Cytosorbents Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. CytoSorbents was a development-stage medical-device company developing blood-purification products. Its CytoSorb device had CE Mark approval and was being sold in Europe, but the company reported limited commercial operations and no significant revenue to date.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $371,330 | $50,226 |
| Product sales | $176,098 | $16,893 |
| Grant and other income | $195,232 | $33,333 |
| Gross profit (loss) | $117,819 | $(3,614) |
| Operating loss | $(1,422,230) | $(1,067,226) |
| Net loss | $(1,628,942) | $(1,426,596) |
| Net loss available to common shareholders | $(2,215,359), including $586,417 preferred dividends | $(2,090,513) |
| Net cash used in operating activities | $(809,461) | $(1,072,325) |
| Cash and cash equivalents at period end | $1,365,295 | $1,803,049 at March 31, 2012 |
Management reported product gross margin of approximately 61.5% and overall gross margin of approximately 31.7%; the latter was affected by high materials and labor costs associated with grant work. At March 31, 2013, current assets were $2.13 million and current liabilities were $993,434, yielding working capital of approximately $1.14 million. Total assets were $2.53 million. Redeemable Series B preferred stock was $13.47 million; stockholders’ equity was a deficit of $11.94 million, with an accumulated development-stage deficit of $100.95 million.
Convertible notes of $1.23 million, including accrued interest, were converted into 9.74 million common shares in February. Thus, no convertible notes remained outstanding at quarter-end; accounts payable and accrued liabilities totaled approximately $993,000. The company reported $450,000 of Q1 proceeds from LPC share sales and $4.55 million remaining available under the facility, subject to its terms, including a minimum share price of $0.10. Common shares outstanding were 228.95 million at March 31 and 229.88 million as of May 15.
Material changes versus prior year
- Revenue rose to $371,330 from $50,226, including growth in product sales as the company moved from a German test-market phase to direct sales in Germany, Austria and Switzerland.
- Operating loss widened by approximately $355,000. Research and development expense increased to $704,141 from $632,854; legal, financial and consulting costs rose to $222,746 from $161,292; and general and administrative expense rose to $613,162 from $269,466, including European sales launch and stock-option costs.
- Net interest expense decreased to $206,712 from $359,370, primarily because of lower noncash debt-discount amortization.
- Operating cash use improved to $809,461 from $1.07 million, while cash declined by $364,049 during the quarter. Current liabilities fell from $2.08 million at year-end, mainly as convertible notes were converted to equity.
Outlook, risks and other notable items
- Management estimated that cash would fund operations into the third quarter of 2013, after which additional funding would be needed for clinical studies and commercialization. The filing states that financing is necessary and that substantial doubt exists about the company’s ability to continue as a going concern. No assurance was given that further capital would be available on acceptable terms or sufficient to execute its plans.
- The company had CE Mark approval for CytoSorb in the EU, but no U.S. FDA approval; U.S. commercialization would require a regulatory pathway and potentially further clinical trials. Management planned larger prospective sepsis studies and was conducting a German dose-ranging trial. It cautioned that limited studies leave substantial risk that the technology may have little or no effect in targeted indications.
- Government research funding was milestone-dependent. The company reported approximately $187,000 received from DARPA in Q1 under a five-year, $3.8 million contract; payments under the Army’s $1 million Phase II SBIR award were contingent on milestones, funding availability and finalizing the contract. An additional $50,000 Phase I SBIR option was announced in April.
- Subsequent events included approximately $100,000 of LPC proceeds in April and May. The board approved a milestone-based 2013 option grant of 10.305 million options and allocated, but did not award, a pool of 22.75 million restricted shares subject to long-term milestones.
- Disclosure controls and internal control over financial reporting were deemed ineffective, with material weaknesses involving lack of independent audit committee oversight and an identified financial expert, insufficient public-company GAAP reporting experience, and oversight and reporting of the German subsidiary. Management said it planned remediation but had not immediately addressed the weaknesses.
- The company disclosed royalty obligations on product sales, including a 3% gross-revenue royalty and separate license royalties of 2.5%–5% on certain products. A contingent agreement could require warrants for up to 10 million shares if specified patent-infringement litigation arises before June 30, 2018; no liability was recorded because management considered the event unlikely.
The filing provided no formal revenue, profit or cash-flow guidance. Management’s liquidity estimate and commercialization plans are forward-looking and subject to financing, clinical, regulatory and market risks.
Important facts for investors to verify
- Cash runway and access to capital: confirm subsequent LPC funding, share-price eligibility and remaining facility capacity.
- Revenue quality and growth: distinguish CytoSorb product sales from grant income, and track product margins and European commercial adoption.
- Clinical and regulatory progress: verify trial results, milestone completion, and any plans or requirements for U.S. FDA clearance or approval.
- Potential dilution: review preferred-stock dividends and conversion terms, outstanding options and warrants, and milestone-based equity awards.
- Remediation of the disclosed material weaknesses and the effect of royalty and contingent warrant obligations.