Business context and reporting period
Creative Medical Technology Holdings, Inc. (Nasdaq: CELZ) filed this Form 10-K for the fiscal year ended December 31, 2021. The company develops regenerative medicine and stem-cell treatments. Its limited commercial sales come primarily from disposable kits used by physicians for CaverStem (erectile dysfunction) and FemCelz (female sexual dysfunction), offered at eight U.S. locations. StemSpine is in clinical-site recruitment; ImmCelz, a stroke-treatment program requiring FDA authorization, remained in development. Other pipeline programs had not commenced commercial operations.
Financial results and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $87,754 | $164,500 |
| Gross profit (gross margin) | $39,805 (45.4%) | $113,904 (69.2%) |
| Operating expenses | $3,165,754 | $1,228,739 |
| Operating loss | $(3,125,949) | $(1,114,835) |
| Interest expense | $(4,278,433) | $(1,229,590) |
| Net income (loss) | $19,211,768 | $(36,325,230) |
| Net cash used in operations | $(2,215,782) | $(434,556) |
The 2021 net income was driven principally by a $26.0 million gain from the change in fair value of derivative liabilities, not by operating performance. The comparable 2020 period included a $34.0 million derivative fair-value loss. Both years also included significant noncash debt-discount amortization; 2021 included $4.16 million.
At December 31, 2021, cash was $10.72 million, current assets $10.74 million, current liabilities $1.05 million, and working capital approximately $9.81 million. Total assets were $11.27 million and stockholders’ equity was $10.22 million. The company reported no outstanding loans or derivative liabilities at year-end. Cash used in investing activities was zero; net cash provided by financing activities was $12.84 million.
Material changes versus 2020
- Revenue fell $76,746, or 46.7%, which management attributed primarily to COVID-19 disruptions to elective procedures. A fourth-quarter direct-to-patient sales test increased procedures and revenue per procedure but reduced margins; the company returned to selling kits through physicians.
- Gross profit declined 65.1%, while operating expenses rose about $1.94 million. The increase included the $707,116 accrual for a vendor arbitration award, stock-based compensation, board consulting, marketing and directors’ and officers’ insurance.
- The December 2021 public offering raised $16.00 million gross through 3.875 million common shares and accompanying warrants. The company used proceeds in part to repay $5.15 million of senior notes and repurchase the CEO’s Series A preferred stock for approximately $195,000. Net proceeds reported in the cash flow statement were $14.76 million.
- Common shares outstanding increased materially: 6,338,864 at year-end 2021 versus 1,537,074 at year-end 2020. A 1-for-500 reverse split took effect in November 2021. The company reported 6,604,820 warrants outstanding at year-end 2021.
Outlook, risks and unusual items
- Management estimated that year-end cash would fund anticipated operating costs and capital needs through at least March 2023, but said additional capital would be needed to support operations, research, trials and commercialization. Future funding may dilute shareholders, and availability on acceptable terms is uncertain.
- Management expects continued operating losses. Commercial revenue remains small, and the company’s pipeline depends on clinical evidence, regulatory outcomes, financing and successful commercialization. The company relies on a limited sales organization and third-party kit manufacturers and research providers.
- The company filed an IND for a Phase I ImmCelz stroke study in January 2021 and described responding to FDA inquiries; the filing does not establish that the FDA authorized the study to proceed. Management considers certain autologous procedures exempt from FDA premarket review, a regulatory position that could be challenged.
- The Spencer Clarke arbitration appeal was denied in December 2021. The company accrued $707,116 and reported that the award was paid in January and March 2022, resolving the matter.
- Subsequent to year-end, the company entered three-year employment agreements with its CEO and CFO, with annual base salaries of $330,000 and $300,000, respectively, targeted annual cash bonuses of 30% of salary, and annual option grants. The company also disclosed issuance of 180,180 shares in February 2022 to pay the $250,000 Jadi Cell license fee.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether commercial sales recover from the pandemic-related decline, and whether the company can sustain margins after ending its direct-to-patient test.
- The status of the ImmCelz IND and planned Phase I trial, progress and evidence from the StemSpine study, and the regulatory basis for marketing its autologous procedures.
- Actual cash burn and financing needs against management’s stated March 2023 runway, including any subsequent capital raises or material changes in spending.
- Potential dilution from outstanding warrants, the December offering and later share issuances; confirm current shares outstanding and warrant terms in subsequent filings.
- Whether the reported 2021 net income is being interpreted appropriately: it was largely attributable to a noncash derivative-liability fair-value gain, while operating losses and operating cash use continued.