Capstone Therapeutics Corp. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The filing identifies the registrant as Capstone Therapeutics Corp.; this differs from the requested company name, Capstone Holding Corp. The financial statements are unaudited and were not reviewed by an independent public accountant.
Business Context
The company is a biotechnology business developing Apo E mimetic peptide candidates, principally AEM-28 and the analog AEM-28-14, through its 64%-owned joint venture, LipimetiX Development, Inc. The company has no revenue-producing operations and operates under a largely virtual model. Prior product licenses for Chrysalin and AZX100 were terminated.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | None reported | None reported |
| General and administrative expense | $113,000 | $225,000 |
| Research and development expense | $267,000 | $157,000 |
| Total operating expenses | $380,000 | $382,000 |
| Loss before taxes | $395,000 | $393,000 |
| Net loss | $387,000 | $379,000 |
| Net loss per basic and diluted share | $0.01 | $0.01 |
| Cash flow used in operating activities | $212,000 | $293,000 |
Margins are not meaningful because the company reported no revenue. At March 31, 2017, cash and cash equivalents were $486,000, total assets were $882,000, current liabilities were $391,000, and total liabilities included $1.0 million of convertible promissory notes. Stockholders’ equity was negative $509,000. The filing reports no investing or financing cash flows during the quarter.
Material Changes Versus the Prior Comparable Period
- G&A expense decreased 50%, primarily from reduced salaries and consulting rates, lower professional fees and insurance costs, and the decision not to engage an independent public accountant.
- R&D expense increased approximately 70% because of funding received by the joint venture through its August 2016 Series B-1 preferred stock and warrant financing.
- Total operating expenses were essentially unchanged, while net loss increased modestly by $8,000.
- Operating cash burn improved by $81,000, although the company continued to consume cash.
- Accumulated deficit increased from $189.619 million at December 31, 2016 to $190.006 million at March 31, 2017.
Guidance, Outlook, Risks and Unusual Items
- Management states that the company and joint venture do not have sufficient funding for additional material development of AEM-28-14 or continued operations without new financing.
- Potential funding sources include strategic or merger transactions, debt or equity offerings, partnering, licensing, or other development arrangements. No specific financing commitment or amount was disclosed.
- The $1.0 million convertible promissory notes bore interest at 5%, were secured by substantially all company assets, and were originally due April 30, 2017. On April 28, 2017, the lenders extended maturity to June 15, 2017. The lenders had not notified the company whether they would convert the notes.
- The notes may automatically convert in a qualified equity financing of at least $5.0 million, or may be converted at the lenders’ option within specified price limits. The lenders collectively owned approximately 19% of the company’s common stock.
- Management disclosed substantial uncertainty regarding the company’s ability to continue as a going concern. Failure to obtain funding could halt development activities and impair continued operations.
- The company did not engage an independent public accountant to audit its 2016 and 2015 annual financial statements or review this Form 10-Q. Management warned that this could adversely affect the company and its stockholders and could affect OTCQB trading status.
- The joint venture had $1.6 million of outstanding advances under a revolving loan arrangement with the company. The company could potentially absorb additional joint venture losses, including $667,000 previously allocated to common noncontrolling interests if the joint venture does not continue as a going concern.
- The company reported that no material legal loss contingency was reasonably possible. Legal proceedings were reported as none.
Investor Verification Items
- Verify the registrant identity and ticker because the filing is for Capstone Therapeutics Corp., not Capstone Holding Corp.
- Reconcile cash disclosures: the balance sheet reports $698,000 of cash at December 31, 2016, while the MD&A section refers to $486,000 at that date. The filing text does not clearly explain this inconsistency.
- Confirm the status and ultimate treatment of the $1.0 million convertible notes after the June 15, 2017 extension, including repayment, conversion, or further extension.
- Assess the company’s near-term liquidity, including whether the reported $486,000 cash balance can fund operations and obligations.
- Confirm whether the company obtained new financing or a strategic, partnering, or licensing transaction after the filing date.
- Evaluate the effect of unaudited, unreviewed financial statements and potential SEC or OTCQB consequences on trading liquidity and reporting compliance.
- Review the joint venture’s funding needs, development status for AEM-28-14, ownership dilution from Series B-1 preferred stock, and potential additional losses borne by Capstone.