Business Context and Reporting Period
Capstone Therapeutics Corp. filed this Form 10-K for the fiscal year ended December 31, 2013. The filing identifies the registrant as Capstone Therapeutics Corp.; the requested company name, Capstone Holding Corp., does not appear in the filing. The company is a development-stage biotechnology business with no approved or marketed products and no revenue-generating operations.
- AZX100 development in dermal scarring was discontinued in 2012; limited fibrosis studies and partnering/licensing efforts continued.
- Through a 60%-owned consolidated joint venture, LipimetiX Development, LLC, the company is developing AEM-28 for severe refractory hypercholesterolemia and homozygous familial hypercholesterolemia.
- The company operated with two full-time administrative employees and a virtual operating model.
Financial Results and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | None reported | None reported | No revenue-generating operations |
| General and administrative expense | $1.169 million | $1.764 million | Down $0.595 million |
| Research and development expense | $3.124 million | $2.385 million | Up $0.739 million |
| Total operating expenses | $4.293 million | $4.149 million | Up $0.144 million |
| Interest and other income, net | $0.158 million | $0.096 million | Up $0.062 million |
| Net loss | $4.114 million | $4.053 million | Higher by $0.061 million |
| Net loss attributable to Capstone stockholders | $3.921 million | $3.580 million | Higher by $0.341 million |
| Basic and diluted loss per share | $0.10 | $0.09 | Higher by $0.01 |
| Cash flow used in operating activities | $3.951 million | $3.367 million | Use increased by $0.584 million |
| Cash and cash equivalents | $6.258 million | $10.205 million | Down $3.947 million |
| Working capital | $6.391 million | $10.294 million | Down $3.903 million |
| Total assets | $7.317 million | $11.591 million | Down $4.274 million |
| Capstone stockholders’ equity | $7.217 million | $11.104 million | Down $3.887 million |
Operating and net margins are not meaningful because the company reported no revenue. The company reported no debt in the disclosed balance sheet; current liabilities were $0.100 million at December 31, 2013.
Of the $6.258 million in cash and cash equivalents, approximately $2.042 million was held in and reserved for LipimetiX and was unavailable for general corporate use. The company reported that the joint venture had used approximately $4.0 million of its contributed cash through year-end 2013.
Material Changes Versus the Prior Comparable Period
- G&A expense declined 34%, primarily from reduced office space and the reduction in administrative personnel.
- R&D expense increased 31%, primarily because LipimetiX expenses increased to approximately $2.652 million from $1.133 million, partially offset by lower AZX100 activity.
- Cash decreased by $3.947 million, principally reflecting operating cash use.
- The noncontrolling interest balance fell to zero as additional joint venture losses were allocated to Capstone after common ownership equity was reduced to zero. The filing states that $0.667 million of cumulative losses had been allocated to noncontrolling interests.
- Interest and other income included approximately $0.152 million received from the conversion of an insurance company from mutual to private ownership.
- The company reduced its leased office space to 2,845 square feet effective March 1, 2013, with the lease extended through February 28, 2015.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated 2014 cash expenditures of approximately $4.0 million, including about $2.5 million for LipimetiX. Approximately $0.5 million of the planned spending would need to come from general company funds or other sources. The estimate excludes potentially significant qui tam litigation costs.
- Management expected cash and short-term investments at December 31, 2013 to fund presently projected requirements for the next twelve months, but stated that substantial additional capital would be required to complete clinical development and pursue regulatory approval.
- AEM-28 development was expected to progress through Phase 1a and Phase 1b/2a trials by the fourth quarter of 2014, subject to regulatory authorization. Proposed trials included 36 Phase 1a patients and 15 Phase 1b/2a patients. The JV selected Australia as the anticipated initial trial location while continuing to work with Canadian regulators.
- No products were approved for marketing, and the company stated that approval before 2018, if ever, was not expected.
- The company remains a defendant in a federal and state qui tam/False Claims Act lawsuit relating to its former bone growth stimulation device business. The government declined to intervene, discovery was open, and no trial date had been set. Potential damages, including penalties and treble damages, could exceed the company’s financial resources.
- The company had approximately $56 million of deferred tax assets subject to a full valuation allowance, including approximately $143 million of federal and $43 million of state net operating loss carryforwards and approximately $6 million of tax credit carryforwards.
- Key risks include clinical or preclinical failure, regulatory delays or rejection, limited funding, dependence on third-party manufacturers and consultants, intellectual-property challenges, competition, product-liability exposure, and possible impairment of the LipimetiX investment.
Most Important Facts for Investors to Verify
- Confirm the registrant’s legal name and ticker, because the filing is for Capstone Therapeutics Corp. rather than Capstone Holding Corp.
- Reconcile unrestricted cash with the approximately $2.042 million reserved for LipimetiX and assess whether the projected 2014 spending plan is adequately funded.
- Review the status, budget, regulatory clearances, and clinical results of the AEM-28 Phase 1a and Phase 1b/2a programs.
- Assess the probability and potential financial impact of the qui tam litigation, including whether any reserve or insurance coverage is available.
- Evaluate the company’s ability to obtain additional capital or a development/licensing partner, given the absence of revenue and continuing losses.
- Consider dilution from approximately 3.226 million outstanding options, 164,129 warrants, and the company’s limited remaining equity-plan capacity.