The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
Introductory Comment
Unless otherwise indicated, any reference
to “our company”, “we”, “us”, or “our” refers to Creative Medical Technology Holdings,
Inc., and as applicable to its wholly owned subsidiary, Creative Medical Technologies, Inc., a Nevada corporation (“
CMT
”).
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
– We were
incorporated on December 3, 1998, in the State of Nevada, and have one wholly-owned subsidiary, Creative Medical Technologies,
Inc., a Nevada corporation (“
CMT
”), which conducts all of our business operations. On September 14, 2016, we
formed a limited liability company, Amniostem LLC, in Nevada for the purpose of creating and/or licensing intellectual property
in the area of amniotic fluid derived stem cells for therapeutic applications. This entity is a wholly owned subsidiary of CMT
and has not commenced any business activities. On May 17, 2017, we formed a limited liability company, StemSpine, LLC in Nevada
for the purpose of creating and/or licensing intellectual property in the area of using stem cells therapies to treat lower back
pain. This entity is a wholly owned subsidiary of CMT and has not commenced any business activities.
We had only limited operations during this
startup phase through June 30, 2008, at which time we ceased all business operations because of increased competition in the industry,
dwindling sales, and elevated costs associated with generating sales.
On May 18, 2016, we closed an Agreement
and Plan of Merger (the “
Merger Agreement
”) with CMT, Steven L. White, our principal shareholder and the sole
officer and director, and Jolley Acquisition Corp., a Nevada corporation and wholly owned subsidiary of our company (the “
Merger
Sub
”). As a result of the closing of the Merger Agreement, the Merger Sub was merged with and into CMT with CMT being
the surviving corporation and CMT became our wholly-owned subsidiary. Effective May 18, 2016, we filed Articles of Merger and Articles
of Exchange with the Nevada Secretary of State evidencing the closing and the issuance of our shares to the shareholders of CMT.
Following closing, Mr. White, who was our majority shareholder prior to the closing, sold 15,100,000 shares of our common stock
to us for $5,000, after which the shares were cancelled and returned to our authorized but unissued shares of common stock.
In connection with the closing, CMT caused
Creative Medical Health, Inc., a Delaware corporation and parent of CMT (“
CMH
”), to advance $25,000 to us for
payment of certain obligations. Prior to the execution of the Merger Agreement, CMH advanced to us $8,256 for the payment of certain
accounts payable and $5,000 for repayment of certain notes payable. At closing, CMT caused CMH to advance $5,000 to us for the
purchase of Mr. White’s shares and the balance of the $25,000 for the payment of our remaining accounts payable. The amounts
advanced by the parent of CMT are evidenced by an 8% Promissory Note dated May 18, 2016.
At closing, each share of common stock
of CMT issued and outstanding immediately prior to the closing was converted into 6.4666666 shares of our common stock (97,000,000
shares), which now constitutes approximately 91%, of our issued and outstanding common stock. The equity of the Company has been
retroactively restated to show the effect of the reverse merger on the common stock outstanding for the periods presented.
As a condition of closing, we
delivered Cancellation of Indebtedness Agreements evidencing the cancellation of all prior outstanding notes payable, except
for promissory notes in the aggregate amount of $20,000 which is now payable upon our having obtained DTC eligibility for
our common stock.
At closing, Timothy Warbington, Donald
Dickerson, Thomas Ichim, PhD, and Amit Patel, MD were appointed as our directors and Mr. White resigned from all positions with
our company.
Effective May 18, 2016, in connection with
the closing, we filed Articles of Merger with the Nevada Secretary of State evidencing the change of our name to “Creative
Medical Technology Holdings, Inc.” This merger was between our company and a newly formed Nevada corporation, Creative Medical
Technology Holdings, Inc., which was formed solely to effect our name change.
Our principal executive offices are located
at 2017 W Peoria Avenue, Phoenix, AZ 85029.
Use of Estimates
–
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation
–
The accompanying unaudited condensed consolidated financial statements have been prepared without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2017 and for the three and nine month periods then ended have been made. Certain information
and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. The operations for the three and nine month period ended
September 30, 2017, are not necessarily indicative of the operating results for the full year.
Going Concern
– The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However,
during the nine-month period ended September 30, 2017, the Company incurred a net loss of $1,181,889 had negative cash flows from
operating activities, had a working capital deficit of $1,245,894 and had no revenue-generating activities. These factors raise
substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise
any necessary additional funds not provided by operations through loans or through additional sales of common stock. There is no
assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The unaudited
condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Research and Development
– Research and development will be the principal function of the Company. Research and development costs will be expensed
as incurred. Expenses in the accompanying unaudited condensed consolidated financial statements include certain costs which
are directly associated with the Company’s research and development:
|
1.
|
Erectile Dysfunction Technology based upon the use of stem cells. These costs, which consist primarily of monies paid for clinical trial expenses, materials and supplies and compensation costs amounted to $79,328 and $147,848 for the three and nine month periods ended September 30, 2017, respectively.
|
|
2.
|
Stroke Treatment based upon implanting amniotic fluid-based stem cells. Monies paid for laboratory expenses, materials and supplies amounted to $8,400 and $24,900 for the three and nine month periods ended September 30, 2017, respectively.
|
Basic and Diluted Loss Per Share –
The Company follows Financial Accounting Standards Board (“FASB”) ASC 260 Earnings per Share to account for earnings
per share. Basic earnings per share (“EPS”) calculations are determined by dividing net loss by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings per share calculations are determined by dividing
net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when
common stock equivalents, if any, are anti-dilutive they are not considered in the computation. During the three and nine month
periods ended September 30, 2017, the Company had 500,000 options and 966,667 warrants to purchase common stock outstanding. In
addition, the Company has various convertible notes payable which at September 30, 2017 are convertible into approximately 3,561,467
shares of common stock. The effects of the dilutive securities were anti-dilutive due to net loss during the three and nine month
periods ended September 30, 2017.
Recent Accounting Pronouncements
–
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities
from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial
instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features)
that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance
creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down
round features that require fair value measurement of the entire instrument or conversion option. For public business entities,
the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating
the impact of adopting this guidance on its consolidated financial statements. The Company has reviewed all recently issued, but
not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position
or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its
financial statements other than disclosed above.
NOTE 2 – LICENSING AGREEMENTS
ED Patent
– The Company
acquired a patent from Creative Medical Health, Inc. (“CMH”), a related company, on February 2, 2016, in exchange for
64,666,667 shares of CMTH restricted common stock valued at $100,000. CMH holds a significant amount of the Public Company’s
common stock. The patent expires in 2025 and the Company has elected to amortize the patent over a ten year period on a straight
line basis. Amortization expense of $2,493 and $7,507 were recorded for the three and nine month periods ended September 30, 2017,
respectively.
Male Infertility License Agreement
– The Company has acquired a royalty license from Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center
(“LABIOMED”) granting the exclusive license to the products and services of a LABIOMED patent.
The license was acquired for a cash payment
of $5,000, issuance of 323,333 shares of restricted common stock of the Company (valued at $1,000, with a par value of $0.01 per
share), and an agreement to reimburse LABIOMED up to $1,800 for expenses incurred by LABIOMED in reviving and defending their patent.
The Company has expensed the cash paid, the value of the stock issued, and the expected reimbursement of $1,800 for a total intangible
royalty expense – license fees of $7,300.
The Company is subject to a 6% royalty
payment to LABIOMED on net sales of any products under this license and 25% on any non-royalty sublicense income. Commencing three
years after the date of the agreement, and each subsequent year thereafter, the Company is required to pay to LABIOMED annual maintenance
royalties of $20,000, unless during the prior one-year period the Company paid $50,000 or more in actual royalty payments. Finally,
the Company agreed to pay LABIOMED certain milestone payments upon achieving the milestones set forth in the agreement. As of September
30, 2017, no amounts are currently due to LABIOMED.
Multipotent Amniotic Fetal Stem Cells
License Agreement
– On August 25, 2016, CMT entered into a License Agreement dated August 25, 2016, with a University.
This license agreement grants to CMT the exclusive right to all products derived from a patent for use of multipotent amniotic
fetal stem cells composition of matter throughout the world during the period ending on the expiration date of the longest-lived
patent rights under the patent. The license agreement also permits CMT to grant sublicenses. Under the terms of the license agreement,
CMT is required to diligently develop, manufacture, and sell any products licensed under the agreement. CMT paid the University
an initial license fee within 30 days of entering into the agreement. CMT is also required to pay annual license maintenance fees
on each anniversary date of the agreement, which maintenance fees would be credited toward any earned royalties for any given period.
The License Agreement provides for payment of various milestone payments and earned royalties on the net sales of licensed products
by CMT or any sub licensee. CMT is also required to reimburse the University for any future costs associated with maintaining the
patent. CMT may terminate the license agreement for any reason upon 90 days’ written notice and the University may terminate
the agreement in the event CMT fails to meet its obligations set forth therein, unless the breach is cured within 30 days of the
notice from the University specifying the breach. CMT is also obligated to indemnify the University against claims arising due
to the exercise of the license by CMT or any sub licensee. As of September 30, 2017, no amounts are currently due to the University.
The Company estimates that the patent expires
in February 2026 and has elected to amortize the patent through the period of expiration on a straight line basis. Amortization
expense of $293 and $409 were recorded for the three and nine month periods ended September 30, 2017, respectively.
Lower Back Patent
–
The Company, through a newly created subsidiary of CMT, StemSpine, LLC, acquired a patent from CMH, a related company, on May 17,
2017, for $100,000, payable in cash or stock. The patent expires on May 19, 2026 and the Company has elected to amortize the patent
over a ten-year period on a straight line basis. Amortization expense of $2,500 and $2,500 were recorded for the three and nine
month periods ended September 30, 2017, respectively.
For a period of five years from the date
of the first sale of any product derived from the patent, StemSpine is required to make royalty payments of 5% from gross sales
of products. StemSpine has also agreed to pay royalties of 50% of sale price or ongoing payments from third parties for licenses
granted under the patent to third parties. In addition, StemSpine has agreed to make progress payments under the patent purchase
agreement determined by whether the technology represented by the patent is tested by use of autologous cells or allogenic cells.
In the case of pursuit of the technology using autologous cells, StemSpine has agreed to pay CMH $100,000 upon the signing of an
agreement with a university for the initiation of an IRB clinical trial and $200,000 upon completion of the clinical trial. In
the event StemSpine determines to pursue the technology using allogenic cells, StemSpine has agreed to pay CMH $100,000 upon the
filing for IND with the FDA; $200,000 upon the dosing of the first patient in Phase 1-2 clinical trial; and $400,000 upon the dosing
of the first patient in Phase 3 clinical trial. In each case StemSpine has the option to make these payments in cash or in shares
of the Company’s common stock at a discount to the market price of the stock at the time of the transaction. The parties
to the patent purchase agreement have agreed that in no event will the aggregate royalty payments under the agreement exceed $2,500,000.
NOTE 3 – RELATED PARTY
TRANSACTIONS
The Company has incurred a monetary obligation
to a related corporation to reimburse the cost of services provided to the Company (management and consulting) through September
30, 2017. Each of the Company’s executive officers is employed by the parent company, CMH, and will continue to receive his
or her salary or compensation from CMH. The Company has an agreement with CMH which obligates the Company to reimburse CMH $35,000
per month for such services beginning January 2016. The compensation paid by CMH will include an allocation of services performed
for CMH and for the Company. The amounts are presented as a “management fee payable - related party” on the accompanying
unaudited condensed consolidated balance sheets. The liability is non-interest bearing, unsecured, and will be due upon the Company
successfully raising at least $1,000,000 through the sale of equity. As of September 30, 2017, amounts due to CMH under the arrangement
were $310,500.
During 2016, the Company entered into three
note payable agreements with CMH in which the proceeds were used in operations. The notes payable were dated February 2, 2016,
May 1, 2016 and May 18, 2016 and resulted in borrowings of $50,000, $50,000 and $25,000, respectively. Notes payable of $50,000
mature on April 30, 2017, $50,000 on July 31, 2017 and $25,000 on May 18, 2018. On May 4, 2017, CMT and CMH entered into a Note
Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated February
2, 2016, in the principal amount of $50,000, from April 30, 2017, to April 30, 2018, and CMH waived the nonpayment of the Note
by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. On
July 31, 2017, CMT and CMH entered into a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity
date of the 8% Promissory Note dated May 1, 2016, in the principal amount of $50,000, from July 31, 2017, to July 31, 2018, and
CMH waived the nonpayment of the Note by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related
to the extended note of $4,050.The notes incur interest at 8% per annum on the outstanding balance of the notes. As of September
30, 2017, accrued interest was $5,897. As of December 31, 2016, accrued interest was $6,398.
On August 12, 2016, CMH advanced the Company
$2,000 for operations. The amount is due on demand and does not incur interest.
See Note 2 for discussion of an additional
related party transaction with CMH.
NOTE 4 – DEBT
$100,000 Loan
On April 13, 2017, the Company received
a loan from an accredited investor in the face amount of $100,000, for which $90,000 in proceeds were received. The loan is evidenced
by a promissory note dated April 13, 2017, which bears interest at 12% and which matures on October 13, 2017. In addition, at maturity
the Company must pay 125% of principal and interest at maturity. The promissory note is secured by 400,000 shares of common stock
held by the lender. The Company is amortizing the on issuance discount of $35,000 to interest expense using the straight-line method
over the term of the loan. During the three and nine month periods ended September 30, 2017 the Company amortized $17,596 and $32,514
respectively to interest expense. As of September 30, 2017, a discount of $2,486 remained.
$400,000 Convertible Debenture
On May 2, 2017, the Company entered into
a convertible debenture agreement with a third party for an aggregate principal amount of up to $400,000, for which up to $360,000
in proceeds is to be received. On May 2, 2017, the Company received the first tranche of proceeds of $85,000 for which the Company
issued a convertible debenture in the face amount of $100,000. Under the terms of the agreement, the convertible debenture incurs
interest at 0% per annum with an effective interest rate at 5% per annum and has a maturity date of three years from the date of
funding, which represents May 2, 2020 for the first tranche of proceeds received. Additionally, the Company issued to the holder
50,000 shares of common stock. The convertible note was fully discounted upon issuance due to an on issuance discount of $10,000,
legal processing fees of $5,000 and the remaining discount of $85,000 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $100,000 to interest expense using the straight-line method over the
term of the loan. During the three and nine month periods ended September 30, 2017 the Company amortized $8,333 and $14,402 respectively
to interest expense. As of September 30, 2017, a discount of $85,598 remained.
The debenture is convertible under the
following terms: 1) any time from issuance until 180 days at a fixed rate of $0.25 per share; 2) any time during the period beginning
on the date which is 180 days following the date of the issuance at the lower of $0.25 or a conversion price equal to 65% (adjusted
to 60% based upon the conversion rate of the $115,000 convertible note discussed below) of the second lowest closing trade price
of the Company’s common stock for the 15 trading days immediately preceding the conversion date. The Company is required
at all times to reserve shares of the Company’s common stock equal to 700% of the number of shares the convertible debenture
is convertible into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible debenture. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, See Note 5. Derivative accounting applies as there are various terms in which the conversion
price is variable and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible
debenture is not repaid prior to the debenture being convertible, significant pressure may be put on the Company’s stock
price and additional dilution of current shareholders may take place.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible debenture at a price equal to 110% of the
aggregate principal amount of the convertible debenture plus all accrued and unpaid interest on the principal amount. In addition,
the default interest rate would increase to the greater of 18% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible debentures within 90 days from the date of issuance at 105% of the principal and interest; between 91 and to 120 days
from the date of issuance at 115% of the principal and interest; between 121 days and 150 days from the date of issuance at 120%
of the principal and interest; between 151 days and to 180 days from the date of issuance at 130% of the principal and interest;
and after 180 days from the date of issuance at 140% of the principal and interest.
$115,000 Convertible Note
On April 10, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $115,000, for which $103,250 in proceeds
were received on May 5, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a
maturity date of January 10, 2018. The convertible note is convertible upon issuance into shares of the Company’s common
stock at a conversion price equal to 60% of the two lowest trading prices of the Company’s common stock during the previous
25 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to 10 times the number of common shares the convertible note is convertible into. The Company is amortizing the on
issuance discount of $10,000 and legal processing fees of $1,750 and the remaining discount of $103,250 due to the recording of
a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $115,000 to interest expense using
the straight-line method over the term of the loan. During the three and nine month periods ended September 30, 2017, the Company
amortized $42,320 and $68,080 respectively to interest expense. As of September 30, 2017, a discount of $46,920 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 24% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible notes within 90 days from the date of issuance at 125% of the principal and interest; between 91 and to 179 days from
the date of issuance at 140% of the principal and interest; and after 180 days the right of prepayment expires.
$55,000 Convertible Note
On April 24, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds
were received on May 8, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a
maturity date of April 24, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to three times the number of common shares the convertible note is convertible into. In conjunction with the issuance
of the note, the Company issued 200,000 five-year warrants to purchase common stock at $0.25 per share to the note issuer. The
Company is amortizing the on issuance discount of $5,000 and legal processing fees of $2,500 and the remaining discount of $47,500
due to the recording of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $55,000
to interest expense using the straight-line method over the term of the loan. During the three and nine month periods ended September
30, 2017 the Company amortized $14,416 and $22,721 respectively to interest expense. As of September 30, 2017, a discount of $32,279
remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature and the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the conversion price is variable
and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place. The warrants were considered derivative liabilities as there are various reset provisions
to the exercise price based upon additional issuances of common stock and equivalents.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 22% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from
the date of issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between
121 days and to 180 days from the date of issuance at 135% of the principal and interest; and after 180 days the right of prepayment
expires.
$50,000 Secured Convertible Note
On June 26, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $50,000 in proceeds were
received on June 26, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and has a maturity
date of December 26, 2017. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to or greater than $0.25 or a conversion price equal to 60% of the average closing trading price
of the Company’s common stock during the previous 20 trading days preceding the conversion date. The Company has pledged
200,000 shares of common stock as security on the note. The Company recorded a discount of $40,681 due to the recording of a derivative
liability as discussed in Note 5. The Company is amortizing the total discount of $40,681 to interest expense using the straight-line
method over the term of the loan. During the three and nine month periods ended September 30, 2017, the Company amortized $20,452
and $21,341 respectively to interest expense. As of September 30, 2017, a discount of $19,340 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has
the right to exercise the Stock Power granted and have the stock certificate representing the pledged stock transferred into the
holder or its broker’s name.
The Company has the option to redeem the
convertible notes within 10 days from the date of maturity at 120% of the principal and interest.
$50,000 Convertible Note
On July 19, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $43,000 in proceeds were
received on July 25, 2017. Under the terms of the agreement, the convertible note incurs interest at 5% per annum and has a maturity
date of July 19, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock
at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20 trading
days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common stock
equal to ten times the number of common shares the convertible note is convertible into. In conjunction with the issuance of the
note, the Company issued 166,667 five-year warrants to purchase common stock at $0.30 per share to the note issuer. The Company
is amortizing the on issuance discount of $5,000 and legal processing fees of $2,000 and the remaining discount of $43,000 due
to the recording of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $50,000 to interest
expense using the straight-line method over the term of the loan. During the three and nine month periods ended September 30, 2017
the Company amortized $10,000 to interest expense. As of September 30, 2017, a discount of $40,000 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the default interest
rate would increase to the lesser of 12% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible notes within 60 days from the date of issuance at 120% of the principal and interest; between 61 and to 120 days from
the date of issuance at 135% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 121 days and to 180 days from the date of issuance at 150% of the principal and interest; and after
180 days the right of prepayment expires.
$55,000 Convertible Note
On August 31, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds
were received on September 1, 2017. Under the terms of the agreement, the convertible note incurs interest at 22% per annum and
has a maturity date of August 31, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to three times the number of common shares the convertible note is convertible into. The Company is amortizing the
on issuance discount of $5,000 and legal processing fees of $2,500 and the remaining discount of $47,500 due to the recording of
a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $55,000 to interest expense using
the straight-line method over the term of the loan. During the three and nine month periods ended September 30, 2017 the Company
amortized $4,521 to interest expense. As of September 30, 2017, a discount of $50,479 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has
the right to require the Company to decrease the conversion price equal to 45% of the lowest trading price of the Company’s
common stock during the previous 20 trading days preceding the conversion date. In addition, the default interest rate would increase
to 22%.
The Company has the option to redeem the
convertible notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from
the date of issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between
121 days and to 180 days from the date of issuance at 135% of the principal and interest; and after 180 days the right of prepayment
expires.
NOTE 5 – DERIVATIVE
LIABILITIES
Derivative
Liabilities
In connection
with convertible notes payable, the Company records derivative liabilities for the conversion feature. In addition, the Company
has warrants for which the exercise prices reset upon future events. These warrants are also considered to be derivative liabilities.
The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting
period. The warrants are valued on the date of issuance and revalued at each reporting period. During the nine months ended September
30, 2017, the Company recorded initial derivative liabilities of $585,317 based upon the following Black-Scholes option pricing
model average assumptions: an exercise price of $0.08 to $0.27 our stock price on the date of grant of $0.22 to $0.45, expected
dividend yield of 0%, expected volatility of 50% to 90%, risk free interest rate of 0.86% and expected terms ranging from 0.5 to
3.0 years. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible note payables by
approximately $215,886, which was recorded as a day one loss on derivative liability.
On September 30,
2017, the derivative liabilities were revalued at $401,461 resulting in a gain of $183,856 related to the change in fair market
value of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with
the following average assumptions: an exercise price of $0.10 to $0.25, our stock price on the date of valuation ($0.20), expected
dividend yield of 0%, expected volatility of 73% to 86%, risk-free interest rate of 1.56%, and an expected terms ranging from 0.5
to 2.6 years.
Future Potential
Dilution
Most of the Company’s
convertible notes payable contain adjustable conversion terms with significant discounts to market. As of September 30, 2017 the
Company’s convertible notes payable are potentially convertible into an aggregate of approximately 3.6 million shares of
common stock. In addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of
common shares issuable is dependent upon the traded price of the Company’s common stock.
NOTE 6 – STOCK BASED
COMPENSATION
In July and September 2016, the Company
granted 10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award consisted
of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary date
of the respective grants.
On April 27, 2017, the Company issued 250,000
shares of common stock to a single party for consulting services. The Company determined the value of such shares to be $112,500.
The values were based upon the fair market value of the Company’s common stock on the date of performance, which in most
cases is the agreement date. Services performed in connection with this issuance relate to assignment to advisory services related
to capital markets.
The fair value of each option award is
estimated using the Black-Scholes valuation model. Assumptions used in calculating the fair value at September 30, 2017 were as
follows:
|
|
Weighted
Average
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
6.3 to 6.5
|
|
Risk-free interest rate
|
|
|
1.42
|
%
|
Expected volatility
|
|
|
111.59
|
%
|
Common stock price
|
|
$
|
0.20
|
|
Since the expected life of the options
was greater than the Company’s historical stock information available, the Public Company determined the expected volatility
based on price fluctuations of comparable public companies.
Stock based compensation was $1,689 and
$144,112 for the three and nine month periods ended September 30, 2017, respectively. These costs are included with general and
administrative expenses on the accompanying unaudited condensed consolidated statement of operations. As of September 30, 2017,
future estimated stock based compensation to be recorded was $72,808 which will be recognized through 2021.
NOTE 7 – STOCKHOLDERS’ DEFICIT
In August 2016, the Company commenced a
non-public offering of up to 10,000,000 shares of common stock at $0.10 per share, and at no additional cost, one warrant to purchase
another share of common stock at $0.10 per share for each ten shares purchased in the offering. The securities offered have not
been and will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. From August 6, 2016 to December 31, 2016, the Company
sold 5,000,000 shares in this offering, resulting in proceeds of $500,000 and the issuance of warrants to purchase 500,000 shares
of common stock. Of this amount $30,000 was received from CMH, a related party.
In July and September 2016, the Company
granted 10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award consisted
of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary date
of the respective grants.
On March 23, 2017, the Company sold an
additional 1,000,000 shares and issued 100,000 warrants for gross proceeds of $100,000 under the same terms as the prior offering.
The Company determined that the fair value of these warrants was $5,546 was estimated using the Black-Scholes valuation model.
The warrants were classified as equity as they were issued in connection with a capital raise.
Assumptions used in calculating the fair
value of the warrants upon issuance were as follows:
|
|
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
4.82
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
Expected volatility
|
|
|
90.57
|
%
|
Common stock price
|
|
$
|
0.45
|
|
See Note 2 for discussion related to the
issuance of common stock in connection with licensing agreements. See Note 4 and 5 for discussion regarding warrants issued with
a convertible note payable.
NOTE 8 – SUBSEQUENT EVENTS
In accordance with ASC 855, management
reviewed all material events through October 14, 2017, for these financial statements and there are no material subsequent events
to report, except as follows:
100,000 Loan
On October 17, 2017 the lender agreed to
extend the maturity of the loan from October 13, 2017 to October 13, 2018.
Safety and Efficacy of Caverstem
TM
Procedure
On October 18, 2017 we announced the completion
of the safety data analysis on 20 patients in our erectile dysfunction clinical trial. Based on establishment of safety of the
CaverStem
TM
procedure in a formal university-based clinical trial, and independent confirmation of efficacy in a European
clinical trial we launched commercialization for the Caverstem
TM
procedure.
$30,250 Convertible Note
On October 23, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $30,250, for which $25,000 in proceeds
were received. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity 12 months
from the effective date of payment. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to the lesser of $0.12 or 60% of the lowest trading price of the Company’s common stock
during the previous 20 trading days preceding the conversion date. The Company is required at all times to reserve shares of the
Company’s common stock equal to ten times the number of common shares the convertible note is convertible into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company anticipates that it will
account for conversion feature as a derivative liability. Derivative accounting applies as the conversion price is variable and
does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place.
In the event of default, the default interest
rate would increase to the lesser of 12% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible notes within 180 days from the date of issuance at 140% of the principal and interest. After 180 days the right of
prepayment expires.
Conversion Notice
On November 3, 2017 we received notice
from a convertible note holder to convert a portion of the outstanding interest into common shares. Based on the
conversion terms, we issued 45,000 shares to the noteholder.
On November 9, 2017 we received notice
from a convertible note holder to convert a portion of the outstanding principle into common shares. Based on the
conversion terms, we issued 357,142 shares to the noteholder.