Creative Medical Technology Holdings, Inc. — Q2 2018 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2018. The company began selling stem-cell separation equipment and disposable kits for its Caverstem erectile-dysfunction procedure in Q4 2017. It also holds or pursues licenses and patents for male infertility, amniotic stem cells, lower-back pain, and neurological treatments.
Financial highlights
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Revenue | $4,800 | $14,400 | $0 |
| Gross profit | $2,272 | $9,472 | $0 |
| Gross margin | 47.3% | 65.8% | Not applicable |
| Operating loss | $314,830 | $519,046 | $395,991 / $636,837 |
| Net loss | $6,432,404 | $14,018,984 | $886,356 / $1,129,707 |
| Operating cash flow | Not separately presented | $(409,702) | $(493,222) |
Revenue remained minimal relative to expenses. Six-month general and administrative expense was $510,546, down 7%; research and development expense was $7,400, down 91%, with management attributing the R&D decline largely to lower clinical-trial and laboratory costs. Interest expense was $604,303 for the six months. The reported net loss was driven principally by the $13,392,280 loss shown for changes in derivative-liability fair value, partly offset by gains on extinguishment of convertible notes.
At June 30, cash was $100,501, versus $13,697 at year-end 2017. Current assets were $105,301 and current liabilities $10,871,486, producing a $10,766,185 working-capital deficit. Total liabilities were $10,871,486; stockholders’ deficit was $10,592,108. Cash from financing activities was $496,506, including $743,310 of convertible-note proceeds, offset by $189,800 of note repayments and $57,004 of prepayment premiums. No investing cash flow was reported for the period.
Material changes and financing
- Six-month net loss increased substantially from the prior year, chiefly due to derivative accounting and higher interest expense; operating loss improved to $519,046 from $636,837.
- During the first half, the company issued $936,000 face value of convertible notes for $743,310 in net proceeds, in addition to a $12,500 note issued for release of reserved shares and a $60,000 note exchanged for an existing $50,000 note.
- Common shares outstanding rose from 114,799,226 at December 31, 2017 to 677,130,755 at June 30, 2018; 717,148,155 shares were outstanding on August 14. The company reported approximately 93 million potential shares from convertible notes and 77,569,929 warrants outstanding at quarter-end. Variable conversion terms may increase dilution.
- Derivative liabilities rose from $1,309,190 at year-end to $9,928,770 at June 30. These liabilities are fair-value accounting estimates and are distinct from conventional cash debt obligations.
Outlook, risks, and unusual items
- Management planned to market Caverstem equipment and kits, complete the UCLA/LABiomed clinical trial, and support investigator-initiated neurological research. Estimated remaining clinical-trial costs were approximately $400,000, excluding overhead.
- The company reported approximately $101,000 cash at June 30 and estimated monthly cash burn of approximately $65,000. Management expected available cash and committed funds to cover operations only through at least August 2018 and stated it had no alternative funding sources if it could not raise capital.
- The filing identifies substantial doubt about the company’s ability to continue as a going concern. Management planned to seek loans, credit facilities, and equity financing, but gave no assurance of success; failure to obtain financing could require operations to be curtailed or terminated.
- Many notes have conversion prices tied to discounted recent trading prices, warrant reset features, share-reservation requirements, and default penalties. The company warns that conversions could pressure the stock price and materially dilute existing holders. Note maturities listed were $118,434 in 2018 and $554,658 in 2019.
- Related-party obligations include management fees payable to parent company CMH; the filing reports $154,050 due under the management-services arrangement. Certain patent agreements also provide for royalties, maintenance fees, or milestone payments.
- Subsequent to quarter-end, the company reported note conversions, an August repayment of $106,342 to fulfill a note, and a new $107,000 promissory note for $106,500 proceeds. Management reported no other material subsequent events through August 14.
Investor verification priorities
- Assess the company’s near-term liquidity, access to financing, and ability to fund the estimated $400,000 clinical-trial cost and ongoing operations.
- Review convertible-note and warrant terms, remaining balances and maturities, share reservations, and the potential dilution from variable-price conversions.
- Understand the assumptions and sensitivity behind the $9.9 million derivative-liability valuation and the large noncash fair-value losses.
- Verify commercial traction and unit economics from Caverstem sales, given six-month revenue of only $14,400.
- Confirm the status, costs, and milestones of the UCLA/LABiomed trial and any related-party fees, royalties, or patent obligations.