Creative Medical Technology Holdings, Inc. — 2018 Q1 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The company had begun selling stem-cell separation equipment and disposable kits for its Caverstem erectile-dysfunction procedure in Q4 2017. Its plans also include clinical research and development of other stem-cell treatments.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior balance date |
|---|---|---|
| Revenue | $9,600 | $0 |
| Gross profit / margin | $7,200 / 75% | $0 |
| Operating expenses | $211,416 | $240,846 |
| Operating loss | $204,216 | $240,846 |
| Net loss | $7,586,580 | $243,351 |
| Net cash used in operations | $164,937 | $223,749 |
| Cash at period end | $102,310 | $13,697 at Dec. 31, 2017 |
| Total liabilities | $8,225,097 | $2,439,320 at Dec. 31, 2017 |
| Stockholders’ deficit | $7,933,824 | $2,236,173 at Dec. 31, 2017 |
Operating expenses included $202,930 in general and administrative costs, $3,200 in research and development, and $5,286 in patent amortization. Current liabilities were $8,221,393, including $7,045,971 of derivative liabilities; the reported working-capital deficit was $8,109,483. Convertible notes were reported at $258,950 net of discount as current liabilities, in addition to $125,000 in notes payable and $125,000 in related-party notes payable.
Material changes and unusual items
- Revenue commenced, but remained minimal. General and administrative expense rose 14% year over year to $202,930; research and development expense fell 95% to $3,200, mainly because of lower clinical-research and laboratory costs.
- Net loss increased sharply, principally reflecting derivative-related expense, interest expense of $191,308, and a $154,284 loss on extinguishment of convertible debt. The filing reports a $7,036,772 change-in-fair-value expense on the income statement.
- Cash increased by $88,613 during the quarter, principally because $253,550 of net financing cash flow offset operating cash use and $800 of note payments. The cash-flow statement reports $254,350 of convertible-note proceeds.
- The company issued or exchanged multiple convertible notes with variable conversion prices, generally set at 60%–63% of specified recent trading prices. It reported approximately 479 million potential shares from convertible notes at March 31 and warned of significant dilution. Notes and warrants with repricing features also generated substantial derivative liabilities.
- Common shares outstanding were reported as 400,340,232 at March 31; the cover page reports 648,714,483 outstanding on May 21. The filing says 214,744,028 shares were issued in April and May for convertible-note conversions, and a further 50,769,355 shares for warrant exercises.
Outlook, liquidity, and risks
Management planned to market Caverstem equipment and kits, complete the UCLA/LABiomed clinical trial, and pursue investigator-initiated trials for neurological programs. The estimated cost to complete the clinical trials was approximately $400,000, excluding overhead and other company costs. Management estimated monthly cash burn at approximately $65,000 and stated that cash and committed funds were expected to cover operations only through at least June 2018. Funding was expected from product sales, borrowing, or equity issuance; the company disclosed no assured long-term funding or alternative funding source.
The filing states that the loss, negative operating cash flow, working-capital deficit, and minimal revenue raise substantial doubt about the company’s ability to continue as a going concern. Management said it was pursuing financing, but there was no assurance it would succeed; failure could require significant curtailment or termination of operations. Variable-price convertible debt, potential dilution, default penalties and elevated default interest are material risks. The filing also describes related-party management fees and patent-license royalties and milestone obligations.
Most important facts for investors to verify
- Whether the company obtained sufficient financing after quarter-end and whether the stated cash runway and going-concern assumptions remain valid.
- The reconciliation of derivative-liability expense: the statements report a $7,036,772 fair-value change, while the derivative note describes a $6,505,216 revaluation loss plus an approximately $502,000 day-one loss.
- The reconciliation of convertible-note proceeds: MD&A reports $254,350 net proceeds, while Part II reports $320,658 proceeds for notes with a stated face amount of $390,000.
- The share-count and authorization position after the reported conversions and warrant exercises: the balance sheet lists 600 million authorized common shares, while the cover reports 648,714,483 shares outstanding on May 21.
- The terms, remaining balances, maturity dates, and potential share issuance of variable-price notes and warrants, including any post-quarter conversions or new financing.
- Whether the approximately $400,000 clinical-trial funding requirement and planned research and commercialization activities can be met.