Creative Medical Technology Holdings, Inc. — Q1 2017 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three months ended March 31, 2017. The company is a clinical-stage stem-cell research and development business; it had no revenue-generating operations. Its programs include a stem-cell treatment for erectile dysfunction (ED), preclinical amniotic-fluid stem-cell research, and licensed male-infertility technology.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $59,831 | $4,364 |
| General and administrative expense | $178,378 | $141,176 |
| Total expenses | $240,846 | $147,129 |
| Interest expense, related party | $2,505 | $716 |
| Net loss | $243,351 | $147,845 |
| Net cash used in operating activities | $223,749 | $35,676 |
With no revenue, a gross margin is not applicable. Loss per share was reported as $(0.00) in both periods. The filing attributes higher general and administrative expense primarily to public-company legal and accounting costs; increased research expense primarily reflected ED clinical-trial work and amniotic stem-cell laboratory research.
At March 31, cash was $98,119, down from $221,868 at December 31, 2016. Total assets were $196,126 and total liabilities were $495,802, leaving a stockholders’ deficit of $299,676. The company reported a $370,751 working-capital deficit. Current liabilities were $468,870, including $262,500 in management fees payable to related party CMH and $100,000 of current related-party notes. Related-party notes totaled $125,000, bore 8% interest, and had $8,903 of accrued interest. Cash from financing activities was $100,000, raised through stock sales; investing activities used no cash.
Material changes and outlook
- Net loss increased by $95,506 year over year. R&D expense rose by $55,467, while G&A expense rose by $37,202.
- Management estimated approximately $600,000 would be needed to complete ED clinical trials, excluding overhead and other company costs. It anticipated that, if trials were successful, marketing treatment kits could begin in 2018.
- Management said available cash would cover only a few more months and that the company had no alternative funding sources identified. It was pursuing financing through loans and equity sales; there is no assurance financing or profitable operations will be achieved.
- The filing states that the loss, operating cash outflow, working-capital deficit, and lack of revenue raise substantial doubt about the company’s ability to continue as a going concern. The financial statements include no adjustments for the outcome of that uncertainty.
Risks, contingencies, and unusual items
- Post-quarter financing: The company disclosed an April 13 loan of $100,000 at 12% interest, with a maturity payment of 125% of principal plus interest. In May it received $85,000 for a $100,000 convertible debenture, $103,250 for a $115,000 convertible note, and $47,500 for a $55,000 convertible note. The notes include variable-price conversion features without a floor; the company anticipated derivative-liability accounting for these features and warned of potential share-price pressure and dilution.
- Financing costs and obligations: A March 31 investment-banking agreement provides for monthly payments, financing success fees, warrants and equity compensation, and a 5% fee on a sale or similar transaction, subject to a $250,000 minimum. On May 4, CMH extended a $50,000 note’s maturity from April 30, 2017 to April 30, 2018; accrued interest through the original maturity was due by June 30, 2017.
- Related-party obligations: The $262,500 management-fee payable to CMH is non-interest-bearing and unsecured, and is due when the company successfully raises at least $1 million through equity sales.
- Other commitments: License agreements include royalties, maintenance fees, milestone payments, and potential patent-maintenance costs. No amounts were due to the licensors at March 31, 2017. The filing reports no material subsequent events other than those described above and no material off-balance-sheet arrangements.
- Controls: Management concluded disclosure controls were effective and stated that previously identified material weaknesses in financial reporting had been remediated during Q1 2017.
Important facts for investors to verify
- Available cash, near-term cash burn, and whether the company secured sufficient funding to complete clinical trials and meet obligations.
- Clinical-trial progress, regulatory requirements, and whether the anticipated 2018 marketing timetable remains achievable.
- Actual conversion prices, dilution, derivative-liability accounting, and repayment terms for the post-quarter convertible securities.
- Status and payment of related-party notes, accrued interest, and management fees, including the extended note and the $1 million equity-funding condition.
- Costs and obligations under the investment-banking and licensing agreements, and any changes to internal-control remediation.