Creative Medical Technology Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company sells disposable kits used with its Caverstem erectile-dysfunction procedure and FemCelz vaginal-rejuvenation procedure, and is developing additional stem-cell treatments. The financial statements are unaudited.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $61,600 | $4,800 | $112,400 | $14,400 |
| Gross profit | $42,400 | $2,272 | $78,961 | $9,472 |
| Operating loss | $275,458 | $314,830 | $526,157 | $519,046 |
| Net loss | $88,233 | $6,432,404 | $885,599 | $14,018,984 |
| Cash used in operations | Not presented by quarter | $602,380 | $409,702 |
- Gross margin was approximately 68.8% for Q2 and 70.3% for the first half, compared with approximately 47.3% and 65.8%, respectively, in 2018.
- At June 30, cash was $204,112, down from $304,056 at December 31, 2018. Current assets were $205,112 against current liabilities of $2,995,006; management reported a $2,789,894 working-capital deficit.
- Total liabilities were $2,995,006, including convertible notes payable, net of discount, of $1,069,827 and derivative liabilities of $1,384,655. Disclosed future note maturities totaled $1,645,742: $640,642 in 2019 and $1,005,100 in 2020.
- Financing activities provided $502,436 of net cash in the first half, including $689,890 in convertible-note proceeds, offset by debt repayments and premiums. Stockholders’ deficit was $2,636,961.
Changes versus the prior period
- Revenue rose 1,183% in Q2 and 681% in the first half, which management attributed to increased disposable-kit sales for Caverstem and FemCelz. FemCelz sales began in Q2 2019.
- First-half general and administrative expense increased 17% to $594,546, mainly reflecting marketing, training, and public-company costs. Research and development expense was zero, versus $7,400 in the prior-year half.
- Reported net loss narrowed substantially, but comparisons were heavily affected by changes in the fair value of derivative liabilities: the prior-year periods included large losses, while the 2019 statements report gains. Interest expense rose to $958,796 for the first half from $604,303.
- Common shares outstanding increased from 902.7 million at December 31, 2018 to 1.188 billion at June 30, 2019; the filing reports 1.460 billion shares outstanding on August 13, 2019.
Outlook, risks, and unusual items
- Management plans to market disposable kits, publish results of the UCLA/LABiomed clinical trial, and partner with researchers on investigator-initiated neurological trials. No revenue, earnings, or cash-flow guidance is provided.
- The company states that substantial doubt exists about its ability to continue as a going concern. It reported losses, negative operating cash flow, and a working-capital deficit, and depends on additional financing and ultimately sufficient operating cash flow. Management said available cash and committed funds were expected to cover current operations through at least September 2019; elsewhere it said cash would meet requirements for only a few more months.
- Many notes have variable conversion prices set at discounts to recent trading prices, with no floor in some cases. The company warns that conversions could cause substantial shareholder dilution and pressure on its share price. It reported approximately 737.5 million shares issuable upon conversion in the EPS note, while another note gives an approximate 93 million-share figure.
- After quarter-end, the company disclosed a July 2019 sale of convertible notes and warrants to three investors, a $50,000 unsecured CEO loan, and issuance of approximately 272.2 million shares in July and August for conversion of $209,485 in notes.
- A dispute over fees for banking services is being litigated in New York. The company recorded no loss provision, stating that a loss was not probable. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the derivative-liability fair-value disclosures: the income statement reports first-half derivative gains of $956,646, while the notes describe a $702,785 revaluation loss and provide other figures.
- Reconcile the sharply different potential-conversion share estimates (approximately 737.5 million versus approximately 93 million) and assess the full dilution from notes, warrants, and subsequent conversions.
- Confirm current cash runway and the status, terms, and availability of additional financing; the filing identifies no secured long-term funding source.
- Verify the outstanding debt and maturity schedule against individual note balances and the reported $1,069,827 net carrying amount.
- Assess whether growing kit sales can scale sufficiently to cover operating costs, and monitor progress and costs for the clinical and neurological programs.