Capstone Therapeutics Corp. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2017, filed November 13, 2017. The supplied filing identifies the registrant as Capstone Therapeutics Corp., not Capstone Holding Corp. The company is a development-stage biotechnology business focused on Apo E mimetic peptide candidates, principally AEM-28-14, through its 64%-owned LipimetiX Development, Inc. joint venture.
Financial position and operating results
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| General and administrative expense | $159,000 vs. $55,000 | $374,000 vs. $437,000 |
| Research and development expense | $386,000 vs. $446,000 | $765,000 vs. $823,000 |
| Total operating expenses | $545,000 vs. $501,000 | $1.139 million vs. $1.260 million |
| Net loss attributable to Capstone stockholders | $598,000, or $0.01 per share, vs. income of $459,000, or $0.01 per share | $1.191 million, or $0.03 per share, vs. $310,000, or $0.01 per share |
| Cash flow from operations | Not separately reported | $(1.133) million vs. $(830,000) |
- Cash and cash equivalents were $1.718 million at September 30, 2017, compared with $698,000 at December 31, 2016; $796,000 was held by the joint venture.
- Total current assets were $1.802 million and current liabilities were $193,000, implying positive working capital of approximately $1.609 million.
- Total debt was $2.159 million at September 30, 2017, consisting of secured debt net of issuance costs. The prior $1.0 million convertible notes were repaid in July 2017.
- Total stockholders’ equity was negative $315,000, compared with negative $122,000 at December 31, 2016.
- There were 54.385 million common shares outstanding as of November 1, 2017.
Material changes versus the prior comparable period
- Third-quarter net loss attributable to Capstone increased to $598,000 from 2016 third-quarter net income of $459,000. The comparison was materially affected by the $946,000 allocation of 2016 joint venture losses to Series B-1 preferred interests.
- Nine-month net loss attributable to Capstone increased to $1.191 million from $310,000 on the same basis.
- Third-quarter G&A expense increased by $104,000, primarily due to directors’ and officers’ insurance, independent-accountant costs and temporary salary increases.
- Nine-month G&A and R&D expenses declined from the prior year because of cost reductions and reduced development activity.
- On July 14, 2017, the company raised $3.440 million through a transaction with BP Peptides, LLC, consisting of $1.1025 million for newly issued common stock and a $2.4275 million secured loan. Net proceeds were approximately $2.074 million after repayment of the convertible notes and transaction costs.
- In August 2017, the company invested $1.0 million in LipimetiX Series B-2 preferred stock. On an as-converted basis, its joint venture ownership was 62.2%; ownership would be 69.75% if the company converts its Series A preferred stock.
- Common shares outstanding increased from 40.885 million at December 31, 2016 to 54.385 million at September 30, 2017.
Guidance, outlook, risks and unusual items
- Management states that AEM-28-14 development and internal operations will remain limited unless additional funding is obtained. The company is pursuing fundraising, partnering, licensing or a strategic transaction.
- The July financing alleviated substantial doubt regarding the company’s ability to continue as a going concern, but management states that additional funds remain necessary to meet development objectives and continue planned operations.
- The secured loan bears interest at 6% and is due October 15, 2020. It is secured by substantially all company assets. BP Peptides owned approximately 34.1% of the company’s common stock at September 30, 2017 and received specified board nomination rights.
- The company operates with a virtual operating model and has no revenue-producing operations following the 2003 sale of its Bone Device Business.
- The AEM-28 clinical trials were completed in 2014. Further clinical development of AEM-28-14 depends on regulatory approvals and additional financing; the filing does not provide a timetable for new trials.
- The joint venture owed the company $1.620 million under a revolving loan, including $20,000 of accrued interest. The maturity was extended to July 15, 2020, subject to earlier repayment upon certain future funding events.
- Potential risks include inability to raise capital, unfavorable clinical or preclinical results, regulatory delays, competition, intellectual-property impairment, dependence on joint-venture or licensing arrangements, and the company’s common stock not being listed on the OTCQB market.
- Management concluded that disclosure controls and procedures were ineffective as of September 30, 2017 because prior quarterly filings misstated the classification of the convertible promissory notes. No material changes to internal control over financial reporting were reported during the quarter.
- No legal proceedings were reported as material. Management stated that no material loss contingency was reasonably possible based on the information available.
Investor verification points
- Verify the registrant identity and whether the requested company name, Capstone Holding Corp., differs from the filing’s Capstone Therapeutics Corp.
- Review the terms, collateral, covenants, maturity and related-party implications of the BP Peptides secured loan.
- Assess the company’s cash runway, including the portion of cash held by LipimetiX and the continuing operating cash burn.
- Confirm the effect of the Series B-2 investment and potential Series A conversion on ownership, control and future distributions from LipimetiX.
- Evaluate the likelihood, timing and terms of additional financing required for AEM-28-14 development.
- Review the control deficiency and any subsequent remediation or restatement information concerning convertible-note classification.