Creative Medical Technology Holdings, Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparative figures are for FY2017. The company develops and commercializes stem-cell-based procedures and technologies. Its initial commercial product is CaverStem, marketed to physicians for erectile dysfunction (ED); it launched FemCelz for female sexual-function concerns in September 2018. Other programs—including lower-back-pain and amniotic-stem-cell research—remain developmental.
Key financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $124,400 | $4,800 |
| Cost of revenue | $70,375 | $8,000 |
| Gross profit (loss) | $54,025; 43.4% gross margin | ($3,200); negative gross margin |
| Research and development | $96,621 | $260,085 |
| General and administrative | $1,050,485 | $898,526 |
| Operating loss | ($1,114,225) | ($1,177,806) |
| Interest expense | $1,361,427 | $377,587 |
| Net loss | ($13,655,653) | ($2,659,108) |
| Net cash used in operations | $1,052,270 | $889,621 |
FY2018 net loss included $11,588,402 of expense from changes in derivative-liability fair value and a $408,401 gain on extinguishment of convertible notes. These accounting items substantially affected reported results; derivative remeasurement is also added back in the cash-flow reconciliation. The filing’s MD&A discussion of derivative expense does not fully reconcile to the statement of operations, so the financial-statement line items are shown above.
- Cash and liquidity: Cash was $304,056 at year-end, versus $13,697 a year earlier. Current assets were $313,656 and current liabilities $4,471,798, leaving a working-capital deficit of $4,158,142.
- Debt and obligations: The balance sheet reported $682,056 of current convertible notes, net of discount, and $3,227,382 of derivative liabilities. The filing states $1,475,650 of loan maturities in 2019. The company issued $2,001,750 in convertible notes during 2018 and received net proceeds of $1,804,927.
- Equity and dilution: Common shares outstanding rose to 902,711,370 at December 31, 2018 from 114,799,226 at December 31, 2017. The company reported 142,075,119 warrants outstanding and estimated convertible notes could convert into approximately 197.8 million shares. Variable-price conversion terms and warrant anti-dilution provisions create additional dilution risk.
- Cash runway: Management estimated a monthly cash burn of about $100,000 and said cash and committed funds would cover operations through at least March 2019. Elsewhere it described cash as sufficient for only a few more months. The company said it had no alternative funding sources if further financing could not be obtained.
Material changes and business developments
- Commercialization of CaverStem drove revenue growth from $4,800 to $124,400, with sales from equipment and disposable kits. Management reported 14 clinics at various stages of development, training, marketing, recruiting, and patient treatment.
- Operating loss improved modestly as gross profit increased and R&D spending fell, partly because the ED trial was winding down and initial AmnioStem preclinical work was completed. G&A rose 17%, primarily due to commercialization-related marketing and travel costs.
- Net loss increased sharply, mainly due to interest, debt discounts, and derivative-liability accounting associated with convertible financing—not a comparable increase in operating loss.
- Management said the UCLA/LABiomed ED trial enrolled 25 subjects, follow-up was complete, and results were being analyzed for publication. The filing reports an IRB safety determination, but does not provide final company-trial efficacy results.
Outlook, risks, and unusual items
- Management planned to market CaverStem and FemCelz kits, publish the ED trial results, and support investigator-initiated neurological research. The filing provides no quantified revenue or earnings guidance.
- The auditor/management financial statements are prepared on a going-concern basis, but the filing states that substantial doubt exists because of recurring losses, negative operating cash flow, a large working-capital deficit, limited operating history, and dependence on new financing. Management’s financing plans were not assured.
- Many notes have discounted, variable conversion prices without a share-count floor. The company warned that conversion may put pressure on its stock price and significantly dilute existing holders; some notes also carry default premiums or elevated default interest.
- Regulatory classification is a material uncertainty. Management believes the autologous ED procedure may qualify for an FDA same-surgical-procedure exception; a change in FDA interpretation could instead require biologic-product approval, more time, and substantially more capital. Management expects AmnioStem and several other research programs to follow a biologic-drug pathway.
- Clinical and commercial claims remain subject to validation: the company’s ED trial results were still under analysis, and FemCelz had only recently launched. The filing describes the broader stem-cell programs as research or development efforts, not established products.
- Related-party and control considerations include a $35,000 monthly management-reimbursement arrangement with parent CMH, $352,750 of accrued and unpaid management fees at year-end, and 3 million Series A preferred shares issued in settlement of $150,000 of related-party debt. Each preferred share carries 1,000 votes, giving CEO Timothy Warbington voting control, as described in the filing.
- After year-end, the company disclosed additional financing: three $100,000 convertible notes issued in February 2019 in exchange for warrant cancellations, and a March 2019 sale to four investors involving notes with $110,000 principal for each $100,000 purchase price, plus warrants.
Important facts for investors to verify
- Confirm current cash, funding availability, and the status or refinancing/conversion of 2019 maturities; assess whether the disclosed runway assumptions were met.
- Review the complete debt and derivative-liability schedules, including note balances, conversion formulas, default terms, warrant adjustments, and potential fully diluted share count.
- Check whether the UCLA/LABiomed results were subsequently published and whether they support the company’s stated efficacy claims; distinguish the IRB safety finding from demonstrated efficacy.
- Confirm the FDA’s applicable regulatory pathway for CaverStem and FemCelz, and the development, trial, and funding milestones required for AmnioStem and other programs.
- Reconcile the filing’s reported derivative-liability expense with the statement of operations and review other apparent inconsistencies in the text, including the quarterly 2018 stock bid-price high/low figures and differing voting-control percentages.
- Consider governance and related-party risks, including the absence of standing audit and nominating committees, concentrated voting control, and significant management-fee obligations to CMH.