Capstone Therapeutics Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2016; filed November 10, 2016. The company is a biotechnology development company with no revenue-producing operations. Its principal focus is the development of AEM-28 and analogs, including AEM-28-14, through its 64%-owned joint venture, LipimetiX Development, Inc. The company operates largely under a virtual model and is classified as a smaller reporting company.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | None reported | None reported |
| Operating expenses | $501,000 in 2016; $416,000 in 2015 | $1.260 million in 2016; $2.073 million in 2015 |
| Research and development | $446,000; prior year $175,000 | $823,000; prior year $808,000 |
| General and administrative | $55,000; prior year $241,000 | $437,000; prior year $1.265 million |
| Net loss | $487,000; prior year $435,000 | $1.256 million; prior year $1.903 million |
| Loss attributable to company stockholders | Net income of $459,000, or $0.01 per share | Net loss of $310,000, or $0.01 per share |
| Cash flow from operations | Not separately reported | $(830,000); prior year $(1.527 million) |
At September 30, 2016, cash and cash equivalents were $1.127 million, including $735,000 held by the joint venture. Total current assets were $1.205 million versus $1.258 million at December 31, 2015. Current liabilities were $369,000 versus $261,000, and convertible promissory notes payable totaled $1.000 million. Total equity declined to $228,000 from $506,000. No investing cash flows were reported.
Material changes versus the prior comparable period
- Third-quarter G&A expense declined 77% to $55,000, primarily due to reduced salaries and consulting rates, lower professional fees, reduced insurance coverage, and the decision not to obtain independent accountant audit and review services.
- Third-quarter R&D expense increased 155% to $446,000, reflecting spending enabled by the joint venture’s August 2016 financing.
- Nine-month operating expenses fell 39% to $1.260 million, principally because of lower G&A costs and reduced operating activity.
- The company’s nine-month loss attributable to its stockholders decreased to $310,000 from $1.903 million. The improvement includes a $946,000 reduction in previously recognized joint-venture losses following the joint venture financing.
- Cash increased $116,000 during the first nine months of 2016, compared with a $1.527 million decrease in the prior-year period. The improvement resulted from $946,000 of net proceeds from the joint venture financing, partly offset by $830,000 of operating cash use.
Guidance, outlook, risks, contingencies, and unusual items
- The company and joint venture state that they do not have sufficient funding for additional material development of AEM-28, AEM-28-14, or continued operations. Development will remain limited unless additional financing is obtained.
- Management is pursuing fundraising, partnering, licensing, strategic transactions, or debt or equity offerings. No specific financing guidance or expected funding amount is provided.
- On August 25, 2016, the joint venture raised $1.012 million gross, or $946,000 net of issuance costs, through Series B-1 preferred stock and warrants. The financing reduced the company’s effective joint-venture ownership to approximately 59.3% on an as-converted basis.
- The company had advanced $1.574 million to the joint venture under a revolving loan agreement. The agreement permits advances up to a net $1.600 million, with the net amount due December 31, 2016.
- The company’s $1.000 million convertible promissory notes bear interest at 5% and mature April 30, 2017. They are secured by substantially all company assets and may convert under specified financing, lender-election, or change-in-control provisions.
- Management states that substantial doubt exists regarding the company’s ability to continue as a going concern absent additional capital. The financial statements do not include potential adjustments resulting from this uncertainty.
- The company did not engage an independent public accountant to audit its 2015 annual financial statements or review this Form 10-Q. Management warns that potential SEC or OTCQB consequences could materially adversely affect the company and trading of its common stock.
- The filing identifies risks related to clinical and preclinical development, regulatory approval, intellectual property, competition, partnering, financing terms, and the ability to execute the AEM-28-14 strategy.
- No material legal proceedings were reported. Management stated that material loss contingencies were not reasonably possible as of the filing date.
Investor verification checklist
- Verify the company’s immediate liquidity, including cash held by the joint venture and the December 31, 2016 maturity of the revolving loan obligation.
- Confirm whether the $1.000 million convertible notes were repaid, converted, or remained outstanding after September 30, 2016.
- Assess the company’s ability to obtain financing sufficient to continue operations and advance AEM-28-14 development.
- Review the implications of unaudited financial statements and the lack of an independent accountant review, including any SEC or OTCQB action.
- Evaluate dilution, priority, dividend, and control effects of the joint venture’s Series B-1 preferred stock and warrants and the company’s convertible notes.