Creative Medical Technology Holdings, Inc. — 2017 Form 10-K Summary
Business context and reporting period. The company reported for the fiscal year ended December 31, 2017. It develops and markets regenerative-medicine technologies through its subsidiaries, including Caverstem, a physician-performed stem-cell procedure for erectile dysfunction (ED). Commercial sales of related equipment and disposable kits began in the fourth quarter; most other programs, including amniotic stem-cell applications and lower-back-pain treatments, remained in research or development. The company had no employees of its own and relied on personnel employed by its parent, Creative Medical Health, Inc. (CMH).
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $4,800 | $0 |
| Cost of revenue / gross profit (loss) | $8,000 / $(3,200) | $0 / $0 |
| Research and development | $260,085 | $85,334 |
| General and administrative | $898,526 | $664,984 |
| Operating loss | $(1,177,806) | $(759,674) |
| Interest expense | $(377,587) | $(6,398) |
| Derivative fair-value expense | $(1,103,715) | $0 |
| Net loss | $(2,659,108) | $(766,072) |
| Basic and diluted loss per share | $(0.03) | $(0.01) |
- Operating cash used was $889,621, compared with $445,232 in 2016. Financing provided $681,450; cash fell from $221,868 to $13,697 during 2017.
- At year-end, current assets were $18,498, total assets $203,147, current liabilities $2,435,194, and total liabilities $2,439,320. The company reported negative working capital of $2,416,696 and a stockholders’ deficit of $2,236,173.
- Derivative liabilities were $1,309,190 at year-end. Convertible notes were reported net of discounts at $252,663 in total, including $251,748 current and $915 long-term. The notes maturity schedule lists $393,250 due in 2018 and $100,000 in 2020; related-party notes and other obligations also exist.
- Management estimated a monthly cash burn of about $65,000 and said available cash and committed funds would cover operations only through at least March 2018. Completing the ED clinical trial was estimated to require about $400,000, excluding overhead.
Material changes versus 2016
- Revenue began, but remained minimal at $4,800; cost of revenue exceeded it.
- R&D rose 205% to $260,085, mainly for the ED clinical trial and AmnioStem preclinical research. General and administrative expense increased 35%, principally from legal, accounting, public-company reporting costs, and stock compensation.
- Net loss increased to $2.66 million from $766,072. Higher interest expense and a $1.10 million derivative-liability fair-value charge were major contributors; the filing also attributes part of the higher interest expense to debt-discount amortization.
- Cash declined by $208,171. The company raised funds through common-stock sales and additional borrowing, including $483,250 of net proceeds from convertible notes in 2017.
Outlook, risks, contingencies, and unusual items
- Management planned to expand Caverstem marketing, complete the UCLA/LABIOMED ED study, and support investigator-led research. It anticipated 2018 revenue but provided no quantified sales guidance.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management said additional financing would be needed; it had no alternative funding source identified and no assurance it could raise capital or become profitable.
- Many convertible notes have variable conversion prices set at discounts to market, and some have no floor on the number of shares issuable. The filing estimates approximately 87.6 million shares of potential conversion dilution at year-end. Conversion, default, redemption, and share-reservation provisions may further affect financing needs and common-share dilution.
- Related-party exposure is significant: CMH provides management services for $35,000 per month, with $352,750 payable at year-end. CMH may elect payment in common shares at a 30% discount to a specified recent market price. The lower-back-pain patent was also acquired from CMH for $100,000, with additional milestone and royalty obligations.
- In January 2018, 3 million Series A preferred shares were issued in settlement of $150,000 of management-fee debt. Each share carries 1,000 votes and a liquidation preference of $0.05 plus 8% simple annual interest; the filing says the issuance gave CEO Timothy Warbington 96.68% of voting power. The company also increased authorized common shares to 3 billion.
- From January 3 through March 14, 2018, noteholders converted $157,652 of principal and interest, plus $6,000 in legal fees, into 130,016,169 common shares. The filing reports 244,815,395 common shares outstanding as of March 14, 2018.
- The stock’s reported fourth-quarter 2017 bid range was $0.01–$0.24. In February 2018, OTC Markets notified the company that its bid had remained below $0.01 for more than 30 consecutive days; failure to cure could result in a move from OTCQB to OTC Pink. Penny-stock rules may also constrain liquidity.
- Management believed the ED procedure could qualify for a regulatory exemption applicable to certain autologous procedures. The filing cautions that a change in FDA rules or interpretation could require a biologics-approval pathway, substantially lengthening development and increasing capital needs. Management expected the amniotic, stroke, glioma, and radiation programs to follow a biologic-drug pathway.
- The ED study’s status is not consistently described: the filing says recruitment was completed in August 2017 in one place, but states enrollment was completed in August 2018 elsewhere, and says the trial was scheduled to finish in the first half of 2018. Clarification is warranted.
- Management described the ED procedure as safe and effective based on interim safety information and other published studies, but the company’s own trial was ongoing. Most additional therapeutic programs were preclinical or otherwise not yet commercialized.
Most important facts for investors to verify
- Current cash, operating burn, funding commitments, and ability to meet near-term obligations and the estimated clinical-trial costs.
- Reconciled debt balances, maturities, default or extension status, derivative-liability accounting, and the actual dilution potential of variable-price notes and warrants.
- ED trial enrollment, follow-up, endpoints, results, and the basis for any commercialization and regulatory claims.
- Post-year-end share issuance and voting control, including the preferred-stock terms, conversions, and updated fully diluted share count.
- Related-party balances and agreements, including management-fee settlement terms and the lower-back-pain patent purchase and milestone obligations.
- OTCQB eligibility and trading liquidity, as well as any changes to the company’s financing or commercialization plans.