The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Creative Medical Technologies Holdings, Inc. (the “Company”) is a commercial stage biotechnology company focused on immunology, urology, orthopedics and neurology using adult stem cell treatments. The Company was incorporated on December 3, 1998, in the State of Nevada under the name Jolley Marketing, Inc. On May 18, 2016, the Company closed a transaction which was accounted for as a recapitalization, reverse merger, under which Creative Medical Technologies, Inc., a Nevada corporation (“CMT”) became the Company’s wholly-owned subsidiary, and Creative Medical Health, Inc. (“CMH”), which was CMT’s sole stockholder prior to the merger, became the Company’s principal stockholder. In connection with this merger, the Company changed its name to Creative Medical Technologies Holdings, Inc. to reflect its current business.
CMT was originally created on December 30, 2015 (“Inception”), as the urological arm of CMH to monetize a patent and related intellectual property related to the treatment of erectile dysfunction (“ED”), which it acquired from CMH in February 2016. Subsequently, the Company has expanded its development and acquisition of intellectual property beyond urology to include therapeutic treatments utilizing amniotic stem cells, and the treatment of neurologic disorders and lower back pain using various types of stem cells through its AmnioStem LLC, StemSpine, LLC, and ImmCelz, Inc. subsidiaries. However, neither AmnioStem LLC, StemSpine, Inc. nor ImmCelz, Inc. have commenced commercial activities.
Risks and Uncertainties - The Company has a limited operating history and has only recently started to generate revenues from its planned principal operations.
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, to-date, the Company is experiencing a reduction in revenues due to the prioritization of medical resources to address the COVID-19 outbreak. In several of our markets, all non-essential (including elective) procedures have been placed on hold. While this has a negative financial impact to our revenues, there have been the same reductions to our costs. Additionally, since the Company maintains no inventory and require nearly all of customers to pre-pay, there is no risk to receivables or inventory write-downs. The company expects existing orders temporarily on hold and continued sales, training and patient treatments will resume once the physician’s offices are back to being fully operational.
The Company’s business and operations are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. A host of factors beyond the Company’s control could cause fluctuations in these conditions, including the political environment and acts or threats of war or terrorism. Adverse developments in these general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on the Company’s financial condition and the results of its operations.
The Company has only recently started to generate sales and we have limited marketing and/or distribution capabilities. The Company has limited experience in developing, training or managing a sales force and will incur substantial additional expenses if it decides to market any of its current and future products and services with an internal sales organization. Developing a marketing and sales force is also time consuming and could delay launch of its future products and services. In addition, the Company will compete with many companies that currently have extensive and well-funded marketing and sales operations. The Company’s marketing and sales efforts may be unable to compete successfully against these companies. In addition, the Company has limited capital to devote to sales and marketing.
The Company’s industry is characterized by rapid changes in technology and customer demands. As a result, the Company’s products and services may quickly become obsolete and unmarketable. The Company’s future success will depend on its ability to adapt to technological advances, anticipate customer demands, develop new products and services and enhance the Company’s current products and services on a timely and cost-effective basis. Further, the Company’s products and services must remain competitive with those of other companies with substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products and services or enhanced versions of existing products and services. Also, the Company may not be able to adapt new or enhanced products and services to emerging industry standards, and the Company’s new products and services may not be favorably received. In addition, the Company may not have the capital resources to further the development of existing and/or new ones.
Use of Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation - The consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented.
Going Concern - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S., which contemplate continuation of the Company as a going concern. However, during the fiscal year ended December 31, 2020, the Company incurred a net loss of $36,325,230, had negative cash flows from operating activities of $434,556, had negative working capital of $40,422,773 at December 31, 2020 and has only generate revenues for approximately 3 years. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management expects to raise additional funds through the sale of convertible notes, preferred stock, common stock and/or other securities. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Concentration Risks - The Federal Deposit Insurance Corporation insures cash deposits in most general bank accounts for up to $250,000 per institution. The Company maintains its cash balances at one financial institution. As of December 31, 2020, the Company’s balance did not exceed the limit.
Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instrument - The Company’s financial instruments consist of cash and cash equivalents, convertible notes, and payables. The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.
Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are required to be disclosed by level within the following fair value hierarchy:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Inputs lack observable market data to corroborate management’s estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
When determining fair value, whenever possible the Company uses observable market data, and relies on unobservable inputs only when observable market data is not available. As of December 31, 2020, the Company has level 3 fair value calculations on derivative liabilities. The table below reflects the results of our Level 3 fair value calculations:
|
|
Notes
|
|
|
Warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability at December 31, 2019
|
|
$
|
6,659,055
|
|
|
$
|
188,822
|
|
|
$
|
6,847,877
|
|
Addition of new conversion option derivatives
|
|
|
2,572,723
|
|
|
|
-
|
|
|
|
2,572,723
|
|
Extinguishment/modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of note derivatives
|
|
|
(2,795,340
|
)
|
|
|
-
|
|
|
|
(2,795,340
|
)
|
Change in fair value
|
|
|
30,907,397
|
|
|
|
1,209,175
|
|
|
|
32,116,572
|
|
Derivative liability at December 31, 2020
|
|
$
|
37,343,835
|
|
|
$
|
1,397,997
|
|
|
$
|
38,741,832
|
|
Intangible Assets - Intangible assets with finite lives are amortized over their respective estimated lives and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The impairment testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.
Impairment - The Company records impairment losses when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Furthermore, the Company will make periodic assessments of technology and clinical testing to determine if it plans to continue to pursue the technology and if the license, patent or other rights have value. To date no impairment has been recorded.
Derivative Liabilities - A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities.
As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company entered into certain debt financing transactions in fiscal 2020 and 2019, as disclosed in Notes 4 and 5, containing certain conversion features that have resulted in the instruments being deemed derivatives. We evaluate such derivative instruments to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured using the Black-Scholes model at each reporting period (or upon reclassification), and the change in fair value is recorded on our consolidated statement of operations.
Revenue - The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from contracts with customers”. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Deferred revenue represents amounts which still have yet to be earned.
The Company generates revenue from the sale of disposable stem cell concentration kits. Revenues are recognized when control of the promised goods or services are transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services, which is generally on delivery to the customer.
Payments received for which the earnings process is not yet complete are deferred. As of December 31, 2020, the Company had deferred revenue of $32,000 included within current liabilities in the accompanying consolidated balance sheet.
Research and Development - Research and development will continue to be a significant function of the Company. Research and development costs will be expensed as incurred. Expenses in the accompanying financial statements include certain costs which are directly associated with the Company’s research and development:
|
1.
|
Erectile Dysfunction Technology based upon the use of stem cells. These costs, which consist primarily of monies paid for clinical trial expenses, materials and supplies and compensation costs amounted to $0 for the year ended December 31, 2020. There were $0 in research costs for the period ended December 31, 2019;
|
|
2.
|
Amniotic Fluid-based Stem Cells. Pre-clinical research costs, which consist primarily of monies paid for laboratory space, materials and supplies amounted to $0 for the year ended December 31, 2020. There were $0 in research costs for the period ended December 31, 2019.
|
Stock-Based Compensation – The Company accounts for its stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation. The Company accounts for all stock-based compensation using a fair-value method on the grant date and recognizes the fair value of each award as an expense over the requisite vesting period. The Company recognizes stock option forfeitures as they occur as there is insufficient historical data to accurately determine future forfeitures rates.
Income Taxes – The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the realizability of deferred tax assets and valuation allowances are provided when necessary to reduce net deferred tax assets to the amounts expected to be realized.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company will recognize interest and penalties related to unrecognized tax benefits in the income tax provision in the accompanying statement of operations.
The Company calculates the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income taxes paid is subject to examination by U.S. federal and state tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made.
Basic and Diluted Loss Per Share – The Company follows Financial Accounting Standards Board (“FASB”) ASC 260 Earnings per Share to account for earnings per share. Basic earnings per share (“EPS”) calculations are determined by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During loss periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. During the year ended December 31, 2020, the Company had 3,333 options and 76,369,112 warrants to purchase common stock outstanding; however, the effects were anti-dilutive due to the net loss. During the year ended December 31, 2019, the Company had 3,333 options and 5,044,260 warrants to purchase common stock outstanding; however, the effects were anti-dilutive due to the net loss.
Recent Accounting Pronouncements – The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.
NOTE 2 – LICENSING AGREEMENTS
ED Patent – The Company acquired a patent from CMH, a related company on February 2, 2016, in exchange for 431,111 shares of CMTH restricted common stock valued at $100,000. CMH holds a significant amount of the Company’s common stock. The patent expires in 2025 and the Company has elected to amortize the patent over a ten-year period on a straight-line basis. Amortization expense of $9,972 was recorded for the years ended December 31, 2020 and 2019. As of December 31, 2020, the carrying value of the patent was $50,960. The Company expects to amortize $9,972 annually through 2026 related to the patent costs.
Multipotent Amniotic Fetal Stem Cells License Agreement - On August 25, 2016, CMT entered into a License Agreement dated August 25, 2016, with a University. This license agreement grants to CMT the exclusive right to all products derived from a patent for use of multipotent amniotic fetal stem cells composition of matter throughout the world during the period ending on the expiration date of the longest-lived patent rights under the patent. The license agreement also permits CMT to grant sublicenses. Under the terms of the license agreement, CMT is required to diligently develop, manufacture, and sell any products licensed under the agreement. CMT paid the University an initial license fee within 30 days of entering into the agreement. CMT is also required to pay annual license maintenance fees on each anniversary date of the agreement, which maintenance fees would be credited toward any earned royalties for any given period. The License Agreement provides for payment of various milestone payments and earned royalties on the net sales of licensed products by CMT or any sub licensee. CMT is also required to reimburse the University for any future costs associated with maintaining the patent. CMT may terminate the license agreement for any reason upon 90 days’ written notice and the University may terminate the agreement in the event CMT fails to meet its obligations set forth therein, unless the breach is cured within 30 days of the notice from the University specifying the breach. CMT is also obligated to indemnify the University against claims arising due to the exercise of the license by CMT or any sub licensee. As of December 31, 2020, no amounts are currently due to the University.
The Company estimates that the patent expires in February 2026 and has elected to amortize the patent through the period of expiration on a straight-line basis. Amortization expense of $1,172 was recorded for the years ended December 31, 2020 and 2019. As of December 31, 2020, the carrying value of the patent was $5,256. The Company expects to amortize approximately $1,172 annually through 2026 related to the patent costs.
Lower Back Patent – The Company, through its subsidiary StemSpine, LLC, acquired a patent from CMH, a related company, on May 17, 2017, covering the use of various stem cells for the treatment of lower back pain from pursuant to a Patent Purchase Agreement, which was amended in November 2017. As amended, the agreement provides the following:
|
·
|
The Company is required to pay CMH $100,000 within 30 days of demand as an initial payment.
|
|
·
|
In the event the Company determines to pursue the technology via use of autologous cells, the Company will pay CMH:
|
|
o
|
$100,000 upon the signing agreement with a university for the initiation of an IRB clinical trial.
|
|
o
|
$200,000, upon completion of the IRB clinical trial.
|
|
o
|
$300,000 in the event we commercialize the technology via use of autologous cells by a physician without a clinical trial.
|
|
·
|
In the event the Company determines to pursue the technology via use of allogenic cells, the Company will pay CMH:
|
|
o
|
$100,000 upon filing an IND with the FDA.
|
|
o
|
$200,000 upon dosing of the first patient in a Phase 1-2 clinical trial.
|
|
o
|
$400,000 upon dosing the first patient in a Phase 3 clinical trial.
|
|
·
|
Payment may be made in cash or shares of our common at a discount of 30% to the lowest closing price within 20 business days prior to the conversion date.
|
|
·
|
In the event the Company’s shares of common stock trade below $0.01 per share for two or more consecutive trading days, the number of any shares issuable as payment doubles.
|
|
·
|
For a period of five years from the date of the first sale of any product derived from the patent, the Company is required to make royalty payments of 5% from gross sales of products, and 50% of sale price or ongoing payments from third parties for licenses granted under the patent to third parties.
|
The patent expires on May 19, 2027 and the Company has elected to amortize the patent over a ten-year period on a straight-line basis. Amortization expense of $10,000 was recorded for the years ended December 31, 2020 and 2019. As of December 31, 2020, the carrying value of the initial patent license was $65,000. The Company expects to amortize approximately $10,000 annually through 2027 related to the patent costs.
In November, 2019, following a successful international pilot study, the Company elected to initiate commercialization of the StemSpine procedure using autologous stem cells. As a result, the Company is obligated to pay CMH $300,000 pursuant to the Patent Purchase Agreement as described above. The Company has elected to amortize the patent over a ten-year period on a straight-line basis. Amortization expense of $45,940 was recorded for the year ended December 31, 2020. Amortization expense of $5,806 was recorded for the year ended December 31, 2019. As of December 31, 2020, the carrying value of the patent was $248,254. The Company expects to amortize approximately $46,000 annually through 2027 related to the patent costs.
ImmCelz™ - On December 28, 2020, ImmCelz, Inc. (“ImmCelz”), a newly formed Nevada corporation and wholly owned subsidiary of the Company, entered into a Patent License Agreement dated December 28, 2020 (the “Agreement”), with Jadi Cell, LLC. (“Jadi”), a company controlled by Dr. Amit Patel, a Board Member. The Agreement grants to ImmCelz™ the patent rights under U.S. Patent# 9,803,176 B2, “Methods and compositions for the clinical derivation of an allogenic cell and therapeutic uses”. The contract grants ImmCelz™ access to proprietary process of expanding the master cell bank of Jadi Cell LLC, as currently practiced by Licensor and as documented in standard operating procedures (SOPs) and other written documentation. The terms of the agreement are as follows:
|
·
|
Licensee shall pay Licensor a license fee of $250,000 (the “Upfront Royalty”), which can also be paid in CELZ stock at a discount of 25% of the closing price of $0.0037, which is based on the date of this agreement
|
|
·
|
Within thirty (30) days of the end of each calendar quarter during the term of this Agreement, Licensee will pay Licensor five percent (5%) of the Net Income of ImmCelz™. during such calendar quarter (the “Continuing Royalty”)
|
|
·
|
in one or a series of related transactions, of all or substantially all of the business or assets of Licensee ImmCelz, Inc. (“Sale of Assets”) will result in a one-time ten-percent allocation to the licensor, the Continuing Royalty will be calculated at five percent (5%) of the Net Income of Licensee in any calendar quarter in which the Net Income in such calendar quarter reflects the receipt of any consideration from such Sale of Assets.
|
As a result, the Company is obligated to pay Jadi $250,000 pursuant to the Patent License Agreement as described above. Refer to exhibit 10.29 for the complete agreement.
The Company has elected to amortize the patent over a ten-year period on a straight-line basis. Given the date of the Agreement, there was no amortization expense recorded for the year ended December 31, 2020. As of December 31, 2020, the carrying value of the patent was $250,000. The Company expects to amortize approximately $25,000 annually through 2030 related to the patent costs.
As of December 31, 2020, future expected amortization of these assets is as follows:
For the year ended December 31,
|
|
|
|
|
|
|
|
2021
|
|
|
93,327
|
|
2022
|
|
|
93,327
|
|
2023
|
|
|
93,327
|
|
2024
|
|
|
93,327
|
|
2025
|
|
|
93,327
|
|
Thereafter
|
|
|
152,835
|
|
Total
|
|
$
|
619,470
|
|
The following is a rollforward of the Company’s licensing agreements for the year end December 31, 2020.
|
|
Assets
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019
|
|
$
|
510,000
|
|
|
$
|
(73,445
|
)
|
Addition of new assets
|
|
|
250,000
|
|
|
|
-
|
|
Amortization
|
|
|
-
|
|
|
|
(66,792
|
)
|
Balances at December 31, 2020
|
|
$
|
760,000
|
|
|
$
|
(140,237
|
)
|
NOTE 3 – RELATED PARTY TRANSACTIONS
The Company has incurred a monetary obligation to a related corporation to reimburse the cost of services provided to the Company (management and consulting) through December 31, 2020. Each of the Company’s executive officers is employed by CMH, and will continue to receive his or her salary or compensation from CMH. The Company has an agreement with CMH which obligates the Company to reimburse CMH $35,000 per month for such services beginning January 2016. On November 17, 2017, the Company entered into an amended Management Reimbursement Agreement dated November 17, 2017, with Creative Medical Technologies, Inc. (“CMT”), the wholly owned subsidiary of the Company, and with Creative Medical Health, Inc., the parent of the Company (“CMH”). The Agreement memorializes the arrangement between the parties whereby the Company has, since January 1, 2016, reimbursed CMH $35,000 per month for the services of management and consultants employed by CMH and performing services for the Company and CMT. At the option of CMH, the reimbursable amounts set forth in the Agreement may be paid from time to time in shares of common stock of the Company at a price equal to a 30% discount to the lowest closing price during the 20 trading days prior to time the notice is given. The Agreement may be terminated by either party upon 30 days’ prior written notice. The agreement was amended in December 2018 to increase the monthly reimbursement from $35,000 to $45,000 effective January 1, 2019 and thereafter.
On January 12, 2018, the Company entered into a Debt Settlement Agreement with Timothy Warbington, our CEO, Chairman, and principal shareholder, and Creative Medical Health, Inc., the parent of the Company, whereby Mr. Warbington cancelled $150,000 of debt owed by CMH to him in return for which he would receive 3,000,000 shares of Series A Preferred Stock which CMH agreed to receive in return for cancellation of $150,000 of debt owed by us to CMH for management reimbursement costs.
As of December 31, 2020, and 2019, amounts due to CMH under the arrangement were $18,782 and $82 respectively.
During 2016, the Company entered into three note payable agreements with CMH in which the proceeds were used in operations. The notes payable were dated February 2, 2016, May 1, 2016 and May 18, 2016 and resulted in borrowings of $50,000, $50,000 and $25,000, respectively. Notes payable of $50,000 mature on April 30, 2018, $50,000 on July 31, 2018 and $25,000 on May 18, 2018. On May 4, 2017, CMT and CMH entered into a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated February 2, 2016, in the principal amount of $50,000, from April 30, 2017, to April 30, 2018, and CMH waived the nonpayment of the Note by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. On July 31, 2017, CMT and CMH entered into a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated May 1, 2016, in the principal amount of $50,000, from July 31, 2017, to July 31, 2018, and CMH waived the nonpayment of the Note by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. The notes incur interest at 8% per annum on the outstanding balance of the notes. As of December 31, 2020, accrued, unpaid interest was $0.
On April 11, 2018, CMH converted $136,003 of principal and accrued interest into 9,855,290 common shares. As of December 31, 2020, the Company had fulfilled all the obligations of the notes.
On August 12, 2016, CMH advanced the Company $2,000 for operations. The amount is due on demand and does not incur interest.
On May 17, 2017, StemSpine, LLC (“StemSpine”), a newly formed Nevada limited liability company and wholly owned subsidiary of Creative Medical Technologies, Inc. (“CMT”), the wholly owned subsidiary of the Company, entered into a Patent Purchase Agreement dated May 17, 2017 (the “Agreement”), with Creative Medical Holdings, Inc. (“CMH”).
To date, the Company has paid CMH the $100,000 obligation of the initial payment due under this agreement, by a $50,000 cash payment and the issuance of 3,333,333 shares of common stock on December 12, 2019. On December 31, 2019 the Company paid CMH $50,000 of the $300,000 obligation from the second payment due under this agreement through the issuance of 66,667 shares of common stock. On September 30, 2020 the Company paid CMH $40,000 of the $300,000 obligation from the second payment due under this agreement through the issuance of 42,328,042 shares of common stock.
On December 28, 2020, ImmCelz, Inc. (“ImmCelz”), a newly formed Nevada corporation and wholly owned subsidiary of the Company, entered into a Patent License Agreement dated December 28, 2020 (the “Agreement”), with Jadi Cell, LLC. (“Jadi”), a company controlled by Dr. Amit Patel, a Board Member. Execution of the agreement triggered a $250,000 payment obligation to Jadi.
See Note 2 for discussion of an additional related party transactions with CMH relating the purchase of our ED patent in 2016, our StemSpine® patent in 2017 and the ImmCelz™ Patent License agreement in 2020.
NOTE 4 – DEBT
During 2019, we issued $1,572,400 in convertible notes to accredited investors with net proceeds of $1,302,795. The notes matured from February through October of 2020 and bore interest rates ranging from 2% to 11%. In February 2019, we entered into three separate exchange agreements with holders of common stock purchase warrants issued by the Company in September 2018 and November 2018. Under each exchange agreement, the Company issued a convertible promissory note in the principal amount of $100,000 to the warrant holder party to such exchange agreement in exchange for the cancellation of common stock purchase warrants held by such warrant holder, initially exercisable for an aggregate of 21,553 shares of the Company’s common stock. The notes were convertible into shares of the Company’s common stock at conversion prices ranging from 60% to 66% of the average of the two lowest traded prices of the Company’s common stock during the previous 15 trading days preceding the conversion date, the lowest trade price during the previous 20 trading days, or the volume weighted average price over the prior 15 trading days. The loans are evidenced by promissory notes and bore interest in a range of 8% to 11%. The loan maturity dates ranged from February 19, 2020 through October 11, 2020. The Company amortized the on-issuance discounts of $1,194,357 to interest expense using the straight-line method over the original terms of the loans. During 2019 the Company amortized $1,613,226 to interest expense. As of December 31, 2019, a discount of $374,124 remained.
During 2019, the Company issued an aggregate of 11,873,057 shares upon the conversion of $1,501,275 of outstanding principal, interest and fees on existing, outstanding notes and 531,247 shares upon the cashless exercise of 594,051 warrants.
During the year ended December 31, 2019, the Company incurred $41,699 in pre-payment premiums associated with the extinguishment of $313,111 in principle that was recorded as interest expense.
During 2020, we issued $831,140 in convertible notes to accredited investors with net proceeds of $710,920. The notes mature from February through December of 2021 and bear an interest rate of 8%. The notes are convertible into shares of the Company’s common stock at conversion prices ranging from 60% to 71% of the average of the two lowest traded prices of the Company’s common stock during the previous 15 trading days preceding the conversion date, the lowest trade price during the previous 15 trading days. The Company is amortizing the on-issuance discounts of $828,710 to interest expense using the straight-line method over the original terms of the loans. During 2020 the Company amortized $979,959 to interest expense. As of December 31, 2020, a discount of $409,650 remained.
During 2020, we issued an aggregate of 681,731,395 shares upon the conversion of $1,366,705 of outstanding principal, interest and fees on existing, outstanding notes.
As of December 31, 2020, future loan maturities are as follows:
For the year ending December 31,
|
|
|
|
|
|
|
|
2021
|
|
|
1,305,005
|
|
NOTE 5 – DERIVATIVE LIABILITIES
Derivative Liabilities
In connection with convertible notes payable and the related party management fee and patent liability, the Company records derivative liabilities for the conversion feature. In addition, the Company has warrants for which the exercise prices reset upon future events. These warrants are also considered to be derivative liabilities. The derivative liabilities are valued on the date the convertible note payable and the related party liabilities become convertible and revalued at each reporting period. The warrants are valued on the date of issuance and revalued at each reporting period. During the year ended December 31, 2020, the Company recorded initial derivative liabilities of $2,572,723 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.0008 to $0.0012 our stock price on the date of grant of $0.0034 to $0.0365, expected dividend yield of 0%, expected volatility of 103.79% to 131.89%, risk free interest rate of 0.16% to 1.62% and an expected term of 1.0 year. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible note payables by approximately $1,864,233, which was recorded as a day one loss on derivative liability.
On December 31, 2020, the derivative liabilities were revalued at $38,741,832 resulting in a loss of $33,980,805 related to the change in fair market value of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following average assumptions: an exercise price of $0.0008 to $0.0134, our stock price on the date of valuation $0.0278, expected dividend yield of 0%, expected volatility of 98.14% to 100.94%, risk-free interest rate of 0.17%, and expected terms ranging from 0.50 to 3.57 years.
During the year ended December 31, 2019, the Company recorded initial derivative liabilities of $2,794,910 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.05 to $3.09, our stock price on the date of grant of $0.06 to $2.78, expected dividend yield of 0%, expected volatility of 87.61% to 103.96%, risk free interest rate of 1.56% to 2.55% and expected terms ranging from 1.0 to 5.0 years. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible note payables by approximately $1,215,985, which was recorded as a day one loss on derivative liability.
On December 31, 2019, the derivative liabilities were revalued at $6,847,877 resulting in a loss of $3,512,648 related to the change in fair market value of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following average assumptions: an exercise price of $0.02 to $0.59, our stock price on the date of valuation $0.05, expected dividend yield of 0%, expected volatility of 93.84% to 103.96%, risk-free interest rate of 1.62%, and expected terms ranging from 0.50 to 4.58 years.
Future Potential Dilution
Most of the Company’s convertible notes payable contain adjustable conversion terms with significant discounts to market. As of December 31, 2020, the Company’s convertible notes payable are potentially convertible into an aggregate of approximately 1.4 billion shares of common stock. In addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of common shares issuable is dependent upon the traded price of the Company’s common stock.
NOTE 6 – STOCK-BASED COMPENSATION
The Company has reserved 13,333 shares under its 2016 Stock Incentive Plan (the “Plan”). The Plan was adopted by the board of directors on May 18, 2016, as a vehicle for the recruitment and retention of qualified employees and consultants. The Plan is administered by the Board of Directors. The Company may issue, to eligible employees or contractors, restricted common stock, options, stock appreciation rights and restricted stock units. The terms and conditions of awards under the Plan will be determined by the Board of Directors.
In July and September 2016, the Company granted 10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award consisted of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary date of the respective grants. The options are accounted for as non-employee stock options and thus revalued for reporting purposes at the end of each quarter. During 2020 and 2019, the fair market value of the options was insignificant to the financial statements.
Since the expected life of the options was greater than the Company’s historical stock information available, the Company determined the expected volatility based on price fluctuations of comparable public companies.
There were no options issued during the years ended December 31, 2020 and 2019.
Option activity for the years ended December 31, 2020 and 2019 consists of the following:
|
|
Stock Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Life Remaining
|
|
Outstanding, December 31, 2018
|
|
|
3,333
|
|
|
$
|
26.25
|
|
|
|
7.65
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2019
|
|
|
3,333
|
|
|
$
|
26.25
|
|
|
|
6.65
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2020
|
|
|
3,333
|
|
|
$
|
26.25
|
|
|
|
5.64
|
|
Vested, December 31, 2020
|
|
|
2,667
|
|
|
$
|
26.25
|
|
|
|
5.64
|
|
See Note 2 for discussion related to the issuance of common stock in connection with licensing agreements. See Note 4 and 5 for discussion regarding warrants issued with a convertible note payable.
From April through September 2020, we granted 11,630,953 3-year warrants to a vendor for services rendered at exercise prices ranging from $0.0029 to $0.007. The value of the warrants was determined to be $35,670 based upon the Black-Scholes method, see variables used below. In December 2020, we granted a total of 30,000,000 warrants to three of our board members at an exercise price of $0.004. The value of the warrants was determined to be $102,081 based upon the Black-Scholes method, see variables used below. As of December 31, 2020, future estimated stock-based compensation expected to be recorded was estimated to be $0.
The fair value of each warrant award is estimated using the Black-Scholes valuation model. Assumptions used in calculating the fair value during the year ended December 31, 2020 were as follows:
|
|
Weighted
Average
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
3.0
|
|
Risk-free interest rate
|
|
|
0.11% to 0.94
|
%
|
Expected volatility
|
|
|
95.27% to 106.51
|
%
|
Common stock price
|
|
$
|
0.0029 to 0.0190
|
|
See Note 7 for warrant rollforward.
NOTE 7 – STOCKHOLDERS’ DEFICIT
During 2019, the Company entered into convertible loan agreements with third parties that included 242,841 5-year warrants to purchase a share of common stock at initial prices ranging from $0.59 to $3.09. On the date of issuance, the Company accounted for the conversion feature on the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the number of warrants and the conversion price are variable and do not have a floor as to the number of common shares in which could be converted. For the year ended December 31, 2019, outstanding warrants were increased by 4,549,975 to reflect the terms of the warrant agreements. For the year ended December 31, 2019, 594,051 warrants were converted into 531,247 common shares through cashless conversions. As of December 31, 2019, 5,044,260 warrants remained.
Assumptions used in calculating the fair value of the warrants issued in 2019 were as follows:
|
|
Range of
|
|
|
|
Inputs Used
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
1.56 to 2.23
|
%
|
Expected volatility
|
|
|
82.85% to 92.64.00
|
%
|
Common stock price
|
|
$
|
0.59 to 1.52
|
|
During 2020, the Company granted 3-year warrants to three board members to purchase an aggregate of 30,000,000 share of common stock at a price of $0.004 and 8,214,286 to a contractor for services rendered at prices ranging from $0.0029 to $0.0050. For the year ended December 31, 2020, outstanding warrants were increased from the initial issuance of 145,717 warrants to 34,531,666 to reflect the terms of the existing warrant agreements. For the year ended December 31, 2020 there were no warrants converted into common shares through cashless conversions. As of December 31, 2020, 76,372,446 warrants remained.
Assumptions used in calculating the fair value of the warrants issued in 2020 were as follows:
|
|
Range of
|
|
|
|
Inputs Used
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
3.00
|
|
Risk-free interest rate
|
|
|
0.11% to 0.29
|
%
|
Expected volatility
|
|
|
99.24% to 106.51
|
%
|
Common stock price
|
|
$
|
0.0029 to 0.0050
|
|
Warrant activity for the years ended December 31, 2020 and 2019 consists of the following:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Life Remaining
|
|
Outstanding, December 31, 2018
|
|
|
947,167
|
|
|
$
|
0.71
|
|
|
|
4.22
|
|
Issued
|
|
|
242,864
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
(594,051
|
)
|
|
|
|
|
|
|
|
|
Anti-Dilution Modifications
|
|
|
4,549,975
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancellations
|
|
|
(101,695
|
)
|
|
|
|
|
|
|
-
|
|
Outstanding, December 31, 2019
|
|
|
5,044,260
|
|
|
$
|
0.09
|
|
|
|
3.08
|
|
Issued
|
|
|
41,630,953
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Anti-Dilution Modifications
|
|
|
29,697,233
|
|
|
|
|
|
|
|
-
|
|
Forfeiture/Cancellations
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Outstanding, December 31, 2020
|
|
|
76,372,446
|
|
|
$
|
0.0057
|
|
|
|
2.47
|
|
Vested, December 31, 2020
|
|
|
76,372,446
|
|
|
$
|
0.0057
|
|
|
|
2.47
|
|
See Note 5 for discussion regarding anti-dilution and modifications related to warrants accounted for as derivative liabilities.
See Note 2 for discussion related to the issuance of common stock in connection with licensing agreements.
See Note 3 for discussion related to the issuance of common stock to a related party for cash.
NOTE 8 – INCOME TAXES
The provision for income tax expense consists of the following at December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Income tax provision attributable to:
|
|
|
|
|
|
|
Federal
|
|
$
|
(250,771
|
)
|
|
$
|
(272,800
|
)
|
State and local
|
|
|
(69,671
|
)
|
|
|
(75,792
|
)
|
Valuation allowance
|
|
|
320,442
|
|
|
|
(348,592
|
)
|
Net provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets consist of the following at December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
1,593,282
|
|
|
$
|
1,347,378
|
|
Accrued management fees, related party
|
|
|
155,063
|
|
|
|
80,825
|
|
Valuation allowance
|
|
|
(1,748,345
|
)
|
|
|
(1,427,903
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The primary difference between the statutory federal rate and the Company’s effective tax rate for the years ended December 31, 2020 and 2019 was due to the 100% valuation allowance. The following is a reconciliation of the statutory federal rate and the Company’s effective tax rate for the year ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Tax at federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State, net of federal benefit
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
Change in temporary differences
|
|
|
(0.0
|
)%
|
|
|
0.0
|
)%
|
Permanent differences
|
|
|
(20.2
|
)
|
|
|
(17.9
|
)%
|
Valuation allowance
|
|
|
(0.9
|
)%
|
|
|
(4.1
|
)%
|
Provision for taxes
|
|
|
-
|
|
|
|
|
|
As of December 31, 2020, the Company had federal and state gross net operating loss carryforwards of approximately $6.5 million. The federal and state net operating losses and tax credits expire in years beginning in 2036. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. To date, the Company hasn’t experienced “ownership changes” under section 382 of the Code and comparable state tax laws. As of December 31, 2020, the Company estimates that none of the federal and state net operating losses will be limited under Section 382 of the Code.
As of December 31, 2020, and 2019, the Company maintained a full valuation allowance on its net deferred tax assets. The valuation allowance was determined in accordance with the provisions of ASC 740, Accounting for Income Taxes, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. The Company’s history of cumulative losses, along with expected future U.S. losses required that a full valuation allowance be recorded against all net deferred tax assets. The Company intends to maintain a full valuation allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.
The applicable federal and state rates used in calculating the deferred tax provision was 21.0% and 8.9%, respectively.
The Company files income tax returns in the U.S. and Arizona. All years presented remain subject to examination for U.S. federal and state purposes. The Company is not currently under examination in federal or state jurisdictions.
NOTE 9 – SUBSEQUENT EVENTS
On January 8, 2021 shares of common stock were issued to CMH in satisfaction of a $50,000 payment owed to CMH under the Patent Purchase Agreement, dated May 17, 2017, as amended on November 14, 2017, between us, our wholly-owned subsidiary StemSpine, LLC, and CMH. Pursuant to the Patent Agreement, the number of shares issued was calculated based on a 30% discount to the closing trading price of the common stock of $.0016 on December 9, 2020.
In February 2020, we completed the sale of two 10% Original Issue Discount Senior Convertible Notes to two institutional investors pursuant to a Securities Purchase Agreement between the Company and the investors. The transactions were effected pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506(b) promulgated thereunder. Pursuant to the Purchase Agreements, for an aggregate purchase price of $144,500, the Investors purchased the notes in the aggregate principal amount of $157.150. The notes mature in February, 2021, bear interest at a rate of 8% per annum, and are convertible into shares of the Company’s common stock at a conversion prices ranging from to 60% to 61% of the average of the two lowest traded price of the Company’s common stock during the 15 trading days preceding the applicable conversion date.
On February 12, 2021, we completed the sale to an institutional investor 350,000 shares of the our newly designated Series B Preferred Stock pursuant to a Securities Purchase Agreement between the Company and the Purchaser for an aggregate purchase price of $350,000. In addition, pursuant to the Purchase Agreement, we issued the Purchaser 1,500,000 shares of our Common Stock as “Commitment Shares” for entering into the transaction. The transaction was effected pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506 of regulation (b) promulgated thereunder.
Each share of Series B Preferred Stock has a Stated Value of $1,200.00 and is convertible into Common Stock at a conversion price equal to $0.05. The conversion price of the Series B Preferred Stock is subject to equitable adjustment in the event of a stock split, stock dividend or similar event with respect to the Common Stock, and will be reduced to $0.035 in the event of a “Triggering Event” a defined in the Certificate of Designation of the Series B Preferred Stock (the “Certificate of Designation”).
The Series B Preferred Stock (i) carries a quarterly dividend at the rate of 10% per annum, payable in cash or additional shares of Series B Preferred Stock, at the Company’s option, and (ii) may be redeemed by us, at its option, upon the payment of an amount equal to (a) $1,200 per share of Series B Preferred Stock, plus all accrued dividends thereon and any unpaid fees or liquidated damages then due with respect to the Series B Preferred Stock pursuant to the Certificate of Designation, multiplied by (b) a premium ranging from 5% if the redemption occurs within 90 days following the issuance of the Series B Preferred Stock, to 20% if the redemption occurs between 120 and 180 days following the issuance of the Series B Preferred Stock.
On March 11, 2020, following the approval of the Board of Directors of the Company filed a Certificate of Amendment to the Certificate of Designation of the Company’s Series A Preferred Stock with the Secretary of State of the State of Nevada (the “Certificate of Amendment”). The Certificate of Amendment increased the voting power of the Series A Preferred Stock to 10,00 votes per share from 30 votes per share. The Company has 3,000,000 shares of Series A Preferred Stock outstanding, all of which are held by Timothy Warbington.
From January 1, 2021 through March 17, 2021, we issued 311,702,077 shares of common stock for the conversion of $947,575 in convertible note principal, interest and fees.
During January and February, 2021 we issued 10,055,556 shares to a contractor upon the conversion of 11,583,333 cashless warrants. The warrants were issued to the contractor for services rendered.