Creative Medical Technology Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company is a clinical-stage stem-cell research business; its operating history reflects Creative Medical Technologies, Inc. following the May 18, 2016 reverse merger and recapitalization. The filing says there is no comparable 2015 operating period because the business was newly formed and the public company had previously been inactive.
Financial results and position
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development | $18,028 | $22,392 in statements; MD&A reports $21,892 |
| General and administrative | $187,576 | $328,752 |
| Total expenses | $208,097 | $355,226 |
| Interest expense | $1,150 | $1,866 |
| Net loss | $209,247 | $357,092 |
| Basic and diluted loss per share | $(0.00) | $(0.00) |
For the six months, operating cash used was $138,955. Financing provided $164,617, including $118,931 in note proceeds and $50,000 collected on a stock subscription receivable; ending cash was $25,762, versus $100 at December 31, 2015. No cash was reported paid for interest or income taxes.
At June 30, total assets were $121,680, including $25,762 cash and a net ED patent asset of $95,918. Current liabilities were $304,025 and total liabilities were $373,056, including $50,000 current related-party notes, $15,686 other notes, $69,031 long-term related-party notes, and a $210,000 related-party management-fee payable. Stockholders’ deficit was $251,376; working capital deficit was $278,263. The filing reports no revenue-generating activities.
Business developments and changes
- The May 18 reverse merger gave former CMT shareholders voting and operating control; the transaction was accounted for as a recapitalization, with CMT’s historical operations presented.
- The company acquired rights for infertility treatments, purchased an ED-treatment patent, and filed patent applications concerning female sexual dysfunction and recurrent miscarriages. In June it reported filing an application based on animal-model data on preventing recurrent miscarriages.
- Six-month G&A included $213,000 in management fees and $100,919 in professional fees. Management said the June-quarter expense level would be more indicative of future expenses.
- Six-month R&D and license-fee figures are inconsistent: the statements show R&D of $22,392, while MD&A says $21,892. The notes describe $12,640 of infertility-license acquisition costs expensed in the period; MD&A separately reports $7,300 of royalty-license fees in the June quarter.
- In August 2016, the company commenced a private offering of up to 10 million shares at $0.10 per share, with one warrant for an additional share at $0.10 for each ten shares purchased. It reported selling 1 million shares by August 6. Common shares outstanding were 100,013,750 at June 30 and 101,013,750 on August 6.
Outlook, risks, and unusual items
- Management estimated approximately $600,000 would be needed to complete ED clinical studies, excluding overhead. It planned to complete trials and potentially begin marketing treatment kits in 2017 if studies are successful; the company said cash on hand would cover only a few more months.
- Management anticipated no revenue in the next several months until clinical trials are successfully completed. It cited loans or equity sales as potential funding sources, but stated there is no assurance of raising capital, no established long-term funding arrangement, and no alternative funding source identified.
- The filing states that losses, negative operating cash flow, a working-capital deficit, and no revenue raise substantial doubt about the company’s ability to continue as a going concern. Failure to obtain funding could require significant curtailment or termination of operations.
- CMH-related funding includes notes bearing 8% interest. The $210,000 management-fee liability is unsecured, non-interest-bearing, and due upon the company successfully raising at least $1 million through equity sales. The LABIOMED license includes a 6% royalty on net sales, 25% on non-royalty sublicense income, potential annual maintenance royalties, and milestone payments.
- Management concluded disclosure controls and internal control over financial reporting were not effective at June 30. Reported weaknesses involved reverse-merger equity reporting and recording the related-party patent acquisition. Management planned further evaluation for its year-end report.
- The filing refers investors to risk factors in the May 19, 2016 Form 8-K. It reports no material off-balance-sheet arrangements and no other material subsequent events beyond the August offering.
Important facts for investors to verify
- Reconcile the R&D expense discrepancy ($22,392 versus $21,892) and clarify the license-fee amounts and classification.
- Confirm cash runway, access to additional CMH loans, and the status and net proceeds of the August equity-and-warrant offering.
- Assess clinical-trial progress, the estimated $600,000 completion cost, and the timing and conditions for potential commercialization.
- Review related-party debt, accrued management fees, reverse-merger accounting, patent valuation and amortization, and the royalty and milestone obligations.
- Monitor remediation of the disclosed control weaknesses and the company’s ability to address the going-concern uncertainty.