Cytosorbents Corp quarterly report, Q3 FY2012

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CytoSorbents Corporation — Q3 2012 Form 10-Q

Business context and period. Development-stage medical-device company developing blood-purification products. This unaudited report covers the three and nine months ended September 30, 2012, with comparisons to 2011; balance-sheet comparisons are to December 31, 2011. CytoSorb had EU CE Mark approval and was beginning commercial sales in Europe, but had limited commercial operations. Filing was delayed following Hurricane Sandy, which disrupted power and access to company files for seven days.

Financial performance and position

  • Revenue: Nine-month revenue was $738,614, comprising $63,614 in product sales and $675,000 in grant income, versus no revenue in the 2011 period. Q3 revenue was $605,346 ($13,679 product sales and $591,667 grants), versus zero in Q3 2011.
  • Gross margin: Nine-month gross margin was $477,513 (about 65% of revenue); Q3 gross margin was $463,497 (about 77%). Cost of revenue was $261,101 and $141,849, respectively.
  • Losses: Nine-month net loss was $3.13 million, improving from $4.28 million; Q3 net loss was $652,000, improving from $1.73 million. Loss available to common shareholders, including preferred dividends, was $5.00 million for nine months and $1.28 million for Q3. The filing reports basic and diluted loss per share of $0.03 for nine months and $0.01 for Q3 2012.
  • Expenses and interest: Nine-month R&D expense declined 22.5% to $1.85 million. Legal, financial and consulting expense rose to $386,000, while SG&A increased to $915,000. Net interest expense decreased to $448,000, primarily due to lower noncash debt-discount amortization.
  • Cash flow: Operating cash use was $2.85 million for nine months, compared with $2.72 million in 2011. Financing provided $3.75 million, including $3.05 million from equity sales under the Lincoln Park agreement and $700,000 in borrowings. Cash increased by $874,479 during the period to $2.06 million.
  • Liquidity and debt: Current assets were $2.86 million and current liabilities $2.08 million at September 30; cash was $2.06 million. Current convertible notes, net of discount, were $973,379, with no long-term notes reported. The company said cash would fund operations into Q1 2013, subject to financing and other funding sources.
  • Capitalization: Stockholders’ equity was $1.19 million, up from $318,000 at year-end. Common shares outstanding increased to 209.9 million from 177.6 million; 211.9 million were outstanding as of November 21, 2012. Potential dilution from options, warrants, preferred shares and convertible notes is substantial.

Changes, outlook, risks and unusual items

  • CytoSorb’s controlled-market release in Germany ended in June 2012, followed by a direct sales launch and hiring of a four-person sales team. Management expected Q4 2012 product revenue to exceed Q3, but provided no numerical sales guidance.
  • The company received $575,000 in Q3 after meeting initial milestones under a five-year, $3.8 million DARPA contract. A $1 million U.S. Army Phase 2 SBIR award was granted, but payments depend on milestones, available funds and completion of the award contract. These are conditional funding sources, not assured revenue.
  • Management stated that the company would need additional funding after its projected Q1 2013 cash runway. Lincoln Park could purchase up to $8.5 million of shares under specified conditions, including a $0.10 minimum purchase price; the company’s access to this funding therefore depends in part on its share price. The company also reported approximately $250,000 of additional LPC proceeds in October and November.
  • The filing raises substantial doubt about the company’s ability to continue as a going concern: it has recurring operating cash outflows, a $97.55 million accumulated development-stage deficit, and depends on future financing. The filing gives no assurance that funding will be available, adequate or on acceptable terms.
  • CE Mark authorization applies in the EU; U.S. FDA approval has not been obtained, and future approval is uncertain. Commercial adoption, clinical efficacy, regulatory compliance, manufacturing and distribution capacity, competition, product liability and financing are identified risks.
  • Potential obligations include product royalties of 3% of gross CytoSorb sales under one agreement and 2.5%–5% on certain licensed products. A specified patent-infringement lawsuit could trigger warrants for up to 10 million shares; no such litigation had arisen by September 30, 2012, and no liability was recorded.
  • The interim statements may be adjusted in the 2012 annual audit. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Investor verification priorities

  1. Confirm subsequent cash balances, actual operating cash use and the company’s ability to fund operations beyond Q1 2013.
  2. Check LPC availability, share-price eligibility, actual share issuance and the resulting dilution; reconcile reported share counts and potential conversions.
  3. Track commercial sales growth, customer adoption, product margins and whether Q4 revenue exceeded Q3 as management expected.
  4. Verify receipt and milestone conditions for the Army and DARPA awards, and distinguish grant funding from product revenue.
  5. Review regulatory and clinical progress, royalty terms, contingent warrant exposure and any updates to the going-concern assessment.