CytoSorbents Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. CytoSorbents develops blood-purification medical devices. Its CytoSorb device had EU CE Mark approval and was being sold in Europe and through distributors; U.S. pivotal-trial planning and other clinical development continued.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1.162 million | $0.881 million | $3.249 million | $1.544 million |
| Product sales | $1.032 million | $0.204 million | $2.264 million | $0.508 million |
| Gross profit | $0.686 million | $0.260 million | $1.445 million | $0.470 million |
| Operating loss | $(1.686) million | $(0.880) million | $(4.224) million | $(3.709) million |
| Net loss | $(1.498) million | $(0.965) million | $(4.327) million | $(4.009) million |
| Net loss available to common shareholders | $(2.779) million | $(1.490) million | $(8.097) million | $(5.737) million |
- Management reported blended gross margins of approximately 59% and product gross margins of approximately 65% for Q3; for the nine-month period, approximately 44% and 66%, respectively.
- Q3 revenue rose about 32%, led by product sales, while grant revenue declined to $0.128 million from $0.677 million. Nine-month product sales increased substantially, but research and development, consulting, and selling, general and administrative expenses contributed to continuing losses.
- For the nine months, research and development expense was $1.464 million, consulting expense $0.733 million, and selling, general and administrative expense $3.471 million. The latter increased with payroll, marketing, conferences, royalties, foreign-exchange losses, and stock-option costs.
Cash, liquidity, and capital structure
- At September 30, cash and cash equivalents were $0.433 million, and short-term investments were $7.347 million; combined, $7.780 million. Current assets were $8.954 million versus current liabilities of $1.549 million.
- Operating cash use was $4.189 million for the nine months. Investing cash use was $7.526 million, largely reflecting purchases of short-term investments; financing provided $9.842 million, primarily from equity contributions. Cash ended the period at $0.433 million.
- The $10.2 million March 2014 offering of common stock and warrants generated approximately $9.451 million net proceeds. Convertible notes were converted into common shares during 2014; no convertible notes remained on the September 30 balance sheet. The company also reported a $0.655 million warrant liability.
- Series B preferred stock had a carrying value of $18.874 million at September 30; Series A and B preferred shares carried 10% cumulative dividends. The nine-month preferred-stock dividend was $3.770 million, substantially increasing the loss attributable to common shareholders.
- Management said available funding was expected to support operations into 2016, but additional capital might be required for clinical trials, commercialization, production capacity, and working capital. The filing nevertheless states that ongoing losses and dependence on future financing raise substantial doubt about the company’s ability to continue as a going concern.
Outlook, risks, and notable developments
- Management described growing European and distributor sales, a seven-person direct sales force, more than 150 key opinion leaders using or planning to use CytoSorb, and more than 40 investigator-initiated studies planned or underway. These are management-reported indicators, not guarantees of future adoption or revenue.
- The company planned further clinical work, including a U.S. pivotal cardiac-surgery trial intended to support a U.S. regulatory application. Trial protocols, funding needs, regulatory outcomes, and commercial success remain uncertain.
- After quarter-end, on October 9, holders elected to convert all outstanding Series A and Series B preferred stock. The filing reports conversion of 1,894,969 Series A shares into 2,583,289 common shares and, following a 10% dividend, 92,712.27 Series B shares into 256,111,243 common shares. The company said no preferred shares remained outstanding after these conversions.
- In November, the company sought stockholder consent for a proposed 25-for-1 reverse split, reductions in authorized shares, a 2014 incentive plan, and a move from Nevada to Delaware. It also intended to pursue a national exchange listing; approval and listing were not assured.
- Disclosure controls were deemed ineffective due to a material weakness: the company lacked an independent audit committee and an audit committee financial expert. Management said it planned to address the weakness and believed the financial statements fairly presented the periods reported.
- The filing reports no current legal proceedings and no off-balance-sheet arrangements. It identifies no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile revenue growth: the financial statements show nine-month revenue increasing from $1.544 million to $3.249 million, a $1.706 million increase; the MD&A also states an increase of approximately $1.424 million. The filing text does not explain this discrepancy.
- Review the post-quarter preferred-stock conversions, resulting common-share count and dilution, and any related dividend or conversion terms.
- Assess cash burn and the adequacy and availability of financing against the planned U.S. and European clinical programs and management’s stated runway.
- Track CytoSorb product sales, margins, distributor performance, clinical evidence, and regulatory progress, including whether planned trials proceed and secure funding.
- Monitor remediation of the disclosed material weakness and the status of proposed corporate actions and any exchange-listing effort.