Creative Medical Technology Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. The company is a commercial-stage biotechnology business focused on adult stem-cell procedures in urology, orthopedics, and neurology. Its marketed products include CaverStem and FemCelz; it is also pursuing commercialization of StemSpine and development of Amniostem.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $77,000 | $57,500 | $147,000 | $169,900 |
| Gross profit / margin | $59,400 / 77.1% | $49,500 / 86.1% | $104,404 / 71.0% | $128,461 / 75.6% |
| Operating expenses | $301,871 | $322,922 | $896,175 | $928,040 |
| Operating loss | $(242,471) | $(273,422) | $(791,771) | $(799,579) |
| Net income (loss) | $394,851 | $(2,406,124) | $2,294,768 | $(3,291,723) |
- Q3 revenue rose $19,500, or 34%, year over year. Nine-month revenue fell $22,900, or approximately 13.5%; the MD&A describes the decrease as 38%, which does not agree with the reported amounts.
- Net income reflected substantial noncash gains from remeasurement of derivative liabilities: $926,532 in Q3 and $3,996,775 for the nine months. The nine-month result was not driven by operating profitability.
- Nine-month interest expense was $910,236, versus $1,487,984 in 2019. No income tax provision was recorded in either period.
- Cash used in operations was $491,542, compared with $960,661 in the prior-year period. Financing provided $441,600, including $458,600 of net convertible-note proceeds and $17,000 of repayments. Cash declined by $49,942 to $38,706.
Financial position, debt, and liquidity
- At September 30, 2020, cash was $38,706, total assets were $425,240, and current liabilities were $3,201,580. Working capital deficit was $3,162,874; stockholders’ deficit was $2,776,340.
- Convertible notes payable, net of discounts, were $908,503. Derivative liabilities were $1,570,971. The company reported $1,197,354 of future loan maturities in its debt note, but maturity disclosures elsewhere in the filing differ; investors should verify the schedule.
- Management stated that the company had substantial doubt about its ability to continue as a going concern and depended on additional financing and improved operating cash flow. It had no alternative funding sources identified and warned that failure to obtain financing could require a substantial curtailment or termination of operations.
- Common shares outstanding increased from 22.5 million at December 31, 2019 to 475.7 million at September 30, 2020; the filing reports 577.1 million shares outstanding on November 6, 2020. Conversions of debt and related-party liabilities were major sources of share issuance.
- Convertible notes had variable conversion prices at substantial discounts to market. The company estimated that notes could convert into approximately 813 million shares as of September 30, in addition to warrants and other potential dilution.
Business developments, outlook, and risks
- Management attributed the nine-month revenue decline to COVID-19 disruptions and the suspension of elective procedures, particularly from March through June. It said Q3 sales growth reflected a partial return to activity; physician-provider incentives contributed to lower gross margins.
- Plans for the next 12 months included expanding CaverStem and FemCelz, launching StemSpine, and pursuing an IND application and research partnerships for Amniostem. These plans are subject to available capital; no quantified revenue or earnings guidance was provided.
- The company reported monthly cash burn of approximately $100,000 and said current cash would cover only a few more months. A separate plan-of-operations statement says cash and committed funds would cover expenses through at least August 2020, an apparently stale or inconsistent estimate given the September 30 reporting date.
- Related-party management services cost $135,000 in Q3 under a $45,000 monthly reimbursement arrangement. The company also disclosed a dispute over fees for banking services allegedly not performed; it recorded no loss provision because payment was not considered probable.
- Management reported disclosure controls and procedures were effective and no material changes in internal control occurred during the quarter.
Key facts for investors to verify
- Reconcile the conflicting note-maturity disclosures, including the stated 2020–2021 maturities, February–June 2021 maturities in Part II, and February–September 2022 maturities in the debt note.
- Confirm current cash runway, financing availability, and the status of management’s going-concern plans.
- Assess dilution from variable-price convertible notes, warrants, related-party conversions, and post-quarter share issuances.
- Evaluate the sustainability of reported net income given the large derivative-liability fair-value gain and continued operating losses.
- Check the reported nine-month revenue decline percentage against the financial statements; the dollar amounts imply a decline of approximately 13.5%, not 38%.