Creative Medical Technology Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company is a commercial-stage biotechnology business, with current sales primarily from physician-use CaverStem and FemCelz kits. It also plans to advance StemSpine and its ImmCelz stroke program. Its kits were available through physicians at 14 locations in the United States and Europe.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $0 | $42,100 in the financial statements; MD&A says $42,500 |
| Gross profit | $0 | $27,904 |
| Operating expenses | $303,944 | $362,940 |
| Operating loss | $(303,944) | $(335,036) |
| Interest expense | $(336,076) | $(323,223) |
| Gain from change in fair value of derivative liabilities | $28,476,039 | $4,400,739 |
| Net income | $27,836,019 | $3,742,480 |
| Basic earnings per share | $0.02 | $0.09 |
| Cash used in operating activities | $(441,518) | $(195,321) |
Reported net income was driven principally by a large, noncash derivative-liability fair-value gain, not sales: the company had no revenue and an operating loss. Cash and cash equivalents were $275,134 at quarter-end, versus $98,012 at December 31, 2020. Current liabilities were $3,314,449, compared with current assets of $275,134; the reported working-capital deficit was $3,039,315. Total assets were $871,876 and stockholders’ deficit was $2,442,573.
Convertible notes had a net carrying amount of $327,225 after discount at March 31; scheduled principal maturities totaled $662,792, including $505,642 in 2021 and $157,150 in 2022. The company issued $157,150 face amount of notes during the quarter, at 8% interest, with conversion prices generally set at a substantial discount to recent market prices. It also raised $462,000 in reported preferred-stock proceeds and received $22,000 in related-party advances.
Changes, financing, and dilution
- Revenue fell to zero from the prior-year quarter; management attributed the decline to COVID-19 and interruptions to elective procedures. The filing says costs also declined, but provides no assurance on when revenue will recover.
- Operating expenses declined year over year. The statements report selling, general and administrative expense of $280,923; MD&A gives $280,293. Amortization rose to $23,021 from $16,772.
- Derivative liabilities fell from $38,741,832 at year-end to $2,275,578 at quarter-end. The quarter included $314,702,077 common shares issued upon conversion of notes, accrued interest and fees, and a noncash reclassification of derivative liabilities to equity. The substantial fair-value gain increased reported earnings.
- Common shares outstanding rose from 768,536,617 at December 31, 2020 to 1,140,079,954 at March 31, 2021; the filing reports 1,142,048,685 outstanding on May 7, 2021. The quarter also included 44,642,847 shares issued for related-party patent and management liabilities, preferred financing-related service shares, and a cashless warrant exercise.
- The company issued 350 Series B and 150 Series C preferred shares. Both series carry cumulative 10% annual dividends, conversion and redemption rights, and most-favored-nation provisions. Their stated liquidation preferences were $420,000 and $180,000, respectively.
Outlook, risks, and contingencies
Management’s stated priorities for the next 12 months were expanding CaverStem and FemCelz sales, building the StemSpine patient registry, and coordinating with the FDA toward an ImmCelz Phase I trial. These are plans, not assured outcomes; the filing provides no revenue or earnings guidance. Management estimated a monthly cash burn of about $100,000 and said available cash and committed funds were expected to cover operations only through at least June 2021. It also said the company had no alternative funding sources and would need additional financing or might have to revise its business plan.
The company disclosed substantial doubt about its ability to continue as a going concern, citing operating cash outflows, a working-capital deficit, minimal revenue, and dependence on additional financing. Management was negotiating possible financing, but there was no assurance it would succeed. COVID-19 continued to adversely affect demand as medical resources were prioritized and elective procedures were paused in some markets.
Other notable exposures include potentially significant dilution from discounted, variable-price convertible debt; related-party management reimbursements of $45,000 per month; and patent-related obligations and royalties. A dispute over fees for banking services that were not performed remained unresolved; the company had not recorded a loss provision because it considered a loss not probable. The filing states that management found disclosure controls effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Resolve the filing’s conflicting prior-year revenue figures ($42,100 in the statements versus $42,500 in MD&A) and SG&A figures ($280,923 versus $280,293).
- Confirm the source, timing, and terms of additional financing needed to fund operations beyond the stated near-term runway.
- Assess the effects of variable conversion-price notes, preferred-stock rights, and further equity issuance on dilution and liquidity.
- Track whether sales resume and whether StemSpine registry and ImmCelz clinical-development plans advance, including any required FDA steps.
- Evaluate the assumptions behind the derivative-liability valuation and the extent to which reported earnings reflect noncash accounting gains rather than operating performance.