CytoSorbents Corporation — Q2 2014 Form 10-Q
Business context and period. The company develops blood-purification medical devices and is classified as a development-stage company. Its CytoSorb device has CE Mark approval and is being commercialized in Europe; the company had limited commercial operations and no significant revenue. This summary covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1.025 million | $0.291 million | $2.087 million | $0.663 million |
| Product sales | $0.663 million | $0.128 million | $1.232 million | $0.304 million |
| Gross profit | $0.359 million | $0.092 million | $0.758 million | $0.210 million |
| Net loss | $1.854 million | $1.415 million | $2.829 million | $3.044 million |
| Net loss available to common shareholders | $3.228 million | $2.031 million | $5.317 million | $4.247 million |
- Management reported Q2 blended gross margin of approximately 35% and product gross margin of approximately 65%; first-half margins were approximately 36% and 63%, respectively.
- First-half operating cash use was $2.261 million, versus $1.833 million in 2013. Investing cash use was $4.861 million, primarily reflecting $4.745 million of purchases of short-term investments. Financing provided $9.813 million.
- At June 30, cash and cash equivalents were $4.878 million and short-term investments were $4.745 million. Current assets were $10.622 million against current liabilities of $2.769 million. The company reported working capital of approximately $7.853 million.
- Convertible notes payable were reported at $0.709 million net of discount; approximately $745,000 of principal remained outstanding. Redeemable Series B preferred stock was recorded at $17.718 million.
- Accumulated development-stage deficit was $111.123 million. Common shares outstanding were 310.4 million at June 30, up from 251.3 million at December 31, 2013; 310.7 million were outstanding at August 6.
Material changes and financing
- First-half revenue increased approximately 215% year over year; product sales rose approximately 305%. Management attributed growth to an expanded direct sales team and distributor sales. Q2 product sales increased approximately 418% year over year.
- First-half R&D expense fell to $0.584 million from $1.412 million, principally because grant-related costs were classified in cost of revenue and some payroll moved to SG&A. SG&A rose to $2.162 million from $1.214 million, reflecting staffing, commissions, marketing, royalties, and conference costs. Legal, financial, and consulting expense increased to $0.550 million from $0.413 million.
- In March, the company raised $10.2 million gross through an offering of 40.8 million common shares at $0.25 and warrants for up to 20.4 million shares at $0.3125. Net proceeds were approximately $9.451 million. The warrants are recorded as a liability; the company reported $0.889 million of warrant liability at June 30.
- In June, $1.098 million of notes matured and converted into 9.487 million common shares, including shares for accrued interest. The offering and note conversion contributed to substantial share-count growth and potential dilution.
- Preferred-stock dividends were $2.489 million for the first half, increasing the loss attributable to common shareholders above the reported net loss.
Outlook, risks, and unusual items
- Management said existing funding was sufficient for operations into 2016, while noting that additional capital may be needed for future operations and U.S. and/or German pivotal trials. The filing states that financing uncertainty raises substantial doubt about the company’s ability to continue as a going concern.
- Management planned additional sales and marketing hiring, further clinical studies, and a U.S. pivotal cardiac-surgery trial intended to support a U.S. regulatory application. It also reported a German dose-ranging study and more than 30 investigator-initiated studies planned or underway. These are plans, not assured outcomes.
- CytoSorb had CE Mark approval, but U.S. regulatory approval had not been obtained. Commercial success depends on clinical evidence, adoption, reimbursement, regulatory progress, and the company’s ability to raise capital.
- Disclosure controls were deemed ineffective due to the lack of an independent audit committee or audit committee financial expert. Management said a previously identified weakness involving the German subsidiary’s reporting had been remediated.
- The company reported no current legal proceedings. A preferred-stock-related agreement could require warrants for up to 10 million shares if specified patent-infringement litigation arises before June 30, 2018; no such litigation had arisen by the reporting date.
- In August 2014, after quarter-end, the company announced an exclusive Taiwan distribution agreement. The filing gives no financial terms for that agreement.
Important facts for investors to verify
- Whether rising product sales translate into sustained growth and improved product and blended margins.
- The assumptions behind management’s cash runway through 2016 and the capital required for planned pivotal trials.
- Potential dilution from preferred stock, outstanding options and warrants, and any future equity financing.
- Clinical-study progress, regulatory requirements, reimbursement, and distributor performance in existing and new markets.
- Remediation of the remaining governance and disclosure-controls weakness, and the status of any material subsequent developments.