Creative Medical Technology Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; financial statements are unaudited. The company is a clinical-stage stem-cell therapeutics business with no revenue-generating operations during the periods reported.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $87,728 | $45,174 | $172,748 | $67,566 |
| General and administrative expense | $201,985 | $164,732 | $748,379 | $493,484 |
| Total operating expenses | $294,999 | $212,543 | $931,836 | $567,769 |
| Net loss | $52,182 | $214,514 | $1,181,889 | $571,606 |
| Basic and diluted loss per share | $(0.00) | $(0.00) | $(0.01) | $(0.01) |
- Margins: Not meaningful because revenue was zero.
- Cash flow: Operating activities used $766,902 in the first nine months of 2017, versus $259,830 in 2016. Financing provided $566,250; investing used no cash. Cash declined by $200,652 to $21,216.
- Balance sheet at September 30: Total assets were $211,151, including $21,216 cash and $189,935 in net licenses. Current liabilities were $1,267,110; total liabilities were $1,284,219. Stockholders’ deficit was $1,073,068, and the reported working-capital deficit was $1,245,894.
- Debt and related-party obligations: Current convertible notes, net of discounts, totaled $133,481; long-term convertible notes, net, were $14,402. Current notes payable were $122,514, and related-party current notes were $125,000. Accrued management fees payable to related party CMH were $310,500. Derivative liabilities were $401,461.
Changes versus prior comparable periods
- Q3 net loss narrowed to $52,182 from $214,514, mainly because the quarter included $372,595 of reported income from a change in derivative fair value. This benefit more than offset higher operating costs and interest expense.
- Nine-month net loss increased to $1,181,889 from $571,606. Operating expenses rose, interest expense increased to $195,523 from $3,837, and the company reported a $54,530 nine-month expense from derivative fair-value changes.
- Management attributed higher nine-month G&A primarily to $144,112 of stock-based compensation, $58,300 of public-market consulting costs, and legal and accounting costs related to debt issuances and public-company reporting. Higher R&D reflected increased ED clinical-trial and Amniostem laboratory costs.
- Cash used in operations increased to $766,902 from $259,830. The company raised $100,000 from common-stock sales and $466,250 from convertible and nonconvertible debt during the nine-month period.
Outlook, risks, contingencies, and notable items
- Going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, no revenue, operating cash outflow, and the working-capital deficit. Management expected to seek loans or equity financing, but disclosed no assurance of success and no established long-term funding source. It said available cash would cover only a few more months.
- Operating plan: Management estimated approximately $500,000 would be needed to complete ED clinical studies, excluding overhead and other corporate costs. Its plan described completing trials and marketing ED treatment kits in 2018. Separately, an October 18, 2017 subsequent-event disclosure said safety analysis on 20 trial patients was complete and commercialization of the CaverStem procedure had been launched, based on the company’s stated safety and efficacy findings.
- Convertible-debt and dilution risks: Several notes have conversion prices based on substantial discounts to market prices, some without a conversion-price floor. The company disclosed approximately 3.6 million potential shares from convertible notes at September 30, 2017, while warning that variable conversion terms could increase dilution and pressure the stock price. Certain notes carry high default rates, premium repayment terms, collateral, or large share-reservation requirements.
- Other commitments: The lower-back patent agreement with related party CMH includes potential milestone payments of up to $700,000 depending on development path, plus royalties; the agreement caps aggregate royalties at $2.5 million. The company also has license-related royalties, maintenance fees, and milestone obligations. No amounts were then due under the university and LABIOMED licenses.
- Subsequent events: The October 2017 extension of a $100,000 loan to October 2018 and a new $30,250 convertible note (with $25,000 proceeds) were disclosed. In November, the company issued 45,000 shares for conversion of interest and 357,142 shares for conversion of principal.
- Controls: Management concluded disclosure controls were effective and stated previously identified material weaknesses had been remediated during the nine months ended September 30, 2017.
Most important facts for investors to verify
- Whether the company can raise sufficient capital to fund operations, trial completion, and near-term obligations, and whether financing terms create further dilution.
- The status, results, regulatory pathway, and commercial readiness of the ED clinical program; reconcile the stated 2018 marketing plan with the October 2017 commercialization announcement.
- The accounting and reconciliation of derivative gains and losses: the Q3 statement reports a $372,595 gain, while the derivative note describes a $183,856 revaluation gain and the nine-month statement reports a $54,530 loss.
- The full principal, maturity, repayment, conversion, collateral, and default terms of outstanding debt, including subsequent conversions and their impact on shares outstanding.
- The nature and timing of related-party amounts, including the $310,500 management-fee payable and potential CMH patent payments.