Capstone Holding Corp. quarterly report, Q2 FY2019

Capstone Therapeutics Corp. — Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2019. The source filing identifies the registrant as Capstone Therapeutics Corp., not Capstone Holding Corp. The company is a biotechnology business developing AEM-28 and related Apo E mimetic peptides through its approximately 60%-owned subsidiary, LipimetiX Development, Inc. Operations are conducted under a substantially virtual model, with development activities limited by available funding.

Financial performance and position

MetricThree months ended June 30Six months ended June 30
Sublicense revenue$0.0 million in 2019; $2.0 million in 2018$0.0 million in 2019; $2.0 million in 2018
Total operating expenses$0.605 million in 2019; $0.660 million in 2018$1.394 million in 2019; $1.190 million in 2018
Net income (loss)$(0.668) million in 2019; $1.278 million in 2018$(1.523) million in 2019; $0.691 million in 2018
Loss per share, basic and diluted$(0.01) in 2019; $0.02 in 2018$(0.03) in 2019; $0.01 in 2018
Operating cash flow$(1.086) million in 2019; $1.016 million in 2018
  • Research and development: $427,000 in the second quarter and $1.028 million for the first six months of 2019, compared with $322,000 and $623,000, respectively, in the comparable 2018 periods.
  • General and administrative: $178,000 in the second quarter and $366,000 for the first six months of 2019, compared with $84,000 and $313,000 in 2018.
  • Interest and other expense, net: $63,000 for the quarter and $126,000 year to date, compared with $62,000 and $122,000 in 2018.
  • Cash and liquidity: Cash was $305,000 at June 30, 2019, down from $1.341 million at December 31, 2018. Approximately $230,000 was held by the joint venture. Other current assets were $398,000, including $320,000 reimbursable under the cooperation agreement.
  • Balance sheet: Total assets were $703,000, current liabilities were $819,000, and total stockholders’ equity was a deficit of $2.760 million. Accounts payable increased to $797,000 from $245,000, including accrued officer compensation of $185,000 and a $480,000 cooperation-agreement payable.
  • Debt: Secured debt and accrued interest, net of unamortized issuance costs, totaled $2.644 million, compared with $2.475 million at year-end 2018. The underlying secured loan bears interest at 6% and is due October 15, 2020.

Material changes versus the prior comparable period

  • The company recorded no sublicense revenue in 2019, compared with the $2.0 million initial payment from ANJI recorded in the second quarter of 2018. The 2018 payment was related to the sublicense of AEM-28 intellectual property in China, Taiwan, and Hong Kong.
  • The absence of the 2018 sublicense payment drove the change from net income of $1.278 million in the second quarter of 2018 to a net loss of $668,000 in the second quarter of 2019, and from six-month net income of $691,000 to a six-month net loss of $1.523 million.
  • Six-month research and development expense increased by $405,000, primarily due to greater activity supported by the 2018 ANJI sublicense proceeds, although development remained constrained by funding limitations.
  • Six-month operating cash flow changed from $1.016 million provided in 2018 to $1.086 million used in 2019. The 2019 cash use included the net loss and increases in other current assets and accounts payable.
  • In March 2019, the company borrowed $50,000 under an amended Brookstone credit facility. The lender subsequently agreed in August 2019 to increase the maximum additional borrowing capacity from $500,000 to $700,000.
  • The patent license rights were fully amortized by June 30, 2019. The company adopted the new lease accounting standard in the first quarter of 2019, recording a $20,000 right-of-use asset and lease liability without a material effect on results.

Outlook, risks, contingencies, and unusual items

  • Management states that the company and its joint venture do not currently have sufficient funding for additional material development activities. Additional capital is required to continue operations and advance AEM-28 and its analogs through further clinical, research, manufacturing, and regulatory work.
  • Management is pursuing fundraising, partnering, licensing, strategic transactions, and potential debt or equity offerings. The filing does not provide a specific financing target or completion timetable.
  • The company is dependent on AEM-28 and its analogs, which have completed Phase 1a and Phase 1b/2a studies. Future development depends on funding, regulatory approvals, clinical results, partnerships, and the ability to implement the development strategy.
  • The filing identifies substantial liquidity risks, including only $305,000 of cash, negative working capital, a stockholders’ equity deficit, recurring operating losses, and secured debt due in October 2020. Management states that additional funding will be required.
  • The joint venture’s revolving loan balance, including accrued interest, was $1.760 million at June 30, 2019 and is scheduled to mature July 15, 2020, subject to earlier repayment under specified funding conditions.
  • If the joint venture cannot continue as a going concern, the company could incur an additional $667,000 loss associated with losses allocated to noncontrolling interests.
  • Accounts payable includes officer compensation payable through December 2020, subject to earlier payment upon specified transactions or Board approval. Joint venture accounting fees earned but unpaid totaled $460,000 at June 30, 2019.
  • Management reported no material loss contingency as reasonably possible, although legal and regulatory proceedings remain subject to uncertainty. No legal proceedings were reported in Part II, Item 1.
  • Disclosure controls and procedures were reported effective, with no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Confirm the issuer identity: the supplied filing is for Capstone Therapeutics Corp. and trades under CAPS on OTCQB, rather than Capstone Holding Corp.
  • Verify the company’s ability to obtain additional financing before cash is exhausted and the terms, availability, and lender discretion associated with the Brookstone facility.
  • Review the October 15, 2020 maturity of the secured loan, accrued interest, security interests, and potential dilution from the Brookstone warrants.
  • Assess whether the ANJI sublicense will generate future milestones, royalties, or additional payments; no 2019 sublicense revenue was recorded.
  • Evaluate the clinical, regulatory, intellectual-property, and funding risks surrounding AEM-28 and its analogs, including the absence of a currently funded material development plan.
  • Reconcile joint venture ownership, preferred-stock rights, unpaid intercompany or management obligations, and the potential additional loss related to noncontrolling interests.