CREATIVE MEDICAL TECHNOLOGY HOLDINGS, INC. quarterly report, Q2 FY2020

Creative Medical Technology Holdings, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. The company is a commercial-stage biotechnology business focused on adult stem-cell treatments, selling CaverStem and FemCelz kits and pursuing commercialization of StemSpine. Its products were available through physicians at 15 locations in the United States and Europe.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$27,900	$61,600	$70,000	$112,400
Gross profit (gross margin)	$17,100 (61%)	$42,400 (69%)	$45,004 (64%)	$78,961 (70%)
Operating loss	$(214,264)	$(275,458)	$(549,300)	$(526,157)
Net income (loss)	$(1,842,563)	$(88,233)	$1,899,917	$(885,599)

• Q2 revenue fell 55% year over year; six-month revenue declined 38%. Management attributed the reductions to COVID-19-related suspension of elective procedures. Lower revenue and provider incentives reduced gross margins.
• Q2 SG&A fell 31% to $214,886; six-month SG&A fell 6% to $561,054. No research and development expense was reported for either comparative period.
• Six-month net income was driven by a $3.07 million noncash gain from the change in fair value of derivative liabilities; the company still reported a $549,300 operating loss. In Q2, derivative remeasurement instead contributed a $1.33 million expense.
• Six-month operating cash use was $317,528, versus $602,380 in 2019. Financing provided $265,900 net, and cash declined by $51,628 to $37,020.

Financial position, debt and liquidity

• At June 30, cash was $37,020, total current assets were $39,620, and current liabilities were $4.65 million. The reported working capital deficit was $4.61 million; stockholders’ deficit was $4.20 million.
• Convertible notes, net of discount, were reported at $1.05 million, and derivative liabilities were $2.81 million. The debt note lists $1.38 million of future maturities, but its maturity schedule conflicts with other debt disclosures in the filing.
• During the first half, the company issued $318,900 face value of convertible notes for $275,200 net proceeds. The notes generally bear 8% interest and have variable conversion prices at 60%–71% of specified recent trading prices. Approximately 700 million shares could be issued upon conversion of notes outstanding at June 30.
• Common shares outstanding rose from 22.5 million at December 31, 2019 to 245.3 million at June 30, largely through debt and related-party liability conversions. The filing reports 333.1 million shares outstanding on August 9, 2020.
• Management stated that approximately $37,000 of cash and an estimated monthly cash burn of about $100,000 would fund operations only through at least August 2020. It expects to rely on sales, debt or equity financing; no committed long-term funding source was identified.

Outlook, risks and unusual items

• Management’s next-12-month plans include expanding CaverStem and FemCelz sales, launching StemSpine, and pursuing an IND application and research partnerships for Amniostem. No quantified revenue or earnings guidance was provided.
• The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing operating cash outflows, a working capital deficit and dependence on additional financing. Management cautioned that financing may not be available and that operations could be curtailed or terminated.
• COVID-19 restrictions reduced elective procedures and revenue. Management expected delayed procedures and orders to resume as physician offices reopened, but the timing and financial effect remained uncertain.
• Variable-price convertible debt and warrants create significant potential dilution; warrant count increased to 34.7 million, including anti-dilution adjustments. The six-month diluted weighted-average share count was reported as 960.4 million, versus basic shares of 105.0 million; diluted EPS was $0.00 despite basic EPS of $0.02.
• Related-party management services are reimbursed at $45,000 per month under an agreement with the parent company. A dispute over fees under a 2016 banking-services agreement remains unresolved; the company recorded no loss provision because it did not consider a loss probable.
• Subsequent events disclosed July and August 2020 note issuances and conversion of $235,694 of notes into 90.8 million shares. The subsequent-events note also says management reviewed events through May 15, 2020, an apparent date inconsistency.

Important facts for investors to verify

• Near-term cash runway, financing availability and the assumptions behind management’s cash-burn estimate.
• Convertible-note balances, maturity dates, conversion-price formulas and the potential share dilution; reconcile the filing’s debt maturity disclosures.
• The derivative-liability accounting and the unusually large gap between basic and diluted weighted-average shares.
• The timing and extent of recovery in elective procedures and whether planned product commercialization and Amniostem development can be funded.
• The subsequent-events review date and the reported share counts following post-quarter conversions.