Business Context and Reporting Period
The filing is Capstone Therapeutics Corp.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 14, 2013. The request identifies Capstone Holding Corp.; the filing itself identifies the registrant as Capstone Therapeutics Corp. (formerly OrthoLogic Corp.).
Capstone was a development-stage biotechnology company with no approved or marketed products and no revenue-generating operations. It operated with two administrative employees and consultants under a virtual operating model. During 2012, it ceased clinical development of AZX100 for dermal scarring, discontinued TP508/Chrysalin and returned the related intellectual property, and formed LipimetiX Development, LLC to develop AEM-28 and analogs.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | None reported | None reported | No revenue-generating operations |
| General and administrative expense | $1.764 million | $3.506 million | Down $1.742 million |
| Research and development expense | $2.385 million | $6.394 million | Down $4.009 million |
| Total operating expenses | $4.149 million | $9.900 million | Down $5.751 million |
| Net loss attributable to Capstone stockholders | $3.580 million | $9.711 million | Loss decreased $6.131 million |
| Basic and diluted loss per share | $0.09 | $0.24 | Improved |
| Cash flow used in operating activities | $3.367 million | $10.590 million | Use decreased $7.223 million |
| Cash and cash equivalents | $10.205 million | $13.778 million | Down $3.573 million |
| Working capital | $10.294 million | $14.417 million | Down $4.123 million |
| Total assets | $11.591 million | $14.696 million | Down $3.105 million |
| Total current liabilities | $294,000 | $119,000 | Increased $175,000 |
Margins are not meaningful because the company reported no revenue. The filing does not report debt outstanding; reported liabilities consisted primarily of current accounts payable and accrued liabilities. Stockholders’ equity was $11.104 million at December 31, 2012, compared with $14.577 million at December 31, 2011. Total equity, including noncontrolling interest, was $11.297 million.
Of the $10.205 million in cash and cash equivalents, approximately $4.499 million was held by and reserved for LipimetiX Development and was unavailable for Capstone’s general use. The company contributed $6.0 million to the joint venture and had no obligation to provide additional funding or guarantee joint venture liabilities.
Material Changes Versus the Prior Comparable Period
- Operating expenses declined substantially following the 2011 workforce reduction and the transition to a virtual operating model.
- AZX100 clinical development in dermal scarring was stopped in the first quarter of 2012, although certain contracted or required preclinical, manufacturing and regulatory work continued.
- All TP508/Chrysalin development activities ceased, and the related intellectual property was returned to the University of Texas Medical Branch.
- Capstone formed and consolidated LipimetiX Development, LLC on August 3, 2012, owning 60% of the voting common interests and contributing $6.0 million. The venture incurred approximately $1.183 million of operating expenses during 2012, of which $473,000 was allocated to noncontrolling interests.
- Research and development expense included approximately $1.3 million related to AZX100 and approximately $1.1 million related to AEM-28 research.
- Cash declined despite lower operating cash use, principally reflecting the joint venture investment and ongoing operations.
- Common shares outstanding increased from 40.775 million at year-end 2011 to 40.885 million at year-end 2012. Options outstanding totaled approximately 3.218 million shares, and warrants covered approximately 164,000 shares.
Guidance, Outlook, Risks and Unusual Items
Management estimated 2013 cash expenditures of approximately $4.0 million, including approximately $2.5 million for LipimetiX Development, excluding potentially significant and currently unestimable qui tam litigation costs. Management expected cash and short-term investments at December 31, 2012 to fund presently projected requirements for the following year, but stated that substantial additional capital would be required to complete development and obtain regulatory approval for product candidates.
LipimetiX’s initial development plan was expected to run approximately 27 months through Phase 1a and Phase 1b/2a studies, with an intended IND filing and development of AEM-28 for severe refractory hypercholesterolemia and homozygous familial hypercholesterolemia. AEM-28 received FDA Orphan Drug Designation in 2012. The filing provides no assurance that the planned studies, regulatory submissions or any commercialization will succeed.
- The company has accumulated approximately $150 million of net losses since becoming a development-stage company in 2004 and does not expect product approval before 2018, if ever.
- A pending federal qui tam action alleges False Claims Act, state false claims and anti-kickback violations relating to the former bone-device business sold in 2003. The government declined to intervene, discovery was open, and no trial date had been set. Potential damages, including treble damages and statutory penalties, could exceed the company’s financial resources and could prevent continuation of the business.
- Management recorded no liability for the litigation because it did not believe a material loss was probable and estimable, but acknowledged that an adverse resolution could materially affect liquidity, financial condition and operations.
- Development, regulatory, manufacturing, intellectual-property, competition, product-liability and market-acceptance risks remain substantial for AZX100 and AEM-28.
- The company’s deferred tax assets were fully offset by a valuation allowance of approximately $56 million. Federal net operating loss carryforwards were approximately $139 million and state carryforwards approximately $51 million, but their future utilization may be limited by ownership changes.
- The 2012 results included an $80,000 gain on the sale of laboratory equipment, $172,000 of total proceeds from asset sales, and $107,000 of noncash stock-based compensation expense.
- The company’s common stock traded on the OTCQB after Nasdaq delisting in 2011. The 2012 trading range was $0.12 to $0.28.
Most Important Facts to Verify
- Confirm the registrant’s legal name and whether the filing is being attributed to Capstone Therapeutics Corp. or Capstone Holding Corp.
- Review the latest status, potential damages and any reserve or settlement developments in the qui tam litigation.
- Verify the amount of unrestricted cash available to Capstone versus the approximately $4.5 million reserved for LipimetiX.
- Assess whether LipimetiX has achieved its development milestones, obtained an IND, required additional funding or generated any partnering or liquidity event.
- Confirm the continuing commercial and partnering strategy for AZX100 after cessation of its dermal-scarring clinical program.
- Evaluate dilution from approximately 3.2 million outstanding options, warrants, future equity financing and the company’s authorized but unissued shares.
- Reconcile the reported lack of revenue, continuing losses and cash runway with the company’s going-concern assumptions and future capital requirements.