Business context and reporting period
CytoSorbents Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The company is a development-stage medical-device business developing blood-purification technology and reported no revenue. Its CytoSorb device received European CE Mark approval in March 2011; a limited, controlled-market release began in select German territories in September.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0 | $0 |
| Total expenses | $1.226 million (2010: $0.781 million) | $3.468 million (2010: $2.423 million) |
| Net loss | $1.729 million (2010: $0.788 million) | $4.285 million (2010: $2.434 million) |
| Net loss available to common shareholders, including preferred dividends | $2.464 million (2010: $1.190 million) | $6.639 million (2010: $4.031 million) |
| Basic and diluted loss per share | $0.01 (2010: $0.01) | $0.04 (2010: $0.04) |
| Research and development expense | $0.780 million (2010: $0.526 million) | $2.394 million (2010: $1.560 million) |
| Operating cash used | Not stated separately for the quarter | $2.720 million (2010: $1.809 million) |
Margins are not meaningful because the company had no revenue. At September 30, cash and equivalents were $2.296 million, versus $1.056 million at December 31, 2010. Current assets were $2.516 million and current liabilities $1.589 million, implying working capital of approximately $0.927 million. Total liabilities were $1.813 million; convertible notes were carried at $0.238 million current and $0.225 million long term, net of debt discounts. The filing does not provide a clear aggregate face value of notes outstanding at quarter-end. Accumulated development-stage deficit was $90.628 million.
Material changes and unusual items
- Compared with the first nine months of 2010, operating cash use increased, while the net loss widened. The company reported $4.012 million of financing cash inflows in the 2011 period, including $2.757 million of net equity contributions and $1.250 million of borrowings.
- Cash also reflected significant share issuance and conversions: 17.3 million shares were sold through the Lincoln Park Capital facility, and convertible notes and accrued interest of $1.483 million were converted into 14.8 million common shares. Common shares outstanding increased to 172.3 million from 122.8 million at year-end 2010; 177.3 million were outstanding on November 14, 2011.
- Nine-month interest expense was $0.816 million, versus $0.011 million in 2010, including amortization of debt discounts. Preferred-stock dividends of $2.354 million for the period increased the loss attributable to common shareholders. Other noncash items included $0.508 million in stock-based compensation.
Outlook, risks and contingencies
Management estimated available cash would fund operations into the first quarter of 2012. It said the company would need additional funding thereafter to complete further clinical studies and fully commercialize its products. Management believed it might be able to sell approximately $2.3 million of additional common stock under its Lincoln Park facility, subject to minimum-price terms and filing an additional effective registration statement; access was not assured.
The filing identifies substantial doubt about the company’s ability to continue as a going concern: it has recurring operating cash outflows, no revenue, and depends on future financing. Management warned that insufficient funding could force delays or reductions in research, product launches, or marketing, or cessation of operations.
Management reported completion of enrollment in a 100-patient European sepsis trial. It said the treatment was well tolerated, with no serious device-related adverse events reported in more than 300 treatments, and that the electronically randomized group showed a statistically significant 30–50% average reduction in key cytokines. Reported mortality benefits came from post-hoc analyses of small high-risk subgroups; the filing notes that the trial was not powered to demonstrate clinical endpoints and that 31 patients affected by randomization imbalance were limited to safety evaluation. These findings should not be treated as established clinical benefit.
The company anticipated only modest initial sales from its limited German release. CE Mark approval does not establish U.S. FDA approval; the company said future U.S. studies and registration plans remained uncertain. Other risks include market acceptance, regulatory approvals, manufacturing and commercialization capability, competition, product liability, and dependence on additional financing. Potential royalties of 3% on CytoSorb gross revenues and 2.5%–5% on certain licensed products may apply if sales occur; no royalties had been incurred. A separate warrant contingency could require up to 10 million shares if specified patent-infringement litigation occurs before June 30, 2018; no such litigation had arisen by quarter-end.
Important facts for investors to verify
- Whether the company obtained financing after the stated cash runway into Q1 2012, including whether the Lincoln Park facility remained usable and on what terms.
- Subsequent cash burn, commercial sales, and the timing and scale of expansion beyond the controlled German release.
- Full trial results and independent assessment of the sepsis study, especially the small post-hoc subgroup findings and the impact of the randomization issue.
- Remaining convertible-note principal, debt discount amortization, preferred dividends, and potential dilution from outstanding options, warrants, and convertible securities.
- Regulatory plans and evidence required for further European indications or U.S. FDA authorization.