CytoSorbents Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company is a development-stage medical-device business developing blood-purification technologies. Its CytoSorb device had EU CE Mark approval and was being sold in Europe; the company had not established significant product revenue.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $880,692 | $605,346 | $1,543,505 | $738,614 |
| Product sales | $203,561 | $13,679 | $507,628 | $63,614 |
| Grant and other income | $677,131 | $591,667 | $1,035,877 | $675,000 |
| Gross profit | $260,069 | $463,497 | $469,816 | $477,513 |
| Net loss | $964,789 | $651,980 | $4,008,720 | $3,125,886 |
| Net loss per common share | $0.01 | $0.01 | $0.02 | $0.03 |
| Cash used in operating activities | Not separately presented for the quarter | $2,386,815 | $2,854,564 |
- Q3 total revenue increased about 46% year over year. Product sales reached a quarterly high, management said, and were 59.1% above Q2 2013. Nine-month product sales rose 698%, attributed to direct sales in Germany, Austria and Switzerland and distributor sales.
- Nine-month revenue more than doubled, but gross profit declined slightly as cost of revenue rose. Management reported product gross margins of about 71% in Q3 and 64% for the nine-month period; overall Q3 gross margin was about 29.5%, reflecting costs associated with grant-funded work.
- Q3 net loss increased year over year; nine-month net loss also widened. Nine-month R&D expense declined to $1.706 million from $1.854 million, while selling, general and administrative expense rose to $1.902 million from $915,000, mainly with commercial staffing, advertising and other selling costs. Nine-month interest expense declined to $300,000 from $448,000, principally because of lower debt-discount amortization.
Financial position and liquidity
- At September 30, cash and cash equivalents were $2.350 million, current assets $3.644 million, and current liabilities $3.066 million. Current liabilities included $1.562 million of convertible notes, net of debt discount, and $436,000 of deferred revenue. Total assets were $4.039 million.
- Cash increased from $1.729 million at December 31, 2012. Operating cash use was $2.387 million for the first nine months, partially offset by $3.023 million in financing cash flows. The company reported $2.350 million in cash at period end; a further $580,000 from the September note offering arrived in early October and was recorded at September 30 as a current asset, not cash.
- Convertible notes issued in June and September totaled $1.843 million principal. They bear 8% interest, mature after one year and automatically convert at stated prices of $0.125 and $0.10 per share, respectively; associated warrants were also issued. Earlier convertible notes and accrued interest converted into common shares in February.
- Common shares outstanding increased from 214.97 million at year-end to 245.14 million at September 30. The company also had 26.44 million warrants outstanding and 47.85 million options outstanding, in addition to preferred-stock and note-conversion potential shares.
Outlook, developments and risks
- Management estimated that available cash would fund operations into the second quarter of 2014, after which additional funding would be needed for clinical studies and commercialization. There is no formal revenue or earnings guidance in the filing.
- The company reported a substantial doubt about its ability to continue as a going concern: it has sustained negative operating cash flows since inception, an accumulated development-stage deficit of $104.469 million, and depends on future financing. Financing may not be available on acceptable terms or in sufficient amounts.
- Funding sources included a Lincoln Park Capital agreement, under which $3.4 million remained available at September 30 and which terminates in August 2014; government grants; and debt or equity offerings. Availability is conditional and not assured.
- Commercial and development milestones included a two-year CE Mark renewal in September 2013, a distribution partnership with Biocon for India and select emerging markets, and ongoing clinical and grant-funded programs. The company planned further studies but had no US marketing approval; FDA approval and product efficacy are uncertain.
- Revenue remained concentrated: two US government grant agencies contributed about 67% of nine-month revenue. Three customers accounted for approximately 73% of receivables at September 30.
- Disclosure controls and internal control over financial reporting were reported ineffective, with material weaknesses involving the lack of an independent audit committee/financial expert and oversight and reporting of the German subsidiary. Management said remediation had begun.
- No material litigation was reported. Certain agreements provide for royalties on CytoSorb sales; a separate agreement could require warrants for up to 10 million shares if specified patent litigation is commenced before June 30, 2018. No such litigation had arisen by the filing date.
Important facts for investors to verify
- Whether product sales and margins continue to grow, and how much revenue remains dependent on grants.
- Cash burn, the stated runway into Q2 2014, and the timing and terms of additional financing.
- Conversion, dilution and potential financing rights under the notes, warrants, options, preferred stock and Lincoln Park agreement.
- Progress and outcomes of clinical studies, distributor commercialization, reimbursement and any path to US regulatory approval.
- Remediation of the disclosed material weaknesses and any changes to customer or funding concentration.