Creative Medical Technology Holdings, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY 2018. The company is a small commercial-stage biotechnology business developing adult stem-cell treatments. It primarily sells physician-use kits for CaverStem (erectile dysfunction) and FemCelz (female sexual dysfunction); StemSpine (lower-back pain) was entering commercialization, while AmnioStem remains in development.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $165,500 | $124,400 |
| Cost of revenue | $45,499 | $70,375 |
| Gross profit and margin | $120,001; 72.5% | $54,025; 43.4% |
| Operating expenses | $1,250,169 | $1,168,250 |
| Operating loss | $(1,130,168) | $(1,114,225) |
| Net loss | $(8,483,673) | $(13,655,653) |
| Net loss per share | $(0.82) | $(3.50) |
| Cash used in operations | $(1,213,093) | $(1,052,270) |
| Cash at year-end | $88,648 | $304,056 |
Revenue rose 33%, attributed to CaverStem kit sales and physician training. Gross profit improved as sales increased and per-unit costs fell after a move to a less expensive device. Operating loss widened modestly: higher selling, general and administrative expense more than offset the gross-profit improvement and the elimination of research and development expense. The net loss narrowed primarily because the prior-year derivative fair-value charge was larger; FY 2019 still included $5.09 million of derivative-liability expense and $1.90 million of interest expense. These valuation and financing-related charges materially affected reported earnings.
Liquidity, debt and capital
At December 31, 2019, current assets were $94,248 versus current liabilities of $8,602,302, producing negative working capital of approximately $8.51 million. Total liabilities were $8.60 million and stockholders’ deficit was $8.07 million. Current liabilities included $6.85 million of derivative liabilities and convertible notes carried at $1.06 million net of discounts; contractual loan maturities reported for 2020 were $1.62 million.
The company received $1.30 million in net proceeds from convertible notes in 2019. The notes generally have variable, discounted conversion prices. The filing estimates that notes outstanding at year-end could convert into approximately 176 million common shares, with the actual amount dependent on the stock price. During 2019, 11.9 million shares were issued for conversions of $1.50 million of principal, interest and fees. Common shares outstanding were reported as 22.49 million at year-end and 59.80 million as of March 13, 2020.
The auditor’s report and management disclosure state that recurring losses, negative operating cash flows and negative working capital raise substantial doubt about the company’s ability to continue as a going concern. Management reported approximately $88,000 of cash at year-end, estimated monthly cash burn of about $100,000, and expected cash and committed funds to cover operations through at least April 2020. It expects to rely on kit revenue and additional financing; no alternative funding source or long-term funding arrangement was identified.
Business developments, outlook and risks
- During 2019, CaverStem and FemCelz expanded to 12 physician locations/markets, and management elected to commercialize StemSpine after a pilot study. The company plans to grow sales, launch StemSpine and pursue an IND filing and research partnerships for AmnioStem.
- Management reported that CaverStem results were published in January 2020, describing 100% safety and 85% efficacy in a combined 140-patient study and registry. These are company-reported study results, not a guarantee of outcomes or regulatory approval.
- Management believes CaverStem, FemCelz and StemSpine procedures qualify for an FDA HCT/P regulatory exception. The filing warns that a change in FDA interpretation could require biologics approval and substantial time and capital. AmnioStem development is expected to follow the biologics IND/BLA pathway.
- In November 2019, the StemSpine commercialization decision triggered a $300,000 payment obligation to related party CMH under the patent agreement. The filing describes payments or share settlement relating to the agreement; the amount and remaining balance should be checked against the detailed disclosures.
- COVID-19 had already reduced revenue by the filing date as elective procedures were put on hold. Management expected activity to resume when physician offices became fully operational, but the duration and financial effect were uncertain.
- Other concerns include dependence on financing, significant potential dilution, limited sales capacity, reliance on CMH for management services, related-party arrangements, and a dispute over fees for unperformed banking services. No loss provision was recorded for that dispute because management considered a loss not probable.
- The company effected a 1-for-150 reverse stock split on February 3, 2020. It reported no cash dividends and its common stock traded on OTC Pink as a penny stock.
Most important facts for investors to verify
- Whether the company secured funding after the stated April 2020 runway estimate, and its subsequent cash balance, operating burn and debt maturities.
- The terms, balances and conversion mechanics of the variable-price notes, derivative liabilities and warrants, including actual dilution and share-count reconciliation after the reverse split.
- The balance and settlement terms of the $300,000 StemSpine milestone and other obligations to CMH, including any share issuance or conversion rights.
- Independent evidence of product adoption, recurring kit revenue, clinical outcomes and the regulatory basis for marketed procedures; confirm the status and timing of any AmnioStem IND plans.
- The revenue and liquidity impact of COVID-19 and whether elective procedures and physician operations resumed as management anticipated.