CytoSorbents Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is a development-stage medical-device business developing blood-purification technologies. Its CytoSorb device had CE Mark approval and was being sold on a limited basis in Europe; the company had not generated significant revenue.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $291,483 | $83,042 | $662,813 | $133,268 |
| Product sales | $127,969 | $33,042 | $304,067 | $49,935 |
| Grant and other income | $163,514 | $50,000 | $358,746 | $83,333 |
| Gross profit | $91,928 | $72,962 | $209,747 | $113,108 |
| Net loss | $(1,414,989) | $(1,047,310) | $(3,043,931) | $(2,473,906) |
| Net loss available to common shareholders | $(2,031,477) | $(1,624,514) | $(4,246,836) | $(3,715,027) |
- First-half revenue rose 497% year over year; product sales rose 609%, reflecting the European sales effort and distributor sales. Product gross margin was about 60% for the first half and 61.3% in Q2. Q2 overall gross margin was about 31.5%; grant-related materials and labor weighed on it.
- First-half operating expenses were $3.039 million, led by R&D of $1.412 million, selling, general and administrative expense of $1.214 million, and legal, financial and consulting costs of $413,000. Net loss increased from the prior-year period.
- First-half operating cash use was $1.833 million, compared with $2.219 million in 2012. Investing cash use was $35,000 and financing provided $2.013 million. Cash increased by $141,000 to $1.871 million.
Financial position and funding
- At June 30, cash was $1.871 million, current assets $2.587 million, and current liabilities $2.104 million, implying working capital of approximately $483,000. Total assets were $2.981 million; stockholders’ equity was a deficit of $13.185 million.
- Current liabilities included $912,000 of convertible notes, net of debt discount. The company issued $1.098 million principal amount of new notes in June, bearing 8% interest and due in one year; they automatically convert at $0.125 per share at maturity or earlier at the holder’s option. Warrants were issued with 50% coverage at $0.15 per share. The notes are not required to be repaid in cash.
- The company raised about $900,000 from Lincoln Park Capital (LPC) in the first half by selling approximately 8.144 million shares at an average $0.113 per share. $4.05 million remained available under the LPC agreement at June 30. From July 1 through August 12, it received a further approximately $700,000 from LPC share sales. Shares outstanding were 234.4 million at June 30 and 245.1 million as of August 12.
Material developments, outlook and risks
- Management stated that existing cash was expected to fund operations into Q4 2013, after which additional funding would be needed for clinical studies and commercialization. The filing says financing may not be available on acceptable terms or at all; without adequate funds, the company may delay or discontinue programs or cease operations. The going-concern uncertainty raises substantial doubt about the company’s ability to continue as a going concern.
- The company reported a $1 million U.S. Army Phase II SBIR contract for trauma and burn-injury development, with about $654,000 available at June 30 subject to milestones. It also reported $305,000 received during the first half under a $3.8 million, five-year DARPA contract, with further payments dependent on milestones. A U.S. Air Force-funded 30-patient trauma pilot study had FDA IDE approval and was anticipated to begin in 2013.
- CytoSorb was being commercialized in Germany, Austria and Switzerland; the company reported new distributor agreements in the United Kingdom and Turkey. A German dose-ranging study was underway. Management planned larger prospective sepsis studies, but the filing provides no assurance of clinical success or U.S. FDA approval. Other products described remained in development.
- Management reported ineffective disclosure controls and material weaknesses in internal control over financial reporting, including the lack of an independent audit committee/financial expert and insufficient integration and oversight of the German subsidiary’s financial reporting. The company had begun remediation and hired a CFO in May 2013.
- Other items include $1.203 million of first-half preferred-stock dividends recorded as noncash, dilution from stock options and warrants, and potential royalty obligations on product sales. Management said it was not aware of litigation expected to have a material adverse effect and reported no material risk-factor changes from its 2012 Form 10-K.
Important facts for investors to verify
- Cash runway and the timing, amount, and terms of future financing; verify subsequent LPC proceeds and remaining facility availability.
- Commercial sales growth, product margins, distributor activity, and whether grant income is recurring or milestone-dependent.
- Clinical-study progress and outcomes, including the Air Force pilot and German dose-ranging trial, and the path to any U.S. regulatory approval.
- Potential dilution from preferred stock, convertible notes, options and warrants; confirm the current share count and relevant conversion terms.
- Progress in remediating the reported material weaknesses and improving disclosure controls and subsidiary reporting.