Creative Medical Technology Holdings, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. The company became a clinical-stage regenerative-medicine business through a reverse merger completed May 18, 2016; 2015 figures cover only the period from CMT’s December 30, 2015 inception and are not meaningfully comparable.
Business context and financial results
The company develops stem-cell treatments, led by an erectile-dysfunction (ED) program, with additional proposed programs for infertility, recurrent miscarriage, female sexual dysfunction, and stroke. It had no revenue-generating operations or employees of its own; it relied on services from its related parent, Creative Medical Health, Inc. (CMH).
| Metric | 2016 | 2015 comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $759,674 | $500 |
| Net loss | $766,072 | $500 |
| Basic and diluted loss per share | $0.01 | $0.00 |
| Net cash used in operating activities | $445,232 | $400 |
| Cash at year-end | $221,868 | $100 |
2016 expenses included $664,984 in general and administrative costs, primarily management fees of $423,000 and professional fees of $208,004; $85,334 in research and development; $9,356 in patent amortization; and $6,398 in related-party interest expense. No operating margin is meaningful because the company had no revenue.
Liquidity, debt, and capital
- At December 31, 2016, total assets were $322,512, total liabilities $480,303, and stockholders’ deficit $157,791. Current liabilities were $453,864, producing reported negative working capital of $231,996.
- Cash was $221,868. Operating cash use was funded principally by $677,000 of financing cash inflows, including $500,000 from private stock sales, $125,000 of related-party borrowing, and other subscription and related-party proceeds.
- Related-party notes totaled $125,000, bore 8% interest, and included $100,000 due in 2017 and $25,000 due in 2018. Accrued interest was $6,398. The company also reported $280,000 payable to CMH for management services; it is non-interest-bearing and due after the company raises at least $1 million through equity sales.
- The company sold 5 million shares for $500,000 and issued warrants to purchase 500,000 shares at $0.10. It reported 105,013,750 common shares outstanding as of February 13, 2017.
Changes, outlook, and key risks
The May 2016 reverse merger transformed the formerly inactive shell into a clinical-stage stem-cell company. The company acquired the ED patent, obtained an infertility license, and added patent applications and an exclusive amniotic-stem-cell license. The resulting 2016 operating expenses and losses reflect the new business; the 2015 comparison is essentially a short, pre-operating period.
Management said the ED clinical trial involved approximately 40 subjects and projected completion and publication by late 2017, with potential commercialization in the second half of 2017 if results were positive. These were plans, not assured outcomes. The company estimated approximately $600,000 to complete the trial, excluding overhead, versus $221,868 cash at year-end; it estimated a monthly cash burn of approximately $65,000 and expected available cash and committed funds to cover costs only through at least March 2017. It had no alternative funding source identified and expected to seek additional financing.
- The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern, citing losses, negative operating cash flow, negative working capital, and no revenue. The statements contain no adjustments for the outcome of that uncertainty.
- Disclosure controls and internal control over financial reporting were reported ineffective. Management identified a continuing material weakness in its ability to record transactions and prepare GAAP statements and disclosures reliably; it engaged outside technical-accounting assistance.
- Regulatory classification is a major uncertainty. Management believed some autologous treatments might qualify for a less burdensome pathway, but said changes in FDA interpretation could require biologics approval, longer development, and significantly more capital. For amniotic-cell and related programs, it anticipated a BLA pathway and a seven-to-ten-year process.
- Development programs remain early-stage and dependent on clinical outcomes, patent prosecution, regulatory clearance, and financing. The filing describes potential license costs, including estimated milestones of approximately $300,000 under the LABIOMED agreement and approximately $2 million under the UCSD license, plus royalties and other obligations.
- Related-party dependence is significant: CMH provides management services, has funded operations, and is a major shareholder. The company had no standing audit committee, and disclosed late Section 16(a) filings by certain insiders and holders.
Most important facts for investors to verify
- Whether the ED trial was completed, what its safety and efficacy results showed, and whether the projected commercialization timeline was achieved.
- Cash runway, subsequent financing, maturity or repayment of related-party debt, and the status and terms of any committed funding.
- Whether the company’s material weakness and ineffective disclosure controls were remediated, and whether later filings report additional accounting or audit issues.
- Actual obligations, payment triggers, royalties, and development milestones under the LABIOMED and UCSD licenses.
- The FDA’s applicable regulatory pathway for each treatment and the clinical, regulatory, and capital requirements that follow.