Capstone Therapeutics Corp. — Fiscal Year 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 22, 2019. The provided filing identifies the registrant as Capstone Therapeutics Corp., not Capstone Holding Corp.
Business Context
Capstone is a biotechnology company operating primarily through LipimetiX Development, Inc., its joint venture, to develop AEM-28 and related Apo E mimetic peptides for severe hypercholesterolemia and cardiovascular indications. The Company no longer owns rights to its former Chrysalin or AZX100 programs. AEM-28 development remains pre-commercial; Phase 1a and Phase 1b/2a trials were completed in 2014, and no product candidate has been approved for sale.
The Company operates with a virtual model and uses consultants rather than a substantial employee base. The joint venture and Company stated that they lacked sufficient funding for additional material development activities without new financing, partnering or licensing.
Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Sublicense revenue | $2.000 million | None |
| Total operating expenses | $2.181 million | $1.680 million |
| General and administrative expense | $554,000 | $641,000 |
| Research and development expense | $1.373 million | $1.039 million |
| Interest and other expense, net | $251,000 | $111,000 |
| Income tax benefit | $52,000 | $36,000 |
| Net loss attributable to shareholders | $380,000 | $1.755 million |
| Basic and diluted loss per share | $0.01 | $0.04 |
| Cash and cash equivalents | $1.341 million | $1.275 million |
| Long-term secured debt, including accrued interest | $2.475 million | $2.249 million |
| Stockholders’ equity | $(1.244) million | $(879,000) |
The $2.0 million sublicense payment was received from Anji Pharmaceuticals for rights to AEM-28 and analogs in China, Taiwan and Hong Kong. Sublicense transaction costs were $254,000, including payments to the University of Alabama at Birmingham Research Foundation, an advisor and legal counsel.
Operating cash flow was positive $66,000 in 2018 versus negative $1.561 million in 2017. No investing or financing cash flows were reported in 2018. The 2018 cash balance increased by $66,000 from the prior year.
At December 31, 2018, total assets were $1.477 million and current liabilities were $246,000. The balance sheet reflected a working-capital surplus of approximately $1.192 million, but total liabilities exceeded assets because of the secured debt and accumulated deficit.
Material Changes Versus 2017
- Revenue increased from zero to $2.0 million because of the Anji sublicense.
- Net loss narrowed from $1.755 million to $380,000, primarily because of sublicense revenue.
- Research and development expense increased by $334,000 to $1.373 million as additional funds permitted increased activity, although development remained limited.
- General and administrative expense declined by $87,000, primarily due to lower accounting fees.
- Interest and other expense increased by $140,000 due largely to secured-debt interest and warrant-related expense.
- Cash increased modestly to $1.341 million, while secured debt and accrued interest increased to $2.475 million.
- Outstanding common shares remained 54.385 million. Outstanding stock options declined to 3.007 million from 3.517 million; no options were granted or exercised in 2018.
Debt, Liquidity and Outlook
The Company’s secured loan from BP Peptides, LLC carries 6% annual interest and is due October 15, 2020. Interest payments were deferred to maturity under a January 2018 amendment. In exchange, the Company issued a warrant for up to 6.322 million common shares at $0.075 per share; 2.437 million shares were fully vested and exercisable at December 31, 2018.
BP Peptides owned approximately 34.1% of the Company’s common stock at year-end and has board nomination rights while its ownership remains above specified thresholds. On March 15, 2019, after year-end, the Company amended the loan agreement to permit additional advances of up to $500,000, with BP Peptides having discretion to increase the maximum to $700,000.
Management expected to continue a limited virtual operating model in 2019. Development of AEM-28 and its analogs would remain dependent on additional funding, strategic transactions, licensing or partnering. The filing does not provide formal revenue or earnings guidance.
Risks, Contingencies and Unusual Items
- The Company states that additional capital is required to continue operations and advance the joint venture’s development programs, creating substantial liquidity and going-concern risk.
- AEM-28 and its analogs remain unapproved, and future clinical, regulatory, manufacturing and commercial outcomes are uncertain.
- The Company’s investment in and $1.720 million loan to the joint venture, including accrued interest, represent a substantial portion of available resources. Joint venture losses exceeded its capital accounts, and the Company could absorb additional losses of $667,000 allocated to noncontrolling interests if the joint venture cannot continue.
- The Company has approximately $38 million of deferred tax assets subject to a full valuation allowance, including substantial federal and state net operating loss carryforwards. Their future use may be restricted by ownership changes.
- The Company has no product liability insurance coverage, is dependent on consultants and third parties, and faces competition from larger pharmaceutical and biotechnology companies.
- The common stock trades on the OTCQB, is thinly traded and volatile. The filing reports a 2018 trading range of $0.02 to $0.06 per share.
- The Company has no dividend history and does not expect to pay dividends in the foreseeable future.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor audited the financial statements but was not engaged to opine on internal control effectiveness.
Investor Verification Items
- Verify the issuer identity and ticker because the request names Capstone Holding Corp., while the filing names Capstone Therapeutics Corp. and reports OTCQB symbol CAPS.
- Review the terms, maturity, collateral and post-year-end availability of the BP Peptides secured debt and related warrant.
- Assess whether the $1.341 million cash balance and potential additional borrowing are sufficient to fund operations through debt maturity and planned development activities.
- Evaluate the sustainability of results excluding the one-time $2.0 million Anji sublicense payment.
- Confirm the joint venture’s ownership, governance, funding requirements, accumulated losses and potential additional losses borne by Capstone.
- Review dilution from 3.007 million outstanding options and the 6.322 million-share BP Peptides warrant.
- Confirm the status of AEM-28 development, regulatory plans, intellectual-property protection and obligations under the UAB Research Foundation license.