Creative Medical Technology Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The unaudited filing covers a clinical-stage stem-cell research and development company; it reported no revenue and had not commenced planned principal commercial operations.
Key financial results
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $25,189 | $85,020 | $18,028 quarter; $22,392 six months |
| General and administrative expense | $368,016 | $546,394 | $187,576 quarter; $328,752 six months |
| Total expenses | $395,991 | $636,837 | $208,097 quarter; $355,226 six months |
| Net loss | $886,356 | $1,129,707 | $209,247 quarter; $357,092 six months |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.00) in both comparable periods |
Gross margin is not meaningful because the company had no revenue. The reported loss includes $427,125 of expense from the change in fair value of derivative liabilities for the six-month period, as well as interest expense of $65,745. General and administrative expense included $142,423 of stock-based compensation for the six months.
Cash, liquidity, and obligations
- Cash was $104,396 at June 30, 2017, down from $221,868 at December 31, 2016. Total assets were $299,617; total liabilities were $1,322,192; and stockholders’ deficit was $1,022,575.
- Working capital deficit was $1,209,524. Six-month operating cash use was $493,222; investing cash use was $100,000, principally for the StemSpine patent; and financing provided $475,750. Ending cash declined by $117,472.
- Current liabilities included $293,000 in management and patent fees payable to a related party, $125,000 of current related-party notes, $149,191 in notes and convertible notes net of discounts, and $681,056 in derivative liabilities.
- The company received $375,750 from third-party debt financing during the six months, including $285,750 from convertible notes. It also raised $100,000 from a stock sale. Related-party notes carry 8% interest; a separate $100,000 loan received only $90,000 in proceeds and carries 12% interest plus a maturity payment premium.
Changes versus prior period
Six-month net loss increased to $1.13 million from $357,092. G&A rose 66%, primarily due to stock compensation and legal and accounting costs related to debt issuances and public-company reporting. R&D increased to $85,020 from $22,392, reflecting higher ED clinical-trial and stem-cell laboratory costs. Cash used in operations increased to $493,222 from $138,955. The company also acquired the StemSpine lower-back patent for $100,000.
Outlook, risks, and unusual items
- Management planned to complete ED stem-cell clinical studies and, if successful, begin marketing treatment kits in 2018. It estimated about $600,000 would be needed to complete the trials, excluding overhead and other corporate costs.
- Management said available cash might fund only a few more months. The company had no committed long-term funding arrangements and expected to seek loans and equity financing. Management warned that failure to obtain financing could require substantial curtailment or termination of operations. The filing states that the losses, operating cash outflows, working-capital deficit, and lack of revenue raise substantial doubt about the company’s ability to continue as a going concern.
- Several convertible notes have variable conversion prices at substantial discounts to market, and some have no conversion-price floor. The filing warns that conversion may create significant shareholder dilution and pressure on the stock price. Potential conversion shares were estimated at approximately 1.9 million at June 30, 2017; the actual number depends on trading prices. Derivative liabilities were valued using option-pricing assumptions and remeasured at period end.
- The StemSpine patent agreement includes royalties and milestone payments tied to development and clinical milestones. Related-party obligations include accumulated management fees payable to CMH, due upon the company raising at least $1 million through equity sales.
- After quarter-end, the company entered into another $50,000 convertible note agreement on July 19, 2017, receiving $43,000 in proceeds. It has a variable conversion price and default and redemption terms that could increase repayment costs.
- Management reported that previously identified material weaknesses in internal control over financial reporting had been remediated during the six months ended June 30, 2017. It concluded disclosure controls were effective at period-end.
Important facts for investors to verify
- Whether the company raised sufficient additional capital after the filing date to fund operations and the estimated $600,000 clinical-trial costs.
- Clinical-trial progress, results, regulatory requirements, and the basis for the contemplated 2018 marketing timeline.
- Current principal, accrued interest, maturities, and redemption obligations under each debt agreement, including any subsequent conversions or defaults.
- The potential share dilution from variable-price convertible notes, warrants, and required share reservations.
- The amount and timing of related-party fees and patent-related royalties, milestones, and other contingent payments.