Creative Medical Technology Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. The company is a commercial-stage biotechnology business focused on regenerative medicine; current commercial activity centers on CaverStem and FemCelz physician kits. StemSpine, ImmCelz and other pipeline programs had not commenced commercial operations.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $10,000 | $77,000 | $20,000 | $147,000 |
| Gross profit | $6,000 | $59,400 | $11,500 | $104,404 |
| Operating expenses | $839,436 | $301,871 | $1,664,722 | $896,175 |
| Operating loss | $(833,436) | $(242,471) | $(1,653,222) | $(791,771) |
| Net income (loss) | $(1,843,596) | $394,851 | $23,087,241 | $2,294,768 |
| Net cash used in operating activities | Not provided by quarter | Not provided by quarter | $(1,054,446) | $(491,542) |
Gross margin was approximately 60% in Q3 2021 versus 77% in Q3 2020, and 58% for the first nine months of 2021 versus 71% in 2020. The reported nine-month net income chiefly reflects a $26.0 million gain from changes in fair value of derivative liabilities; it does not indicate operating profitability. Q3 2021 interest expense was $1.3 million, partly offset by a $489,157 gain on extinguishment of convertible notes.
Financial position and financing
- At September 30, 2021, cash was $2.38 million, current assets were $2.58 million, current liabilities were $3.50 million, and working capital deficit was $917,327. Total assets were $3.13 million and stockholders’ deficit was $363,345.
- Cash increased from $98,012 at December 31, 2020. Nine-month financing cash inflow was $3.53 million; investing cash outflow was $200,000, including an advance to a related party.
- In August, the company issued 15% original-issue-discount senior bridge notes with $4.46 million aggregate principal to investors and $690,000 additional principal in exchange for Series B and C preferred shares. The notes mature February 11, 2022, are generally non-convertible and non-interest-bearing except upon default, and must be redeemed earlier from net proceeds of a future securities offering. The balance sheet reports notes payable, net of discount, of $2.74 million; scheduled future loan maturities total $5.15 million in 2022.
- The notes were accompanied by five-year warrants for 363,046 shares at an initial $14.175 exercise price, plus a placement-agent warrant for 20,189 shares. The company also reported 481,351 warrants outstanding at September 30.
- Common shares outstanding were 2,458,242 at September 30. A 1-for-500 reverse split took effect November 10, 2021; reported share figures were restated for the split.
Changes, outlook and risks
- Revenue fell 87% year over year in Q3 and 86% for the first nine months. Management attributed the decline to COVID-19 disruption and prioritization of medical resources, including delays to elective procedures.
- Operating expenses increased, mainly from stock-based compensation, legal fees and marketing. Research and development expense of $59,180 related to responding to FDA information requests on the ImmCelz stroke IND filing.
- Management plans to expand CaverStem and FemCelz sales, build a 100-patient StemSpine treatment registry, and coordinate with the FDA toward an ImmCelz Phase I trial. It gave no revenue or earnings guidance.
- Management estimated monthly cash burn of approximately $200,000 and stated that cash and committed funds were expected to cover operations through at least January 2022. Separately, the filing identifies substantial doubt about the company’s ability to continue as a going concern: operating cash outflow, a working capital deficit and debt due in February 2022 make additional financing important. The company reported no alternative funding sources and warned that equity financing could substantially dilute shareholders; failure to raise funds could require curtailing or terminating operations.
- A Form S-1 registration statement filed September 28 contemplated an underwritten offering, but the filing cautions that completion and proceeds were not assured. COVID-19 effects and the limited number of commercial locations (eight U.S. physician locations) remain business risks.
- The company disclosed a dispute over fees under a 2016 banking-services agreement; it believes no amount is due, expects to defend any claim, and recorded no loss provision because a loss was not considered probable. Related-party items include a $200,000 advance and patent/license arrangements involving a company controlled by a director.
Important facts for investors to verify
- Whether the contemplated securities offering closed, its net proceeds, and whether proceeds were sufficient to address the February 2022 bridge-note maturity and operating cash needs.
- The bridge notes’ full repayment terms and current outstanding amount; reported net carrying value differs from the $5.15 million scheduled maturities.
- Whether operating revenue, physician adoption and cash burn improved after September 30, and whether the company maintained operations beyond management’s January 2022 cash-runway estimate.
- FDA status and timing for the ImmCelz IND and Phase I trial, and progress on the StemSpine registry and commercialization.
- The economic and dilution effects of warrants, future financing, related-party arrangements, and the November 2021 reverse split.
- Resolution or escalation of the banking-services fee dispute and any material changes in the company’s going-concern assessment.