Creative Medical Technology Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results are for the company and its wholly owned subsidiary. The company markets CaverStem and FemCelz physician procedure kits and is commercializing StemSpine, while advancing its Amniostem program.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $42,100 | $50,800; down 17% |
| Gross profit / margin | $27,904 / 66.3% | $36,561 / 72.0% |
| Operating expenses | $362,940 | $287,260 |
| Operating loss | $(335,036) | $(250,699) |
| Net income (loss) | $3,742,480 | $(797,366) |
| Cash from operating activities | $(195,321) | $(273,015) |
| Cash at period end | $38,327 | $88,648 at Dec. 31, 2019 |
Q1 net income chiefly reflected a $4.4 million gain from revaluing derivative liabilities, rather than operating profitability. Interest expense was $323,223. The company reported no income tax provision.
At March 31, 2020, total assets were $469,310, current liabilities were $3,651,565, and the working capital deficit was $3,602,038. Convertible notes were reported at $1,031,360 net of discount; the debt note lists $1,470,734 in future maturities, including $1,302,434 in 2020 and $168,300 in 2021. Derivative liabilities fell to $1,840,921 from $6,847,877 at year-end. Stockholders’ deficit was $3,182,255.
Material changes and financing
- Revenue fell by $8,700; management attributed the decline to COVID-19-related suspension of elective procedures. Cost of revenue was nearly unchanged, but gross margin declined.
- General and administrative expense rose 23% to $346,168, primarily due to $30,000 more in management fees and $41,282 more in accounting and legal expenses. Research and development expense was zero.
- The company issued $168,300 face value of convertible notes in Q1, reporting net cash proceeds of $145,000 in the cash flow statement. The notes carry 8% interest, mature in February 2021, and have conversion prices set at substantial discounts to market. The filing’s unregistered-securities disclosure reports proceeds of $150,278; this differs from the cash flow statement and warrants verification.
- During Q1, 61,016,388 shares were issued upon conversion of debt, interest and fees. Common shares outstanding were 85,756,727 at March 31. In April and May, the company issued a further 59,094,721 shares to convert $98,512 of notes; reported shares outstanding on May 11 were 144,855,448.
- Potential conversion of notes was approximately 589 million shares at March 31. The reported diluted weighted-average share count was 776.6 million, versus 40.7 million basic; diluted EPS was reported as $0.00, compared with basic EPS of $0.09.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing operating cash outflow, a working capital deficit and limited cash. It estimated monthly cash burn at approximately $100,000 and said available cash and committed funds would cover operations only through at least May 2020. Continued operations depend on additional financing and improved operating cash flow; no alternative funding sources were identified.
- Plans: Over the next 12 months, management planned to expand CaverStem and FemCelz, launch StemSpine, pursue an Amniostem IND filing and seek research partners. The filing provides no quantified revenue or earnings guidance.
- COVID-19: Elective procedures were put on hold in several markets, reducing revenue. Management expected paused orders, sales, training and treatments to resume when physician offices became fully operational, but said the duration and full financial effect were unknown.
- Contingencies and related parties: The company has a dispute with a third party over fees for banking services it says were not performed; it recorded no loss provision because a loss was not considered probable. It owes management and consulting reimbursements to parent company CMH, which employs its executive officers. A related-party patent agreement also provides for a $300,000 payment following the decision to commercialize StemSpine using autologous cells.
Most important facts for investors to verify
- Whether the company secured financing after the filing and how long available cash supported operations.
- The proceeds discrepancy for Q1 convertible notes ($145,000 in cash flows versus $150,278 in the unregistered-securities disclosure), and the debt maturity and discount figures.
- The effect of discounted, variable-price conversions and subsequent share issuances on actual and potential dilution.
- How much of reported net income came from noncash derivative revaluation, and whether operating revenue and margins recovered after COVID-related disruptions.
- The status and payment terms of the $300,000 related-party StemSpine patent obligation and the third-party banking-fee dispute.