Creative Medical Technology Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company commercializes disposable stem-cell separation kits for Caverstem® (erectile dysfunction) and FemCelz™ (female sexual dysfunction), and holds or pursues related stem-cell treatment licenses and patents. Financial statements are unaudited.
Financial results and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $50,800 | $9,600 |
| Cost of revenue | $14,239 | $2,400 |
| Gross profit / margin | $36,561 / approximately 72% | $7,200 / 75% |
| Operating expenses | $287,260 | $211,416 |
| Operating loss | $(250,699) | $(204,216) |
| Interest expense | $(454,542) | $(191,308) |
| Net loss | $(797,366) | $(7,586,580) |
| Net cash used in operating activities | $(273,015) | $(164,937) |
Cash was $419,477 at March 31, 2019, versus $304,056 at year-end 2018. Current assets were $419,640 and current liabilities $4,182,639, producing a reported working-capital deficit of $3,762,999. Total liabilities were $4,182,639, including $1,079,414 of net current convertible notes and $2,526,952 of derivative liabilities. Stockholders’ deficit was $3,604,780. Cash provided by financing was $388,436; investing cash flow was zero.
Material changes and notable items
- Revenue rose $41,200, or 429%, which management attributed to continued Caverstem commercialization. Gross profit increased to $36,561, while gross margin declined to approximately 72% from 75%.
- General and administrative expense increased 39% to $281,974, attributed mainly to marketing, physician training, and legal and accounting costs related to debt and public-company reporting. Research and development expense was zero, versus $3,200.
- Net loss narrowed substantially from the prior-year quarter, principally because the prior period included a $7,036,772 loss from derivative-liability remeasurement. Q1 2019 recorded a $265,167 gain on that line. The quarter also included a $357,292 loss on extinguishment of convertible notes.
- Convertible-note and related financing activity was significant. The company reported $575,890 of proceeds from convertible notes in the cash-flow statement, $168,300 of note repayments and $19,154 of prepayment premiums. It also disclosed issuing $300,000 face amount of notes in exchange for warrant cancellations. Note conversions and warrant exercises contributed to common shares outstanding increasing from 902,711,370 at December 31, 2018 to 1,007,488,561 at March 31, 2019; 1,043,498,850 shares were outstanding May 15.
- Convertible notes generally have variable conversion prices set at a discount to recent trading prices and may convert into approximately 392 million shares, according to the filing. The company warns that conversions could cause substantial dilution and pressure on its share price.
Outlook, liquidity, risks and contingencies
- Management’s stated 12-month priorities are marketing Caverstem and FemCelz kits, publishing results of the UCLA/LABiomed clinical trial, and partnering with researchers on investigator-initiated neurological studies. The filing provides no quantified revenue or earnings guidance.
- Management estimated monthly cash burn at approximately $100,000 and said cash and committed funds were expected to cover current operations through at least June 2019. Elsewhere, it said cash would meet requirements for only a few more months. The company has no alternative funding sources identified and expects to rely on kit sales, third-party borrowing, and equity financing.
- The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern, citing the quarterly loss, operating cash outflow, and working-capital deficit. Management was negotiating financing, but there is no assurance it can raise capital or achieve profitable operations; failure could require curtailing or terminating operations.
- Convertible-note terms include discounted, floating conversion prices, share-reservation requirements, default penalties and, for certain notes, higher default interest. The filing lists $1,992,225 of future loan maturities: $1,020,125 in 2019 and $972,100 in 2020.
- A dispute over fees under a 2016 banking-services agreement remains unresolved. The company recorded no loss provision because it said a loss was not probable and intends to defend any litigation.
- Related-party management services are charged at $45,000 per month; the payable to the parent company was $153,082 at quarter-end. Repayment is due upon a qualifying equity raise, and the parent may elect payment in discounted common shares.
- Subsequent to quarter-end, the company reported issuing 27,496,186 shares for conversion of $117,134 in notes and 8,514,103 shares for exercise of 10,000,000 warrants during April and May 2019.
Important facts for investors to verify
- Available cash, committed financing, actual monthly burn, and the timing and sufficiency of any new capital—especially given the going-concern warning and projected runway.
- Reconciliation of financing disclosures: the filing cites $575,890 of note proceeds in cash flows, $672,100 of notes issued with $605,300 net proceeds in MD&A, and $972,100 face amount of notes in the unregistered-sales section, plus $300,000 of exchange notes.
- Outstanding note principal, maturity and default exposure, and the number of shares issuable under floating-price conversions; the filing’s approximately 392 million potential conversion shares are price-dependent.
- How continued conversions and warrant exercises affect share count, ownership dilution, and the company’s ability to preserve operating liquidity.
- Commercial traction and economics of Caverstem and FemCelz, including whether reported revenue growth can support operating costs and clinical-program plans.
- The subsequent-events note says management reviewed events through May 15, 2018, despite reporting April–May 2019 conversions; verify the apparent date error and the complete subsequent-event disclosure.