Business Context and Reporting Period
Capstone Therapeutics Corp. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing entity is Capstone Therapeutics Corp.; the request metadata identifies Capstone Holding Corp. The company is a biotechnology business operating under a virtual model and has no revenue-producing operations following the 2003 sale of its Bone Device Business.
The company’s principal remaining program is AEM-28 and related analogs, including AEM-28-14, being developed through its 60%-owned LipimetiX Development, Inc. joint venture. The initial Phase 1a and Phase 1b/2a trials were completed in 2014, but further material development is currently constrained by funding.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| General and administrative expense | $552,000 | $222,000 | $1,024,000 | $674,000 |
| Research and development expense | $283,000 | $1,172,000 | $633,000 | $1,802,000 |
| Total operating expenses | $835,000 | $1,394,000 | $1,657,000 | $2,476,000 |
| Net loss attributable to Capstone stockholders | $752,000 | $1,391,000 | $1,468,000 | $2,413,000 |
| Basic and diluted loss per share | $0.02 | $0.03 | $0.04 | $0.06 |
Six-month operating cash flow was negative $1.127 million, compared with negative $2.065 million in the prior-year period. There were no investing or financing cash flows. Cash and cash equivalents declined to $1.037 million at June 30, 2015 from $2.164 million at December 31, 2014 and $4.193 million at June 30, 2014.
Total assets were $2.134 million at June 30, 2015, including $588,000 of net patent license rights. Current liabilities were $351,000, consisting primarily of $211,000 of accounts payable and $140,000 of accrued liabilities. The company reported no debt on its balance sheet, although it had advanced $739,000 to the joint venture under a revolving loan agreement, with the net amount due September 30, 2015. Stockholders’ equity was $1.783 million.
Operating margins are not meaningful because the company reported no revenue. The six-month net loss was approximately 4.6% lower than the prior-year period, while cash used in operations declined approximately 45%.
Material Changes Versus the Prior Comparable Period
- Second-quarter net loss decreased to $752,000 from $1.391 million, and six-month net loss decreased to $1.468 million from $2.413 million.
- Research and development expense declined substantially, reflecting reduced AEM-28 and analog development activity. Joint venture operating expenses included in research and development were $347,000 for the first six months of 2015 versus $1.405 million in the prior-year period.
- General and administrative expense increased to $1.024 million for the first six months from $674,000, primarily due to qui tam litigation, Form S-1 filing costs and investor-relations activities.
- The company recognized a $198,000 income tax benefit for the six-month period related to an Australian refundable research and development credit. Accrued Australian credits totaled AUD$493,000, or approximately US$380,000, at June 30, 2015.
- The long-pending qui tam litigation was settled in June 2015 for a one-time $50,000 payment, and the matter was dismissed and closed.
- In June 2015, the joint venture converted from a limited liability company to a corporation.
- The company’s cash balance fell by $1.127 million during the first six months, with no external financing proceeds.
Guidance, Outlook, Risks and Unusual Items
Management stated that additional capital is required to continue operations and further develop AEM-28 and its analogs. The company is exploring fundraising, partnering, licensing, strategic transactions, mergers and debt or equity offerings. Management does not expect to continue material development activities without additional funding and intends to maintain a limited virtual operating model.
The financial statements were prepared assuming continued operations, but management disclosed substantial doubt about the company’s ability to continue as a going concern. The filing states that funding is needed within the next 12 months to sustain current operations. No specific financing commitment or amount of required capital was disclosed.
Key risks include failure to obtain additional funding, inability to advance clinical development, unfavorable preclinical or clinical results, delays or failure in obtaining regulatory approvals, competition, loss or impairment of intellectual-property rights, and risks associated with joint-venture or partnering arrangements.
The joint venture has no obligation to contribute additional funds or assume liabilities. Because noncontrolling interests have a negative capital account, the company could potentially absorb additional joint-venture losses. If the joint venture does not continue as a going concern, the company could incur an additional loss of $667,000 related to losses allocated to noncontrolling interests.
Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Investor Verification Points
- Verify the legal registrant name and relationship, if any, between Capstone Therapeutics Corp. and Capstone Holding Corp.
- Confirm the company’s ability to raise capital and the September 30, 2015 due date and repayment status of the $739,000 joint-venture advance.
- Assess going-concern risk given $1.037 million of cash, recurring operating losses and negative operating cash flow.
- Review the status, funding and regulatory plans for AEM-28, AEM-28-14 and other joint-venture programs.
- Validate the collectability and approval status of the approximately US$380,000 Australian refundable research and development credit.
- Confirm that the $50,000 qui tam settlement fully resolved the disclosed litigation and identify any remaining contingencies.
- Evaluate potential dilution, pricing and shareholder effects of contemplated equity, debt, merger or strategic financing transactions.