CytoSorbents Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. The company commercializes its CytoSorb blood-purification device, CE-marked in the EU and marketed in 40 countries, while pursuing clinical studies and developing additional products.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $2.412 million | $1.344 million | $6.444 million | $3.031 million |
| Product sales | $2.143 million | $1.071 million | $5.593 million | $2.548 million |
| Gross profit | $1.448 million | $0.705 million | $3.788 million | $1.622 million |
| Operating loss | $(2.144) million | $(2.150) million | $(6.922) million | $(6.641) million |
| Net loss | $(2.683) million | $(2.847) million | $(7.524) million | $(6.130) million |
| Loss per share, basic and diluted | $(0.11) | $(0.11) | $(0.30) | $(0.25) |
Management reported product gross margins of approximately 68% in Q3 and 66% year to date, versus 63% and 62% in the comparable periods. Gross profit as a share of total revenue, which also includes grant income, was approximately 60% in Q3 and 59% year to date.
Cash flow and balance sheet: Net cash used in operating activities was $5.652 million for the nine months, compared with $6.822 million in 2015. Cash and equivalents were $6.375 million at September 30, up from $5.317 million at year-end; short-term investments declined from $2.192 million to zero. Current assets were $9.053 million and current liabilities $4.999 million. Stockholders’ equity fell to $1.379 million from $8.211 million.
Debt: The company drew a $5.0 million secured Bridge Bank term loan in June. Its stated rate was 8.24% at September 30 (30-day LIBOR plus 7.75%); principal payments are scheduled to begin in 2017, with maturity in July 2020. The loan is secured by specified assets, includes a 2.5% final fee, and is accompanied by a 6.37% success fee triggered by defined liquidity events, including the stock-price trigger described in the filing.
Changes versus the prior comparable period
- Q3 total revenue rose 79%, with product sales up 100%; management attributed growth to new and repeat direct customers and distributor sales. Nine-month total revenue increased 113%, including an 81% increase in grant income.
- Q3 operating loss was roughly flat year over year, while the nine-month operating loss widened by about $0.281 million. Higher R&D and SG&A spending offset much of the sales growth.
- Nine-month SG&A increased $1.894 million, primarily from staffing and personnel costs, royalties, sales and marketing, and stock compensation. R&D increased $0.501 million, mainly due to REFRESH I trial costs.
- Nine-month net loss increased despite improved operating cash use. Other-period comparisons were affected by noncash warrant remeasurement and foreign-currency movements: warrant remeasurement was a $0.667 million expense in 2016 versus $0.818 million income in 2015.
Outlook, developments, and risks
- Funding and going concern: Management stated that available cash was insufficient to fund operations for the next 12 months and that additional capital would be needed. The filing cites substantial doubt about the company’s ability to continue as a going concern. Management expects continuing operating losses while it funds development, clinical studies, manufacturing, and commercialization; profitability timing is uncertain.
- Clinical progress: REFRESH I enrollment was complete at 46 patients. After quarter-end, the company announced positive top-line safety data; the independent safety board reported no device-related safety concerns. Free-hemoglobin results were still pending review. The company planned to discuss final results with FDA and sought to initiate a pivotal REFRESH 2 study in early 2017, subject to the review and regulatory process.
- Commercial and development activity: The company added distributors in Spain, Portugal, and Iran during 2016 and announced a Chile distributor in October. It also entered a Terumo partnership for cardiac-surgery distribution in specified European markets. Government-funded development contracts support several programs, including HemoDefend and a potassium adsorber.
- Key risks: Need for further financing; continued losses; adoption and reimbursement uncertainty; clinical, regulatory, and manufacturing risks; dependence on distributors and key personnel; foreign-exchange exposure and concentration in Germany; intellectual-property disputes and patent protection; product liability; and potential dilution from future equity issuance. The company reported no current legal proceedings and no off-balance-sheet arrangements.
- Other items: The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It extended its New Jersey facility lease through May 2018 and entered a five-year German office and warehouse lease.
Important facts for investors to verify
- Cash runway and timing, amount, and terms of additional financing, including available equity and debt capacity.
- Quarterly product-sales growth, customer and distributor reorder trends, and sales concentration in Germany.
- Final REFRESH I efficacy results and the status, timing, cost, and FDA requirements for REFRESH 2.
- Bridge Bank loan terms, security and covenants, scheduled repayments, and potential success-fee triggers.
- Product reimbursement, regulatory approvals, manufacturing capacity, and whether development spending and operating costs can be supported by commercial growth.