recorded bad debt
expense of approximately $68,000 and $14,000, respectively.
In
February 2021, the Company implemented a patient financing program whereby it utilized third-party financing companies to facilitate
financing to its patients to pay for treatments. The financing structure allows patients to make monthly payments to the financing companies
with an interest rate ranging from 7.0 – 13.9% based on the patient’s credit score with contract terms ranging from 12 to
36 months. The Company subsequently receives a payment from the financing company net of the finance company’s service fees plus
interest. The Company earns interest income from these arrangements which are reflected in interest income in the Company’s financials
and combined with interest expense to reflect the net expense. Accounts receivable for financed treatments are listed as “Patient
financing receivable, current portion” and “Patient financing receivable, net of current portion”.
Leases
LEASES
The
Company accounts for leases in accordance with the Financial Accounting Standard Board (“FASB”) Topic 842, Leases,
which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The standard
establishes a right-of-use (“ROU”) model that requires a lessee to recognize an ROU asset and lease liability on the balance
sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the statement of operations. The Company has not entered into significant lease
agreements in which it is the lessor.
Revenue
Recognition
REVENUE
RECOGNITION
The
Company recognizes revenue in accordance with U.S. GAAP as outlined in the FASB ASC 606, Revenue From Contracts with Customers,
which requires that five steps be completed to determine when revenue can be recognized: (i) identify the contract with the customer;
(ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price;
and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company records revenue under ASC 606 as services
are performed for the customer.
The
Company uses a standard pricing model for the types of cellular therapy treatments that is offered to its patients. The transaction price
accounts for medical, surgical, facility, and office services rendered by the Company for consented procedures and is recorded as revenue.
The Company recognizes revenue when the terms of a contract with a patient are satisfied.
The
Company offers two types of cellular therapy treatments to their patients:
| |
1) |
The
first type of treatment includes medical services rendered typically over a two-day period in which the patient receives cellular
therapy. For this treatment type, revenue is recognized in full at time of service. |
| |
|
|
| |
2) |
The
Company also offers a four-day treatment in which medical services are rendered typically over a two-day period and then again, approximately
three months later, medical services are rendered for an additional two days of treatment. Payment is collected in full for both
service periods at the time the first treatment is rendered. Revenue is recognized when services are performed based on the estimated
standalone selling price of each service. |
The
Company’s policy is to not offer refunds to patients. However, in limited instances the Company may make exceptions to this
policy for extenuating circumstances. These instances are evaluated on a case-by-case basis and may result in a patient refund.
Management performed an analysis of its customer refund history for refunds issued related to prior year’s revenue. Management
used the results of this historical refund analysis to record a reserve for anticipated future refunds related to recognized revenue
of approximately $25,000 for the year ended December 31, 2022. 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.
Research
and development costs
RESEARCH
AND DEVELOPMENT COSTS
Research
and development expenses are recorded in operating expenses in the period in which they are incurred.
Advertising
ADVERTISING
Advertising
costs are recorded in operating expenses in the period in which they are incurred.
Share-Based
Compensation
SHARE-BASED
COMPENSATION
The
Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718, Compensation
- Stock Compensation. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite
service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee and
non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for
estimated forfeitures.
Income
Taxes
The
Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”.
Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases
of assets and liabilities using tax rates expected to be in effect during the years in which the difference turns around. The Company
accounts for interest and penalties on income taxes as income tax expense. A valuation allowance is recorded when it is more likely than
not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future
taxable income and the availability of tax planning strategies.
From
inception to December 31, 2022, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred
tax asset generated by these losses is fully offset by a valuation allowance as of December 31, 2022 and 2021 since it is currently likely
that the benefit will not be realized in future periods.
There
are no uncertain tax positions at December 31, 2022 and 2021. The Company has not undergone any tax examinations since inception.
Net
Loss Per Share
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 potentially dilutive 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.
Fair
Value Measurements
FAIR
VALUE MEASUREMENTS
The
Company measures certain non-financial assets, liabilities, and equity issuances at fair value on a non-recurring basis. These non-recurring
valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value
to assets in an acquired asset group; and applying accounting for business combinations.
The
Company classifies its stock warrants as either liability or equity instruments in accordance with ASC 480, “Distinguishing Liabilities
from Equity” (ASC 480) and ASC 815, “Derivatives and Hedging” (ASC 815), depending on the specific terms of the warrant
agreement.
The
Company uses the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded,
adjusted above, or written down.
The
fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure
fair values in their broad levels. These levels from highest to lowest priority are as follows:
| |
● |
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; |
| |
|
|
| |
● |
Level
2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on
active markets, but corroborated by market data; and |
| |
|
|
| |
● |
Level
3: Unobservable inputs or valuation techniques that are used when little or no market data is available. |
The
determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations
often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation
methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the
asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions
of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors
to assist in determining fair value, as appropriate.
The
Company evaluates its financial liabilities subject to fair value measurements on a recurring basis to determine the appropriate level
in which to classify them for each reporting period. This determination requires significant judgments to be made. Although the Company
believes that the recorded fair value of our financial instruments is appropriate at December 31, 2022, these fair values may not be
indicative of net realizable value or reflective of future fair values.
Note
3 - Liquidity, Going Concern and Management’s Plans
LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The
Company incurred net losses of approximately $10,300,000 for the year ended December 31, 2022. The Company had a negative cash balance
of approximately $4,000 as of December 31, 2022, which is included in current liabilities, and has historically incurred losses from operations and expects to continue to generate
negative cash flows as the Company implements its plan to transition the Biotech Division into a medical biosciences incubator division
focusing on bringing new biologics and therapeutic device technologies to market for various health conditions. The consolidated financial
statements are prepared using generally accepted accounting principles in the United States (“U.S. GAAP”) as applicable to
a going concern.
COVID-19
was declared a global pandemic by the World Health Organization on March 11, 2020 and the Company continues to monitor the impact on
its operations of the COVID-19 pandemic and its aftermath. The Company believes the effect of the COVID-19 pandemic and certain public
and certain governmental responses to it have negatively affected each of its last twelve quarter’s results.
During
the COVID-19 pandemic and its aftermath the Company experienced material reductions in demand and net revenues at its lung treatment
centers. This reduction in demand lead to the Company shifting its focus from treating chronic lung disease to acquiring and developing
early-stage companies or their technologies in the areas of therapeutics, medical devices, and diagnostics.
The
Company had a negative cash balance of approximately $4,000 as of December 31, 2022, and approximately $4,000, as of April 30, 2023.
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 financing
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.
On
February 24, 2023, the Company and certain investors entered into a Securities Purchase Agreement (the “SPA”), whereby the
Company sold and issued to the certain investors an aggregate of three hundred thousand dollars ($300,000) of the Company’s convertible
promissory notes (the “Note” or “Notes”), which are convertible into the Company’s Common Stock, $0.001
par value (“Common Stock”). In connection with the aforementioned Notes, the Company also issued to the investors a warrant
to purchase (the “Purchase Warrant”) a certain number of shares of Common Stock, which are equal to 20% of the shares of
Common Stock issuable upon conversion of the Note, based on a price of $2.00 per share. These warrants have a term of five (5) years,
with an exercise price of $2.00 per share. Unless the Company chooses to terminate earlier, the offering and the sale of the Notes shall
terminate on the sooner of the sale of the maximum offering amount or April 30, 2023. However, the Company has the option to extend this
offering to June 30, 2023.
The
Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified offering. Interest on
the Note shall accrue on the unpaid principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated
on an actual/365-day basis. In the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder
may convert the unpaid and outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock
at a conversion price equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company, dated February 24, 2023. The Company issued Warrants to purchase an aggregate
of 30,000 shares of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
On
February 28, 2023, the Company entered into a securities purchase agreement for a total of $128,250 with an accredited investor. The
notes issued are convertible into common stock at a 65% 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 40% depending on when it is repaid.
On
March 27, 2023, H-Cyte, Inc., (the “Company”) and three related party investors entered into a Securities Purchase Agreement
(the “SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of one hundred twenty five thousand
dollars ($125,000) of the Company’s convertible promissory notes (the “Note” or “Notes”), which are
convertible into the Company’s Common Stock, $0.001 par value (“Common Stock”). On April 12, 2023, the Company and
an additional investor entered into the SPA, whereby, the Company sold and issued an aggregate of thirty five thousand dollars ($35,000)
of the Company’s Notes. In connection with the aforementioned Notes, the Company also issued to the investors a warrant to purchase
(the “Purchase Warrant”) a certain number of shares of Common Stock, which are equal to 20% of the shares of Common Stock
issuable upon conversion of the Note, based on a price of $2.00 per share. These warrants have a term of five (5) years, with an exercise
price of $2.00 per share. Unless the Company chooses to terminate earlier, the offering and the sale of the Notes shall terminate on
the sooner of the sale of the maximum offering amount or April 30, 2023. However, the Company has the option to extend this offering
to June 30, 2023.
The
March 27, 2023 Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified
offering. The April 12, 2023 Note has a maturity date 60 days from issuance. Interest on the Note shall accrue on the unpaid
principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated on an actual/365-day basis. In
the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder may convert the unpaid and
outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock at a conversion price
equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company. The Company issued Warrants to purchase an aggregate of 13,500 shares
of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
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 received $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 years ended December 31, 2022, and 2021, the Company expensed $75,000
and $70,000
respectively, for board of director fees to Mr. Monteleone. Due to lack of financial resources, the Company was unable to pay Mr.
Monteleone for his services totaling $35,000,
which is included in accrued liabilities as of December 31, 2022.
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 years ended December 31, 2022 and 2021, the Company expensed $0 and $46,000 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 years ended December 31, 2022, and 2021, the Company expensed $50,000 and $37,500, respectively, for board of director
fees to Mr. Horne. Due to lack of financial resources, the Company was unable to pay Mr. Horne for his services totaling $17,500,
which is included in accrued liabilities as of December 31, 2022.
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 year ended December 31, 2022 the Company expensed $42,500 for board of director fees
to Mr. Rosenblum. Due to lack of financial resources, the Company was unable to pay Mr. Rosenblum for his services totaling $17,500,
which is included in accrued liabilities as of December 31, 2022.
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 year ended December 31, 2022 the Company expensed $42,500 for board of director fees
to Mr. Anderer. Due to lack of financial resources, the Company was unable to pay Mr. Anderer for his services totaling $17,500,
which which is included in accrued liabilities as of December 31, 2022.
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) related party 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 17, 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) related party 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.
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 70%.
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 year ended December 31, 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. For the year ended December 31, 2022, approximately $499,000
of amortization of the debt premium is included
in interest income. Management is currently working with the noteholders on the extension of the maturity of the outstanding notes.
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 65% 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, on June 9, 2022, 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 convertible notes were
analyzed under Accounting Standards Codification 815-“Derivatives and Hedging” (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 convertible 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.
On August 8, 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 65% 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 40% depending on when it is
repaid.
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.
Other Obligations
During the year ending December 31, 2022,
Michael Yurkowsky, CEO, advanced the Company approximately $40,000
as a non-interest-bearing note with no established repayment terms. The balance owed is approximately $35,000 as of December 31, 2022.
Note
5 - Equity Transactions
EQUITY TRANSACTIONS
On
December 31, 2021, a certain warrant holder of the Company, exercised 1,339,286 warrants on a cashless basis resulting in the issuance
of 818,453 shares of the Company’s common stock.
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 December 31, 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 618,506 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.
On
September 29, 2022, the Company entered into a securities purchase agreement with two related party 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 approximately $225,000.
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.
On
November 14, 2022, 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.
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
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Common Stock | |
| 618,506 | | |
| 166,394 | |
| Series A Preferred Stock | |
| 438,776,170 | | |
| 501,887,532 | |
Series
A Preferred Stock
For
the years ended December 31, 2022 and 2021, 63,111,364
and 36,221,875
shares of Series A Preferred Stock were converted to 63,114 and 36,222 shares of Common Stock, respectively, at the request of certain Series A
Preferred Shareholders.
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 1:1000 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
The
Company utilizes the Black-Scholes valuation method to recognize share-based compensation expense over the vesting period. The expected
life represents the period that the stock-based compensation awards are expected to be outstanding.
On
April 1, 2021, the Board of Directors of the Company approved and granted 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.
As
of December 31, 2022, 29,385
options were outstanding and 21,406
were vested. As of December 31, 2021, 29,635
options were outstanding and 15,385
were vested. For the years ended December 31,
2022 and 2021, the Company recognized and expense related to stock options of approximately $296,000
and $1,147,000,
respectively, which is included in share based compensation. As of December 31, 2022, the Company has approximately $156,000
of unrecognized compensation costs related to
non-vested stock options, which is expected to be recognized over a weighted average period of approximately 1.95
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 years ended December 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 | | |
| 9.25 | |
| Expired/Cancelled | |
| (25,525 | ) | |
| 70.00 | | |
| — | |
| Outstanding at December 31, 2021 | |
| 29,635 | | |
$ | 86.48 | | |
| 9.20 | |
| | |
| | | |
| | | |
| | |
| Exercisable at December 31, 2021 | |
| 15,385 | | |
$ | 101.74 | | |
| 9.16 | |
| | |
| | | |
| | | |
| | |
| Outstanding at December 31, 2021 | |
| 29,635 | | |
$ | 86.48 | | |
| 9.20 | |
| Forfeited | |
| (250 | ) | |
| 400.00 | | |
| — | |
| Outstanding at December 31, 2022 | |
| 29,385 | | |
$ | 83.81 | | |
| 8.22 | |
| | |
| | | |
| | | |
| | |
| Exercisable at December 31, 2022 | |
| 21,406 | | |
$ | 88.96 | | |
| 8.21 | |
The
following is a summary of the Company’s non-vested shares for the years ended December, 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 | | |
| 60.00 | |
| Vested | |
| (15,000 | ) | |
| 50.00 | |
| Forfeited | |
| (25,500 | ) | |
| 70.00 | |
| Non-vested at December 31, 2021 | |
| 14,250 | | |
$ | 60.00 | |
| | |
| | | |
| | |
| Vested | |
| (6,271 | ) | |
| 54.64 | |
| Non-vested at December 31, 2022 | |
| 7,979 | | |
$ | 55.70 | |
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 Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Warrants to purchase common stock (in the money) | |
| 147,329 | | |
| 383,694 | |
| Series A Preferred Stock convertible to common stock | |
| 438,776 | | |
| 501,888 | |
| Total | |
| 586,105 | | |
| 885,582 | |
| Antidilutive Shares | |
| 586,105 | | |
| 885,582 | |
Excluded
from the above table are 300,638 warrants and 21,406 stock options for the year ended December 31, 2022 and 22,608 warrants and 29,635
stock options for the year ended December 31, 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 438,776,168 outstanding shares of Series
A Preferred Stock are convertible into an aggregate of 438,776 shares of common stock at December 31, 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 years ended December 31, 2022 and 2021, the Company recognized approximately $290,000 and $38,000, 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. During 2023, the Company paused this service for a three month period.
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 obtained a legal
judgment for breach of contract for advertising services in the amount of approximately $72,000
plus interest and costs. The Company has retained legal counsel for guidance in this matter. The amount is recorded in accounts
payable as of December 31, 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 obtained a legal judgment for breach of
contract for advertising services in the amount of approximately $45,000
plus interest and costs. The Company has retained legal counsel for guidance in this matter. The amount is recorded in accounts
payable as of December 31, 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 December 31, 2022 and December 31, 2021. The
Company has not made payments on these notes since February 10, 2020. 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.
Convertible
notes
On
April 1, 2021, the Company, entered into a Secured Convertible Note Purchase Agreement (the “April 2021 Note Purchase
Agreement”) with five (5) related party 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 17, 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, H-Cyte, Inc. (the “Company”) entered into the Second Closing Bring Down Agreement (the “October
2021 Note Purchase Agreement”) whereby the five (5) related party 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.
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 70%.
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 December 31, 2022, which was comprised of the following:
SCHEDULE OF LOSS UPON EXTINGUISHMENT OF DEBT
| | |
| | |
| 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 65% 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, on June 9, 2022, 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 convertible 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 convertible 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 40% depending on when it is repaid.
On
February 24, 2023, H-Cyte, Inc., (the “Company”) and certain investors entered into a Securities Purchase Agreement (the
“SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of three hundred thousand dollars ($300,000.00)
of the Company’s convertible promissory notes (the “Note” or “Notes”), which are convertible into the Company’s
Common Stock, $0.001 par value (“Common Stock”), par value $0.001. In connection with the aforementioned Notes, the Company
also issued to the investors a warrant to purchase (the “Purchase Warrant”) a certain number of shares of Common Stock, which
are equal to 20% of the shares of Common Stock issuable upon conversion of the Note, based on a price of $2.00 per share. These warrants
have a term of five (5) years, with an exercise price of $2.00 per share. Unless the Company chooses to terminate earlier, the offering
and the sale of the Notes shall terminate on the sooner of the sale of the maximum offering amount or April 30, 2023. However, the Company
has the option to extend this offering to June 30, 2023.
The
Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified offering. Interest on
the Note shall accrue on the unpaid principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated
on an actual/365-day basis. In the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder
may convert the unpaid and outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock
at a conversion price equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company, dated February 24, 2023. The Company issued Warrants to purchase an aggregate
of 30,000 shares of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
On
February 28, 2023, the Company entered into a securities purchase agreement for a total of $128,250 with an accredited investor. The
notes issued are convertible into common stock at a 65% 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 40% depending on when it is repaid.
On
March 27, 2023, H-Cyte, Inc., (the “Company”) and three related party investors entered into a Securities Purchase
Agreement (the “SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of one hundred twenty
five thousand dollars ($125,000.00)
of the Company’s convertible promissory notes (the “Note” or “Notes”), which are convertible into the
Company’s Common Stock, $0.001
par value (“Common Stock”). On April 12, 2023, the Company and an additional investor entered into the SPA, whereby, the
Company sold and issued an aggregate of thirty five thousand dollars ($35,000.00) of the Company’s Notes. In connection with
the aforementioned Notes, the Company also issued to the investors a warrant to purchase (the “Purchase Warrant”) a
certain number of shares of Common Stock, which are equal to 20% of the shares of Common Stock issuable upon conversion of the Note,
based on a price of $2.00
per share. These warrants have a term of five (5)
years, with an exercise price of $2.00
per share. Unless the Company chooses to terminate earlier, the offering and the sale of the Notes shall terminate on the sooner of
the sale of the maximum offering amount or April 30, 2023. However, the Company has the option to extend this offering to June 30,
2023.
The
March 27, 2023 Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified
offering. The April 12, 2023 Note has a maturity date 60 days from issuance. Interest on the Note shall accrue on the
unpaid principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated on an actual/365-day
basis. In the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder may convert the
unpaid and outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock at a
conversion price equal to a 20% discount to the offering price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company. The Company issued Warrants to purchase an aggregate of 13,500 shares
of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
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 December 31, 2022, the
PPP loan was paid in full.
Note
8 – Acquisitions
ACQUISITIONS
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.
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. Prior to the acquisition, Michael Yurkowsky, CEO, had approximately 17.5% ownership interest in Jantibody.
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 | |
| Accounts payable 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.
On
December 22, 2022, the Company acquired a 100% interest in Scion Solutions, LLC (“Scion”). Scion is a life sciences company
that has developed a new technology in regenerative medicine specifically for limb salvage. Their proprietary product SkinDisc (patent
pending) is a combination of stem cells and several other molecular components that stimulate tissue regeneration. Prior to the acquisition, Tanya Rhodes, CSO, had approximately 33.3% ownership interest in Scion.
Pursuant
to the terms of the Scion Agreement, the Company issued the equity holders of Scion an aggregate of 123,153 shares of the Company’s
common stock. In addition, for every share of the Company’s common stock issued within 18-months of the Effective Date of the transaction,
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 Scion members will receive 20% 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.
In
addition, the former shareholders of Scion are eligible to receive Performance Payments consisting of the following:
SCHEDULE
OF PERFORMANCE PAYMENTS
| Performance Milestone | |
Performance Payment | |
| Qualified Funding/Uplifting of H-Cyte | |
$ | 45,000 | |
| 1-Year Anniversary of Uplifting of H-Cyte | |
$ | 75,000 | |
| 2-Year Anniversary of Uplifting of H-Cyte | |
$ | 120,000 | |
| Initiation of SkinDisc Study | |
$ | 50,000 | |
| Receipt of De Novo or any other approval/clearance that would allow SkinDisc to go to market | |
$ | 100,000 | |
| Submission for specific and individual reimbursement codes relating to SkinDisc | |
$ | 25,000 | |
| Receipt of specific and individual reimbursement codes relating to SkinDisc | |
$ | 50,000 | |
| Completion of SkinDisc Study | |
$ | 50,000 | |
| Launch of any additional SkinDisc product line extension (e.g., SkinDisc Lite)* | |
$ | 100,000 | |
| Annual net sales from SkinDisc (including SkinDisc extensions) (2023 and each subsequent calendar year)* | |
| Greater of (i) 4% of net revenues from SkinDisc (including SkinDisc line extensions) during such calendar year and (ii) $50,000 | |
| Cumulative net sales from SkinDisc (including SkinDisc extensions) of $600,000 | |
$ | 200,000 | |
| Cumulative net sales from SkinDisc (including SkinDisc extension) of $2,000,000 | |
$ | 150,000 | |
| Cumulative net sales from SkinDisc (including SkinDisc extension) of $4,000,000 | |
$ | 300,000 | |
| Net sales from SkinDisc (including SkinDisc extensions) of $6,000,000 during any single calendar year* | |
$ | 300,000 | |
Substantially
all of the value acquired was concentrated in a single in-process research and development (“IPRD”) asset, which included
license rights, clinical trial data, clinical trial development plans, research and development materials, formulations and intellectual
property related to SkinDisc. There was no workforce, and no outputs were present. Accordingly, the acquired set of assets and activities
did not meet the definition of a business as defined by ASC 805, Business Combinations and
was considered an asset acquisition. In an asset acquisition, the consideration transferred is allocated to identifiable tangible
and intangible assets acquired and liabilities assumed based on their relative fair values. In the Scion acquisition, the only asset
or liability acquired was IPR&D. As a result, the consideration transferred was recorded fully to the IPR&D asset.
In
an asset acquisition, cash-settled contingent consideration is measured when probable and estimable, unless the contingent consideration
falls under the guidance of ASC 815. The Company determined the contingent consideration was not subject to ASC 815 and thus, the performance
payments which were estimable and probable (i.e., more than 50% likely to occur) were recorded on the acquisition date. The fair value
was estimated based on a probability weighting of the present value of cash flows over the expected time period until payment, using
a credit-risk adjusted interest rate. Each reporting period, the Company will determine if the performance payments are estimable and
probable and will record them as a liability at that time.
The
purchase price was allocated, as follows:
SCHEDULE
OF NET IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES ASSUMED
| | |
| | |
Consideration:
Common stock | |
$ | 54,070 | |
| Anti-Dilution share liability | |
| 305,998 | |
| Contingent Performance payment liability | |
| 417,850 | |
| Direct transaction costs | |
| 14,338 | |
| Total costs of the asset acquisition | |
$ | 792,256 | |
The
common stock value was recorded as equity. The consideration of $792,256 was recorded as IPR&D, since the
SkinDisc technology was still in the research and development stage and had no alternative future use. The purchased IPR&D asset
was expensed immediately subsequent to the acquisition within our consolidated statements of operations.
Note
9 - Common Stock Warrants
COMMON STOCK WARRANTS
A
summary of the Company’s warrant issuance activity and related information for the years ended December 31, 2021 and 2022 is as
follows:
SUMMARY 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 | ) | |
| 330.00 | | |
| — | |
| Exercised | |
| (1,339 | ) | |
| 10.00 | | |
| — | |
| Outstanding and exercisable at December 31, 2021 | |
| 406,302 | | |
$ | 35.00 | | |
| 8.17 | |
| | |
| | | |
| | | |
| | |
| Issued | |
| 148,329 | | |
| 9.06 | | |
| 4.41 | |
| Expired | |
| (23,085 | ) | |
| (364.60 | ) | |
| — | |
| Exercised | |
| (83,579 | ) | |
| 14.00 | | |
| — | |
| Outstanding and exercisable at December 31, 2022 | |
| 447,967 | | |
$ | 10.90 | | |
| 6.65 | |
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 | |
| Granted for securities purchase agreement | |
| 11/14/2022 | | |
| 7,500 | | |
$ | 5.75 | | |
$ | 2.50 | | |
$ | 5.69 | | |
| 5 years | | |
| 4.00 | | |
| 213.28 | |
The
fair value of warrants issued during the year ended December 31, 2022 totaled approximately $377,000 and is included in general and administrative expense.
The fair value of warrants issued as a result of the warrant inducement during the year ended December 31, 2022 totaled approximately
$3,133,000 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
10 - Income Taxes
INCOME TAXES
The
Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, “Income Taxes”.
Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets
and liabilities using tax rates expected to be in effect during the years in which the basis difference reverses. The Company accounts
for interest and penalties on income taxes as income tax expense. A valuation allowances is recorded when it is more likely than not
that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable
income and the availability of tax planning strategies.
The
Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. As of December
31, 2022, the Company has not recorded any uncertain tax positions and, therefore, has not incurred any interest or penalties. The Company
is not currently under examination by any Federal or State authority and is no longer subject to federal or state examination for years
prior to 2019.
A
reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows for the years ended December
31:
SCHEDULE
OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
| | |
2022 | | |
2021 | |
| Statutory rate – federal | |
| 21.0 | % | |
| 21.0 | % |
| Effect of: | |
| | | |
| | |
| State deferred provision | |
| 3.4 | | |
| 5.1 | |
| State NOL true-up | |
| (.3 | ) | |
| (2.1 | ) |
| Prior year true up | |
| .1 | | |
| (6.8 | ) |
| Other true-ups | |
| 8.9 | | |
| - | |
| Loan forgiveness - PPP | |
| - | | |
| 3.0 | |
| Other permanent differences | |
| (8.2 | ) | |
| - | |
| Change in valuation allowances | |
| (24.9 | ) | |
| (20.2 | ) |
| Income taxes | |
| 0.0 | % | |
| 0.0 | % |
The
Company’s financial statements contain certain deferred tax assets which have arisen primarily as a result of losses incurred that
are considered start-up costs for tax purposes, as well as net deferred income tax assets resulting from other temporary differences
related to certain reserves and differences between book and tax depreciation and amortization.
The
Company assesses the realizability of deferred tax assets based on the available evidence, including a history of taxable income and
estimates of future taxable income. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely
than not that all or some portion of deferred tax assets will not be realized. Due to the history of losses incurred by the Company,
management believes it is not more likely than not that all of the deferred tax assets can be realized. Accordingly, the Company established
and recorded a full valuation allowance on its net deferred tax assets of $16.0 million and $13.5 million as of December 31, 2022 and
2021, respectively.
Deferred
tax assets and liabilities consist of the following at December 31:
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| | |
2022 | | |
2021 | |
| Deferred Tax Assets: | |
| | | |
| | |
| Federal and state net operating loss carry forwards | |
$ | 11,475,536 | | |
$ | 10,680,766 | |
| Capitalized start-up costs | |
| 1,858,781 | | |
| 1,980,984 | |
| Capitalized research and development costs | |
| 616,031 | | |
| 210,448 | |
| Patents | |
| 26,777 | | |
| 32,371 | |
| Share-based compensation | |
| 423,133 | | |
| 543,252 | |
| Depreciation/Amortization | |
| 720,701 | | |
| -- | |
| Accruals | |
| 833,004 | | |
| -- | |
| Other | |
| 94,305 | | |
| 35,083 | |
| Total gross deferred tax assets | |
| 16,048,268 | | |
| 13,482,904 | |
| Deferred Tax Liabilities | |
| | | |
| | |
| Right-of-use asset | |
| - | | |
| - | |
| Total gross deferred tax liabilities | |
| - | | |
| - | |
| Valuation Allowance | |
| 16,048,268 | | |
| 13,482,904 | |
| Net deferred tax assets | |
$ | - | | |
$ | - | |
Utilization of the net operating loss carryforwards
is subject to a substantial annual limitation due to the “ownership change” limitations provided by Section 382 and 383 of
the Internal Revenue Code of 1986, as amended, and other similar state provisions. Any annual limitation may result in the expiration
of net operating loss carryforwards before utilization. As of December 31, 2022, the Company had $46.4 million of U.S. federal net operating
loss carryforwards available to reduce future taxable income, of which $39.2 million will be carried forward indefinitely for U.S. federal
tax purposes and $7.2 million will expire beginning in 2035 to 2037. The Company also has $31.3 million of U.S. state net operating loss
carryforwards of which $30.6 million will be carried forward indefinitely and $.7 million that will expire beginning in 2035 to 2037.
Note
11 – Subsequent Events
SUBSEQUENT EVENTS
On
February 24, 2023, H-Cyte, Inc., (the “Company”) and certain investors entered into a Securities Purchase Agreement (the
“SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of three hundred thousand dollars ($300,000.00)
of the Company’s convertible promissory notes (the “Note” or “Notes”), which are convertible into the Company’s
Common Stock, $0.001 par value (“Common Stock”), par value $0.001. In connection with the aforementioned Notes, the Company
also issued to the investors a warrant to purchase (the “Purchase Warrant”) a certain number of shares of Common Stock, which
are equal to 20% of the shares of Common Stock issuable upon conversion of the Note, based on a price of $2.00 per share. These warrants
have a term of five (5) years, with an exercise price of $2.00 per share. Unless the Company chooses to terminate earlier, the offering
and the sale of the Notes shall terminate on the sooner of the sale of the maximum offering amount or April 30, 2023. However, the Company
has the option to extend this offering to June 30, 2023.
The
Notes have a maturity date of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified offering. Interest on
the Note shall accrue on the unpaid principal balance of this Note at the rate of eight percent (8%) per annum, and will be calculated
on an actual/365-day basis. In the event that the Company moves forward with a qualified offering, as referenced in the SPA, the Holder
may convert the unpaid and outstanding principal plus any accrued and unpaid Interest into shares of the Company’s Common Stock
at a conversion price equal to a 20% discount to the offering price.
Further, in connection with the SPA, the
Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or prior to the close of business
on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares of Common Stock, with 20%
of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the Holder, pursuant to the SPA
between the Holder and the Company, dated February 24, 2023. The Company issued Warrants to purchase an aggregate of 30,000 shares of
Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.
On
February 28, 2023, the Company entered into a securities purchase agreement for a total of $128,250 with an accredited investor. The
notes issued are convertible into common stock at a 65% 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 40% depending on when it is repaid.
On
March 27, 2023, H-Cyte, Inc., (the “Company”) and three related party investors entered into a Securities Purchase
Agreement (the “SPA”), whereby, the Company sold and issued to the certain investors, an aggregate of one hundred twenty
five thousand dollars ($125,000.00)
of the Company’s convertible promissory notes (the “Note” or “Notes”), which are convertible into the
Company’s Common Stock, $0.001
par value (“Common Stock”). On April 12, 2023, the Company and an additional investor entered into the SPA, whereby, the Company sold
and issued an aggregate of thirty five thousand dollars ($35,000.00) of the Company’s Notes.
In connection with the aforementioned Notes, the Company also issued to the investors a warrant to purchase (the “Purchase
Warrant”) a certain number of shares of Common Stock, which are equal to 20% of the shares of Common Stock issuable upon
conversion of the Note, based on a price of $2.00
per share. These warrants have a term of five (5)
years, with an exercise price of $2.00
per share. Unless the Company chooses to terminate earlier, the offering and the sale of the Notes shall terminate on the sooner of
the sale of the maximum offering amount or April 30, 2023. However, the Company has the option to extend this offering to June 30,
2023.
The March 27, 2023 Notes have a maturity date
of the earlier of (i) one year from issuance; or (ii) upon the closing of a qualified offering. The April 12, 2023 Note
has a maturity date 60 days from issuance. Interest on the Note shall accrue on the unpaid principal balance of this Note at the
rate of eight percent (8%) per annum, and will be calculated on an actual/365-day basis. In the event that the Company moves forward
with a qualified offering, as referenced in the SPA, the Holder may convert the unpaid and outstanding principal plus any accrued
and unpaid Interest into shares of the Company’s Common Stock at a conversion price equal to a 20% discount to the offering
price.
Further,
in connection with the SPA, the Company also issued a Common Stock Purchase Warrant to certain investors, which are exercisable on or
prior to the close of business on the five (5) year anniversary of the initial exercise date, to purchase up to a certain amount of shares
of Common Stock, with 20% of the shares of Common Stock issuable upon conversion of the Convertible Promissory Note purchased by the
Holder, pursuant to the SPA between the Holder and the Company. The Company issued Warrants to purchase an aggregate of 13,500 shares
of Common Stock. The exercise price per share of the Common Stock under this Warrant is $2.00.