Cytosorbents Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. CytoSorbents is a development-stage medical-device company. Its CytoSorb device had EU CE Mark approval and initial European sales, but the company reported limited commercial operations and no significant revenue.
Financial performance
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $33,042 | $0 | $49,935 | $0 |
| Gross profit | $22,962 | $0 | $29,775 | $0 |
| Gross margin | 69.5% | Not meaningful | 59.6% | Not meaningful |
| Research and development expense | $665,750 | $854,827 | $1,309,031 | $1,613,984 |
| Net loss | $(1,047,310) | $(1,341,182) | $(2,473,906) | $(2,555,766) |
| Net loss available to common shareholders | $(1,624,514) | $(2,219,108) | $(3,715,027) | $(4,175,337) |
Six-month operating cash outflow was $2.219 million, compared with $1.621 million in 2011. Investing cash outflow was $26,022; financing provided $2.800 million, including $2.1 million of equity contributions and $700,000 of borrowings. Cash rose by $555,186 to $1.742 million. The filing does not provide a clear standalone operating margin; operating losses were $2.077 million for the six-month period.
Financial position and material changes
- At June 30, cash was $1.742 million, current assets $2.467 million, total assets $2.896 million, and stockholders’ equity $592,000. Current liabilities were $2.304 million, implying working capital of approximately $162,000.
- Convertible notes payable, net of debt discount, totaled $1.185 million, all classified as current, versus $571,000 current and long-term combined at December 31, 2011. The company issued $700,000 of 8% notes in February; principal and accrued interest are repayable in equity under the note terms. Notes totaling $395,153 were converted into common shares during the six months.
- Common shares outstanding increased from 177.6 million at December 31, 2011 to 199.1 million at June 30, primarily reflecting equity issuance and note conversions. The company reported 202.96 million shares outstanding on August 8.
- Revenue began during 2012’s test-market phase; there was no comparable-period revenue in 2011. Six-month R&D expense declined about 19%, while legal, financial and consulting expense rose about 41% and general and administrative expense rose about 22%. Net loss narrowed year over year.
- Preferred-stock dividends were $1.241 million for the six months, recorded as noncash stock dividends; they widened the loss attributable to common shareholders relative to net loss.
Outlook, risks and notable items
- Management estimated available cash would fund operations into Q4 2012 and said additional financing would be needed thereafter. The filing states that recurring operating cash outflows, accumulated development-stage deficit of $96.3 million, and dependence on future financing raise substantial doubt about the company’s ability to continue as a going concern. There is no assurance that financing will be available on acceptable terms or in sufficient amounts.
- The company completed a controlled-market release and began a commercial launch in Germany near quarter-end, adding a four-person sales team. Management expected Q3 2012 to be transitional as the sales force trained and expanded its activities. The company was also evaluating distributors in other European markets.
- After quarter-end, CytoSorbents reported a five-year DARPA development contract worth up to $3.8 million; first-year funding of up to $1.5 million depends on milestones. It also reported approximately $450,000 of July–August proceeds from LPC share sales.
- Clinical and regulatory risks remain: CE Mark permits EU sales, but US FDA approval has not been obtained, and the filing gives no assurance of US or other-market approvals or product effectiveness. Commercial acceptance, manufacturing and sales capabilities, competition, financing, and dependence on key personnel are among the stated risks.
- The CFO resigned effective July 13, 2012; the company’s long-time controller was appointed interim CFO. Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting.
- Royalty obligations include 3% of gross CytoSorb revenues under an investor agreement and 2.5%–5% on certain licensed products, if sold. A separate agreement could require warrants for up to 10 million shares if specified patent-infringement litigation occurs before June 30, 2018; no such litigation had arisen by quarter-end, and no liability was recorded.
Investor facts to verify
- Whether cash, LPC funding availability, and subsequent financing were sufficient to support operations beyond the stated Q4 2012 runway.
- Whether Germany’s commercial launch translated into sustained sales, and whether the reported Q3 transition affected revenue or selling costs.
- Milestone conditions, timing, and actual funding under the DARPA contract.
- Current convertible-note balances and terms, share-count dilution, preferred dividends, and the potential impact of options and warrants.
- Progress toward additional clinical evidence and regulatory approvals, particularly any US FDA pathway.
- The balance-sheet statement reports current liabilities of $2,304,252, while MD&A cites $2,304,334; verify the source of this $82 difference.