Creative Medical Technology Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company describes itself as commercial stage after beginning sales of stem-cell separation equipment and disposable kits for its Caverstem erectile-dysfunction procedure in Q4 2017. It also holds or licenses intellectual property relating to male infertility, amniotic stem cells, erectile dysfunction, lower-back pain, and neurological treatments.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $52,400 | $0 | $66,800 | $0 |
| Gross profit (margin) | $16,005 (30.5%) | $0 | $25,477 (38.1%) | $0 |
| Operating expenses | $290,840 | $294,999 | $819,358 | $931,836 |
| Operating loss | $(274,835) | $(294,999) | $(793,881) | $(931,836) |
| Net loss | $(1,571,020) | $(52,182) | $(15,590,004) | $(1,181,889) |
- Q3 other expense was $1,296,185, including $919,147 of derivative-liability remeasurement loss and $377,038 interest expense. Nine-month other expense was $14,796,123, including $14,311,427 of derivative-liability remeasurement loss, $981,341 interest expense, and a $496,645 gain on extinguishment of convertible notes.
- The nine-month net loss was therefore far greater than the $793,881 operating loss, primarily because of non-operating derivative valuation losses and debt-related interest expense. The filing’s MD&A contains a passage that appears to call the $15.59 million net loss an “operating loss”; the statement of operations reports operating loss of $793,881.
- At September 30, cash was $172,832, accounts receivable $14,000, and total assets $355,623. Current liabilities were $7,709,559, including $6,818,117 of derivative liabilities; total liabilities were $7,709,559. Stockholders’ deficit was $7,353,936, and the reported working-capital deficit was $7,522,727.
- For the first nine months, operating cash outflow was $756,639 and financing cash inflow was $915,774; cash increased from $13,697 to $172,832. Financing included $1,378,072 of convertible-note proceeds, offset by $405,294 of note repayments and $57,004 of prepayment premiums.
Changes, financing and dilution
- Revenue began to appear in 2018, but remained limited. Q3 G&A increased 40% year over year to $282,670, mainly from marketing and travel associated with Caverstem commercialization. Nine-month G&A rose 6% to $793,216. R&D fell 97% in Q3 and 94% year to date, primarily as clinical research spending for the erectile-dysfunction trial declined.
- During the first nine months, the company issued $1,448,750 in convertible notes for net proceeds of $1,378,072, in addition to notes issued for release of reserved shares and in exchange for existing debt. Many notes have variable conversion prices at substantial discounts to recent trading prices, and some include default premiums, elevated default interest, warrants, and share-reservation requirements.
- At September 30, common shares issued were 784,794,117 and outstanding were 784,194,117; the filing reports 830,514,426 shares outstanding on November 14. Approximately 74 million shares were potentially issuable on conversion of notes, and 255,772,846 warrants were outstanding. The company cautions that variable conversion terms can increase dilution and pressure the share price.
- The derivative liability increased from $1,309,190 at December 31, 2017 to $6,818,117 at September 30, 2018. This fair-value liability is based on Level 3 inputs and is sensitive to assumptions including stock price and volatility.
Outlook, risks and unusual items
- Management planned to market Caverstem equipment and kits, complete the UCLA/LABiomed clinical trial, and support investigator-initiated trials for neurological programs. Estimated cost to complete the clinical trials was approximately $300,000, excluding overhead and other company costs. No specific revenue or earnings guidance was provided.
- Management estimated monthly cash burn at approximately $95,000 and said cash and committed funds were expected to cover operations only through at least November 2018. The company stated it had no alternative funding sources and expected to rely on product sales, borrowing, or equity financing. It warned that financing might not be available and that operations might need to be substantially curtailed or terminated.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing the nine-month net loss, operating cash outflow, working-capital deficit, and minimal revenue. The financial statements include no adjustments that might be required if the company cannot continue as a going concern.
- Future obligations include note maturities reported at $987,750 in 2019, as well as potential license royalties, maintenance fees, and milestone payments. A related-party management fee payable to CMH was $269,050; it is generally due upon a successful equity raise of at least $1 million. Certain patent-related clinical milestones could also trigger payments to a related company.
- The filing reports post-quarter conversions of notes and cashless warrant exercises, including share issuances through November 12, 2018, adding to potential dilution.
Most important facts for investors to verify
- Whether the company secured financing after the stated November 2018 cash runway, and the resulting terms and dilution.
- Current outstanding, reserved, and potentially issuable shares, including conversion rights and warrants, and the effect of variable-price conversion provisions.
- The composition and valuation assumptions behind the $6.8 million derivative liability and the impact of future remeasurement on reported earnings.
- Progress, remaining cost, and regulatory or clinical milestones for the UCLA/LABiomed trial, and whether Caverstem sales can grow beyond the reported $66,800 nine-month revenue.
- Debt repayment, default, and maturity status, including the 2019 maturities, and the company’s ability to meet obligations and address the stated going-concern uncertainty.