Capstone Therapeutics Corp. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; filed November 9, 2015. The filing identifies the registrant as Capstone Therapeutics Corp., not Capstone Holding Corp. The company is a biotechnology business focused on peptide drug candidates and operates primarily through a virtual model.
Business Context and Development Status
The company’s principal current program is AEM-28 and its analogs, including AEM-28-14, developed through the company’s 60%-owned LipimetiX Development, Inc. joint venture. Phase 1a and Phase 1b/2a trials were completed in Australia in 2014, with generally acceptable safety findings and statistically significant pharmacodynamic results in pooled analyses. The joint venture is prioritizing AEM-28-14 but lacks sufficient funding for additional material development activities.
The company previously discontinued AZX100 development and returned the related intellectual property in 2014. It has had no interest in Chrysalin since 2012 and sold its revenue-producing Bone Device Business in 2003.
Financial Condition and Key Metrics
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 | Nine months ended September 30, 2015 | Nine months ended September 30, 2014 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| General and administrative expense | $241,000 | $373,000 | $1.265 million | $1.047 million |
| Research and development expense | $175,000 | $865,000 | $808,000 | $2.667 million |
| Total operating expenses | $416,000 | $1.238 million | $2.073 million | $3.714 million |
| Net loss attributable to stockholders | $435,000 | $1.234 million | $1.903 million | $3.647 million |
| Basic and diluted loss per share | $0.01 | $0.03 | $0.05 | $0.09 |
At September 30, 2015, cash and cash equivalents were $637,000, compared with $2.164 million at December 31, 2014. Total assets were $1.546 million and current liabilities were $188,000. Stockholders’ equity was $1.358 million. The filing does not report conventional debt; however, the company had advanced $759,000 to the joint venture under a revolving loan agreement, with the net amount contractually due December 31, 2015. The company had 40,885,411 common shares outstanding.
Cash used in operating activities was $1.527 million for the first nine months of 2015, compared with $3.147 million in the comparable 2014 period. There were no investing or financing cash flows reported. Cash declined from $2.164 million at the beginning of 2015 to $637,000 at September 30, 2015.
Gross or operating margins are not meaningful because the company reported no revenue. The operating loss margin cannot be calculated from the filing because revenue was not reported.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss decreased to $435,000 from $1.234 million, primarily because of lower research and development and general and administrative expenses.
- Nine-month net loss decreased to $1.903 million from $3.647 million.
- Research and development expense declined substantially as joint venture development activities were reduced while the company sought funding.
- Nine-month general and administrative expense increased to $1.265 million from $1.047 million, primarily due to qui tam litigation costs, including a one-time $50,000 settlement payment, and investor relations activities.
- Cash used in operations improved year over year but remained significant relative to the company’s $637,000 cash balance.
- The company deferred approximately $148,000 of fundraising-related costs, primarily legal and filing fees, pending completion of a contemplated equity offering.
Outlook, Liquidity, Risks, and Unusual Items
Management stated that additional capital is required to continue operations and develop AEM-28 and its analogs. The company is evaluating strategic or merger transactions, private or public debt or equity offerings, partnering, licensing, and other funding alternatives. Its Form S-1 registration statement for a contemplated common-stock offering was not effective as of September 30, 2015.
The financial statements were prepared on a going-concern basis, but the company disclosed substantial doubt about its ability to continue as a going concern. Management stated that a lack of additional funding within the next 12 months could impair current operations and further development activities. The filing does not provide a clear estimate of the amount or timing of funding required.
- The joint venture’s revolving loan balance was $759,000 at September 30, 2015, exceeding the stated $700,000 net advance limit described in the agreement.
- If the joint venture cannot continue as a going concern, the company could incur an additional loss of $667,000 related to losses allocated to noncontrolling interests.
- The company may absorb additional joint venture losses because the noncontrolling interests are not obligated to contribute assets when their capital account is negative.
- The Australian subsidiary had accrued a refundable research and development tax credit of AUD$202,000, approximately US$142,000, at September 30, 2015. The credit remains subject to approval and receipt.
- Future clinical development depends on regulatory approvals, additional funding, partnering or licensing arrangements, and other conditions. The company warned of risks including unfavorable clinical results, FDA delays, competition, intellectual-property impairment, and unfavorable financing terms or dilution.
- No material legal loss contingency was identified by management, and the filing reported no legal proceedings in Part II, Item 1.
Management reported that disclosure controls and procedures were effective as of September 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the registrant identity and ticker history, since the supplied metadata names Capstone Holding Corp. while the filing names Capstone Therapeutics Corp.
- Confirm cash runway, expected operating expenditures, and the timing and terms of any required financing.
- Review the status and terms of the contemplated Form S-1 offering and the $148,000 of deferred offering costs.
- Reconcile the $759,000 joint venture advance with the agreement’s stated $700,000 limit and December 31, 2015 maturity.
- Assess whether AEM-28-14 can advance without additional financing and review the clinical, regulatory, patent, and partnering assumptions.
- Confirm the collectability and approval status of the Australian research and development tax credit.
- Evaluate the going-concern disclosure and the potential additional $667,000 loss associated with noncontrolling interests.