CytoSorbents Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are to the same periods in 2010 unless stated otherwise. The filing is unaudited. CytoSorbents describes itself as a development-stage medical-device company.
Business context and operating progress
The company develops blood-purification devices using proprietary adsorbent-polymer technology. It reported no revenue and had not commenced commercial operations. In March 2011, CytoSorb received CE Mark approval for clinical use in the European Union. Management was preparing a controlled-market release and planned further clinical studies, subject to funding and continued positive results. The company reported completing enrollment of 100 patients in its European sepsis trial; it said the device reduced circulating cytokine levels and was well tolerated, with no serious device-related adverse events reported in more than 300 treatments to date.
Key financial metrics
| Metric | Q2 2011 / June 30, 2011 | Prior comparable period / December 31, 2010 |
|---|---|---|
| Revenue | $0 | $0 |
| Net loss | $1.341 million for Q2; $2.556 million for six months | $0.676 million for Q2; $1.645 million for six months |
| Net loss available to common shareholders | $2.219 million for Q2; $4.175 million for six months, including preferred dividends | $1.090 million for Q2; $2.840 million for six months |
| Basic and diluted loss per common share | $0.01 for Q2; $0.03 for six months | $0.01 for Q2; $0.03 for six months |
| Research and development expense | $0.855 million for Q2; $1.614 million for six months | $0.353 million for Q2; $1.034 million for six months |
| Cash and cash equivalents | $3.417 million | $1.056 million |
| Operating cash used | $1.621 million for six months | $1.175 million for six months |
| Current assets / current liabilities | $3.452 million / $1.419 million | $1.400 million / $1.219 million |
| Convertible notes, net of debt discount | $0.527 million long-term | $1.077 million long-term |
| Total assets / total liabilities | $3.862 million / $1.945 million | $1.812 million / $2.297 million |
Margins are not meaningful because the company reported no revenue. Six-month financing activities provided $4.010 million, including $2.757 million of net equity contributions and $1.250 million of borrowings. Investing activities used $28,000. Cash rose by $2.361 million during the six months.
Changes, financing and unusual items
- Six-month net loss increased to $2.556 million from $1.645 million; Q2 net loss increased to $1.341 million from $0.676 million. R&D expense rose in both comparisons.
- The company sold 16.3 million common shares to Lincoln Park Capital during the six months at an average price of approximately $0.18 per share. Common shares outstanding increased from 122.8 million at year-end 2010 to 165.9 million at June 30, 2011; 167.3 million were reported outstanding on August 15, 2011.
- Series A and Series B preferred stock conversions and note conversions also increased common shares. Convertible notes with $882,901 of principal and accrued interest were converted into 8.83 million common shares during the six months. In July, a further $145,391 of note principal and interest converted into 1.45 million shares.
- Preferred stock dividends were $1.620 million for the first six months and were issued in stock. The filing reports $313,116 of net interest expense for six months, including $304,167 of debt-discount amortization. The February 2011 notes had $1.25 million aggregate principal, an 8% rate, a 24-month term and conversion and warrant provisions; the balance sheet reports them net of a substantial debt discount.
Outlook, liquidity and risks
Management estimated that available cash would fund operations into the first quarter of 2012, after which additional financing would be needed for clinical studies and commercialization. It said up to approximately $2.3 million might remain available under the Lincoln Park agreement, subject to the agreement’s conditions and an additional effective registration statement. The company gave no revenue or earnings guidance and said it expected to remain in the development stage for at least the next several quarters.
The filing states that the company has never generated revenue, has incurred negative operating cash flows since inception and had an accumulated development-stage deficit of $88.164 million at June 30, 2011. Management and the filing identify substantial doubt about the company’s ability to continue as a going concern, citing dependence on future financing. Financing may not be available on acceptable terms or at all; without adequate funds, the company could delay or stop development, launches or operations.
Other material risks include uncertainty about clinical effectiveness and market acceptance, further regulatory approvals (including U.S. FDA approval), limited manufacturing and commercialization experience, competition, product liability, reliance on research institutions and key personnel, and the need for additional clinical evidence. CE Mark approval does not assure U.S. or other regulatory approval. The company disclosed no off-balance-sheet arrangements and stated that it was not involved in material litigation. Potential royalties of 3% on CytoSorb gross revenue and 2.5%–5% on certain licensed products would apply if qualifying products are sold; no royalty expense had been incurred.
Important facts for investors to verify
- Cash runway and subsequent financing: confirm current cash, remaining Lincoln Park capacity, registration status and any financing terms or dilution.
- Commercialization milestones: confirm controlled-market launch timing, manufacturing readiness, actual sales and any required regulatory steps.
- Clinical evidence: review complete sepsis-trial results, safety data, follow-on studies and evidence supporting the proposed indications.
- Capital structure: assess dilution from outstanding options, warrants, preferred stock and convertible notes, including conversion and warrant terms.
- Going-concern status and cash use: monitor operating cash burn and whether funding is sufficient to complete planned studies and commercialization.