CytoSorbents Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. The company describes itself as a development-stage medical-device business developing blood-purification technology. Its CytoSorb device had EU CE Mark approval and was being commercially launched in Europe.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $1.062 million | $371,000 | Up 186% |
| Product sales | $569,000 | $176,000 | Up 223% |
| Grant income | $491,000 | $195,000 | Growth also reflected grant activity |
| Gross profit / margin | $400,000 / about 38% | $118,000 | Management reported product gross margins above 60% |
| Operating loss | $1.154 million | $1.422 million | Improved year over year |
| Net loss | $975,000 | $1.629 million | Preferred dividends of $1.115 million meant loss attributable to common shareholders was $2.090 million, versus $2.215 million |
| Net cash used in operations | $800,000 | $809,000 | Broadly unchanged |
Research and development expense fell to $237,000 from $704,000, in part because grant-related costs were reclassified to cost of revenue. Selling, general and administrative expense rose to $1.007 million from $613,000, primarily with added European sales and support personnel and higher marketing costs. Legal, financial and consulting expense increased to $310,000 from $223,000. Net interest expense was $137,000, down from $207,000.
Liquidity, capital and debt
- At March 31, cash and cash equivalents were $6.416 million and short-term investments were $4.745 million, or $11.161 million combined. Current assets were $11.828 million against current liabilities of $3.299 million.
- Q1 investing cash outflow was $4.771 million, mainly purchases of short-term investments. Financing provided $9.803 million, including net proceeds of about $9.451 million from a registered stock offering and about $300,000 from the Lincoln Park Capital purchase agreement.
- Convertible notes payable were $1.727 million net of debt discount. The notes generally bear 8% interest and mature one year after issuance; certain financing events allow holders to exchange notes for securities sold in the financing.
- The March offering sold 40.8 million common shares at $0.25 per unit and issued warrants for 20.4 million shares at $0.3125. Common shares outstanding were 299.0 million at quarter-end, versus 251.3 million at year-end 2013. Redeemable Series B preferred stock was recorded at $16.353 million.
- Management said available funding was sufficient into 2016, but additional capital might be needed for pivotal clinical trials. The filing also states that continuing operating losses and dependence on future financing raise substantial doubt about the company’s ability to continue as a going concern.
Business developments, outlook and risks
- Management attributed product-sales growth to the German direct sales team and distributor sales. At quarter-end, the company reported more than 100 key opinion leaders using or planning to use CytoSorb, and more than 30 investigator-initiated studies planned or underway. It intended to expand sales and marketing staffing and pursue additional clinical studies; no quantified revenue or earnings guidance was provided.
- A German dose-ranging study was underway, and a U.S. Air Force-funded 30-patient trauma pilot study began in April 2014. The company also described ongoing U.S. government-supported development programs, including DARPA, Army and NIH work.
- After quarter-end, the company announced an exclusive multi-year distribution agreement covering the Gulf Cooperation Council countries and several neighboring markets, subject to annual minimum orders.
- The company recognized a $546,720 warrant liability at quarter-end and a $316,200 gain from its remeasurement during Q1. Management attributed the change to the share-price movement after the March offering.
- The company reported ineffective disclosure controls and material weaknesses in internal control over financial reporting: no independent audit committee or identified audit committee financial expert, and a need for better oversight and financial reporting of the German subsidiary. Management said remediation had begun.
- No current legal proceedings were reported. The filing describes a contingent obligation to issue up to 10 million warrants if specified patent-infringement litigation arises before June 30, 2018; none had arisen by quarter-end. Royalty obligations include 3% of CytoSorb gross revenue under one agreement and 2.5%–5% on certain products under a license agreement.
Important facts for investors to verify
- Whether product-sales growth and reported product margins continue as commercialization expands, separately from grant revenue.
- Cash burn, the liquidity runway, and the timing and funding requirements of pivotal clinical trials, given the going-concern disclosure.
- Potential dilution from outstanding options, warrants, preferred stock and convertible notes, in addition to the substantial Q1 share issuance.
- Clinical-study progress, regulatory and distribution milestones, and whether distributor minimum-order commitments translate into sales.
- Progress in remediating the disclosed control weaknesses and the accuracy of subsidiary financial reporting.