Creative Medical Technology Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The unaudited filing covers a commercial-stage biotechnology company developing adult stem-cell treatments. Its marketed CaverStem and FemCelz kits were available through physicians at 14 locations in the United States and Europe; StemSpine and ImmCelz were also key development and commercialization priorities.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $10,000 | $27,900 | $10,000 | $70,000 |
| Gross profit (margin) | $5,500 (55.0%) | $17,100 (61.3%) | $5,500 (55.0%) | $45,004 (64.3%) |
| Operating expenses | $521,342 | $231,364 | $825,286 | $594,304 |
| Operating loss | $(515,842) | $(214,264) | $(819,786) | $(549,300) |
| Net income (loss) | $(2,905,182) | $(1,842,563) | $24,930,837 | $1,899,917 |
| Net cash used in operations | Not separately stated | Not separately stated | $(663,657) | $(317,528) |
The six-month net income was largely driven by a $26.2 million noncash gain from remeasuring derivative liabilities; it should not be read as evidence of profitable operations. In Q2, derivative remeasurement instead produced a $2.25 million loss. Six-month interest expense was $570,414.
Liquidity, debt and capital
- At June 30, cash was $158,588, total current assets were $158,588, current liabilities were $1,446,762, and working capital deficit was $1,288,174. Total assets were $732,309; stockholders’ deficit was $714,453.
- Cash increased by $60,576 in the first half: $724,233 provided by financing activities was partly offset by $663,657 used in operations. Financing included preferred-stock proceeds, convertible debt and related-party advances.
- Current liabilities included $117,267 of convertible notes, a $105,000 note payable, $237,300 of related-party advances and $248,097 of derivative liabilities. Convertible notes had variable conversion discounts; the filing reports approximately 12 million potential shares from notes at June 30.
- Common shares outstanding increased from 768.5 million at year-end 2020 to 1.220 billion at June 30, 2021. The filing reports 1,226,141,742 shares outstanding on August 16, 2021. Series B and C preferred shares carry 10% cumulative dividends, conversion and redemption provisions, and liquidation preferences.
Changes, outlook and risks
- Revenue fell 64% in Q2 and 86% for the first half year over year. Management attributed the decline to COVID-19-related delays and prioritization of medical resources; elective procedures were on hold in some markets.
- Q2 selling, general and administrative expense rose 132% to $498,321, principally due to $211,768 of stock-based compensation, higher legal fees and officer consulting costs. First-half SG&A increased 39% to $779,244. No research and development expense was reported for either comparative period.
- Management planned to expand CaverStem and FemCelz sales, build a 100-patient StemSpine registry, and coordinate with the FDA on an ImmCelz Phase I trial. The company said its cash and committed funds were expected to cover operations only through at least September 2021, based on an estimated monthly cash burn of about $100,000. It had no alternative funding sources identified and warned that failure to obtain financing could require curtailing or terminating operations. The filing states substantial doubt exists about the company’s ability to continue as a going concern.
- After quarter-end, the company reported receiving approximately $3.7 million in proceeds from senior notes: $4.456 million principal issued for $3.788 million, maturing February 11, 2022. The notes are nonconvertible and generally non-interest-bearing except upon default; future offering proceeds must be used to redeem them. The offering also included five-year warrants for 157.2 million shares, plus placement-agent warrants for 10.1 million shares. The filing also reports subsequent borrowing and repayment of convertible notes and repayment of short-term loans.
- A disputed fee claim concerning a 2016 banking-services agreement remains unresolved. Management recorded no loss provision because a loss was not considered probable. COVID-19 impacts, access to capital, variable-price debt conversions, dilution, and near-term note repayments remain material risks.
Important facts for investors to verify
- Whether post-quarter financing and subsequent debt repayments provide adequate liquidity beyond the near term, given the February 2022 senior-note maturity and going-concern warning.
- The composition and accounting impact of the derivative-liability gain that drove reported first-half net income, including how future stock-price changes may affect results.
- The actual and potential dilution from common-share issuance, discounted convertible notes, preferred-stock conversion terms, and the substantial warrant grants.
- Whether revenue and physician activity recover from pandemic-related disruptions and whether StemSpine and ImmCelz development milestones proceed as planned.
- The status and potential exposure of the disputed banking-services claim and any other contingencies.