CytoSorbents Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 7, 2017. Financial statements are unaudited.
Business context
CytoSorbents develops and commercializes blood-purification devices. Its flagship CytoSorb product was CE marked in the EU and marketed in 44 countries. The company reported more than 27,000 human treatments to date. It also develops products including HemoDefend, ContrastSorb and DrugSorb.
Financial performance and liquidity
- Q2 revenue: $3.57 million, up 60% from $2.22 million in Q2 2016. Product sales were $3.04 million (+64%); grant income was $0.53 million.
- First-half revenue: $6.68 million, up 66% from $4.03 million. Product sales were $5.64 million (+63%); grant income was $1.04 million (+79%).
- Gross profit: $2.08 million for Q2 and $3.94 million for the first half. Product gross margin was approximately 65% in Q2 versus 68% a year earlier, and 66% for the first half versus 65%.
- Operating loss: $2.33 million in Q2 versus $2.69 million; $3.89 million for the first half versus $4.78 million. First-half R&D expense declined to $0.96 million from $1.95 million, while SG&A increased to $6.15 million from $4.60 million.
- Net loss: $1.12 million in Q2 versus $3.01 million; $2.49 million for the first half versus $4.84 million. Improvement included noncash gains from foreign currency transactions and remeasurement of warrant liability; first-half gains were $0.87 million and $0.77 million, respectively. The company remained loss-making at the operating level.
- Cash flow: First-half operating cash use was $3.87 million versus $3.18 million in 2016. Cash and equivalents ended June at $16.40 million, up from $5.25 million at December 31, 2016.
- Liquidity and capitalization: Current assets were $19.74 million and current liabilities $6.23 million. Total liabilities were $14.17 million. The company raised approximately $10.3 million net from an April equity offering and drew the second $5 million loan tranche in June.
- Debt: $10 million principal outstanding under Bridge Bank loans, bearing interest at 30-day LIBOR plus 7.75% (8.97% at June 30). Principal payments begin in February 2018; final maturity is July 2020. The loans are secured by substantially all company assets other than intellectual property.
- Share count: 28.13 million common shares outstanding at June 30, compared with 25.48 million at December 31, 2016.
Material changes versus the prior comparable period
- Product sales growth reflected new and repeat direct customers and increased distributor sales; grant revenue rose due to new grants.
- Q2 product gross margin declined, which management attributed primarily to the mix of direct and distributor sales; first-half product margin improved slightly.
- Higher SG&A reflected stock-based compensation, added personnel and commissions, royalties, and sales and marketing costs. Lower R&D reflected reduced clinical-study costs and more costs assigned to grant-funded work.
- The April offering increased shares outstanding and reset the exercise price of certain 2014 warrants to $4.50. The warrant-liability remeasurement generated noncash income.
Outlook, risks and unusual items
- Management said available liquidity was expected to fund operations through 2018, but additional capital may be needed to fund pivotal U.S. and/or German trials. The filing provides no revenue or earnings guidance.
- The financial statements are prepared on a going-concern basis. Despite management’s liquidity expectation, the filing states that accumulated losses and anticipated future operating losses raise substantial doubt about the company’s ability to continue as a going concern; no adjustments for that uncertainty are included.
- A covenant associated with the second loan tranche requires trailing six-month product-sales revenue to equal at least 75% of the company’s projection for that period. The filing text does not provide a clear statement of covenant compliance.
- Management reported positive top-line safety findings from the REFRESH I cardiac-surgery study and planned to discuss results with the FDA in preparation for a pivotal REFRESH 2 IDE application in 2017. The study was not powered to measure clinical outcomes.
- Fresenius’s expanded distribution and co-marketing program was expected to begin in the second half of 2017. These are plans, not reported results.
- Key risks include continued losses and potential need for financing; clinical, regulatory and commercialization uncertainty; reimbursement and market-acceptance challenges; dependence on Germany and exposure to euro movements; manufacturing scale-up; competition and intellectual-property disputes; and possible dilution from future share issuance.
- The company reported no current legal proceedings and no off-balance-sheet arrangements. It recorded royalties under agreements, including a 3% royalty on CytoSorb gross revenue and 2.5%–5% royalties on certain products under a license agreement.
Important facts for investors to verify
- Progress in sales growth, product gross margins, customer and distributor concentration, and dependence on Germany.
- Cash runway against operating cash use, anticipated clinical-trial spending, and any need or ability to raise additional capital.
- Compliance with the Bridge Bank revenue covenant, debt-service requirements, and the terms and potential triggers of the success-fee arrangement.
- FDA feedback and timing for REFRESH 2, the quality and publication of REFRESH I results, and the status of other clinical and regulatory programs.
- Whether expected Fresenius co-marketing activity and broader distribution partnerships translate into sustained product sales and adequate reimbursement.