CytoSorbents Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures compared with December 31, 2017. The company develops and commercializes blood-purification devices. Its CytoSorb product had EU CE-mark approval and was sold in 45 countries, but was not approved for sale in the United States.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $4.925 million | $3.114 million |
| Product sales | $4.433 million | $2.596 million |
| Grant income | $491,000 | $517,000 |
| Gross profit | $3.357 million | $1.859 million |
| Operating loss | $(3.101) million | $(1.557) million |
| Net loss | $(2.982) million | $(1.525) million |
| Basic and diluted loss per share | $(0.10) | $(0.06) |
| Net cash used in operations | $(2.204) million | $(1.984) million |
- Product sales increased 71% and total revenue increased 58% year over year. Management attributed sales growth to direct and distributor sales, including approximately $505,000 from the stronger euro.
- Product gross margin rose to approximately 74% from 68%, which management attributed to manufacturing efficiencies, sales mix, and currency effects. Gross profit was 68% of total revenue in Q1 2018, versus 60% in Q1 2017.
- Research and development expense increased to $1.780 million from $470,000, primarily reflecting higher clinical-trial and study costs. Selling, general and administrative expense rose to $4.262 million from $2.667 million; stock-based compensation contributed substantially to the increase.
- Cash and cash equivalents were $21.090 million at March 31, up from $17.322 million at year-end. Investing activities used $472,000; financing activities provided $6.443 million, including $6.047 million of net proceeds from at-the-market share sales.
- Current assets were $24.515 million and current liabilities $3.986 million. Long-term debt was $10.0 million principal, or $9.870 million net of debt costs, with no current maturities reported at quarter-end.
Material changes and financing
- On March 29, 2018, the company refinanced its existing bank loans with a $10 million Term A loan. The facility also allows an additional $5 million Term B loan, at the company’s request before March 31, 2019, subject to conditions.
- The loans bear interest at the Wall Street Journal prime rate plus 3.66% (8.41% at March 31, 2018). Principal repayments are scheduled to begin in 2019 or 2020 depending on whether Term B is drawn; the stated maturity is April 1, 2022. The debt is secured by a first-priority interest in specified assets, with intellectual property excluded.
- The company sold 782,328 shares through its ATM program during the quarter at an average $7.97 per share, receiving approximately $6.047 million net. It reported 29,974,368 shares outstanding at March 31 and 30,031,676 at May 2, 2018.
- The company adopted ASC 606 using the modified retrospective method, with no retained-earnings adjustment and no expected significant ongoing net-income effect. It also applied ASU 2017-11, which changed accounting for certain warrants with down-round provisions; the 2017 comparative net loss was adjusted upward by $146,858.
Outlook, risks, and other notable items
- Management said available liquidity was expected to fund operations into the second half of 2019, while also stating that additional capital would be needed to fully fund clinical trials in the United States and Europe. The company expects continuing operating losses and has not established when, if ever, it will become profitable.
- The filing says the recurring losses and funding requirements raise substantial doubt about the company’s ability to continue as a going concern. Management cited product development, regulatory approvals, manufacturing, commercialization, and future financing as key dependencies.
- The FDA-approved REFRESH 2-AKI pivotal U.S. cardiac-surgery study began enrolling its first patient in April 2018. Management anticipated at least two years to complete it, with possible delays. A German government-funded 250-patient REMOVE study began enrollment in January 2018.
- Germany was the largest product-sales market. The filing highlights risks from market adoption and reimbursement, clinical and regulatory outcomes, manufacturing scale-up, reliance on distributors and partners, foreign-exchange movements, competition, intellectual-property protection, and the need for additional capital.
- Foreign-currency transaction gains were approximately $358,000, compared with $153,000 in Q1 2017. The filing reports no current legal proceedings and states that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and improved product margins persist, particularly after separating underlying performance from euro exchange-rate benefits and sales mix.
- Cash-burn trends, the assumptions behind management’s runway estimate, and the timing and terms of any additional financing or Term B borrowing.
- REFRESH 2-AKI enrollment pace, trial costs and results, and progress toward U.S. regulatory approval; also verify progress and outcomes for REMOVE and other clinical studies.
- Debt covenants, scheduled repayments, interest-rate exposure, and potential fees triggered by prepayment, specified share-price levels, or change-of-control events.
- Potential dilution from further ATM sales, options, warrants, and restricted stock awards. The filing reports an accumulated deficit of $155.295 million and continuing expected losses.
- The filing contains an inconsistent net-loss figure in one narrative passage ($2.892 million); the financial statements and other discussion report Q1 2018 net loss of $2.982 million.