Creative Medical Technology Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company is a clinical-stage stem-cell research business; following its May 18, 2016 reverse merger, the public company’s reported historical operations reflect Creative Medical Technologies, Inc. The filing says there is no comparable prior-year operating period.
Financial results and position
| Metric | Three months ended September 30, 2016 | Nine months ended September 30, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development | $45,174 | $67,566 |
| General and administrative | $164,732 | $493,484 |
| Total expenses | $212,543 | $567,769 |
| Interest expense | $1,971 | $3,837 |
| Net loss | $214,514 | $571,606 |
| Basic and diluted loss per share | $0.00 loss | $0.01 loss |
With no revenue, gross margin and operating margin are not meaningful. The filing provides no prior comparable operating figures for year-over-year analysis.
- Cash and assets: Cash was $33,456 at September 30, 2016, versus $100 at December 31, 2015. Total assets were $136,737, including $103,281 of net licenses.
- Cash flows, nine months: Operating activities used $259,830; investing activities used $10,000; financing activities provided $303,186. Cash increased $33,356 to $33,456.
- Liquidity: Current liabilities were $445,957 and working capital deficit was $412,501. Management said cash would cover only a few more months.
- Debt and obligations: Total liabilities were $471,892. The balance sheet reports $125,000 of related-party notes ($100,000 current and $25,000 long-term), $15,686 of other notes payable, and $280,000 payable to related-party parent Creative Medical Health, Inc. (CMH). Related-party notes bear 8% interest; accrued interest was $3,757.
Material developments and management outlook
- The company completed a reverse merger in May 2016 and became focused on stem-cell applications for erectile dysfunction (ED), infertility, and reproductive conditions. It acquired or licensed related technologies and formed wholly owned subsidiary Amniostem LLC in September.
- Management reported that Q3 general and administrative expense consisted primarily of $105,000 in management fees and $51,056 in professional fees. For the nine months, it reported $318,000 in management fees and $151,975 in professional fees. Management said Q3 expense levels would be more indicative of future expenses.
- The company planned to complete ED clinical trials and, if successful, begin marketing treatment kits in 2017. It estimated trial completion costs at approximately $600,000, excluding overhead and other company costs.
- Management stated that it expected short-term funding needs to be met by CMH loans and longer-term needs by equity offerings, but had no long-term funding arrangements. It warned that failure to raise funds could require significant curtailment or termination of operations.
- The company sold 1.3 million shares for $130,000 through September 30 under a private offering, with warrants issued alongside the shares. It subsequently sold 800,000 additional shares for $80,000. The filing’s Part II reports 2.1 million shares and $210,000 of proceeds from August through October.
- Going-concern uncertainty is substantial: the company had no revenue, incurred losses, used cash in operations, and management said additional capital was necessary. The statements include no adjustments that might result if the company cannot continue as a going concern.
- Disclosure controls were deemed ineffective. A material weakness concerning recording transactions and preparing GAAP financial statements and disclosures remained; the company engaged a third party to assist with accounting and control documentation.
Key facts for investors to verify
- Whether the company secured enough financing to fund the estimated $600,000 ED clinical-trial costs and ongoing overhead, and the terms and availability of any CMH support.
- Clinical-trial progress, results, regulatory or commercialization requirements, and whether the 2017 marketing expectation remained achievable.
- The offering proceeds reported in different sections: $130,000 sold through September 30, $80,000 afterward, and $210,000 reported for August through October; MD&A separately refers to $100,000 raised through September.
- The related-party management-fee accrual and repayment condition: the $280,000 payable is described as due upon raising at least $1 million through equity, while reported management-fee expense totals differ across disclosures.
- Progress in remediating the material weakness in financial reporting and the implications of the going-concern warning.
- License obligations, including royalties, milestone payments, maintenance fees, and patent-related costs; the filing says no amounts were currently due under the described licenses at September 30.