CytoSorbents Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; interim financial statements are unaudited. CytoSorbents develops and commercializes blood-purification technology. Its CytoSorb device had CE Mark approval and was marketed in 37 countries; it was not yet approved for sale in the United States.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $2.22 million | $0.96 million | $4.03 million | $1.69 million |
| Product sales | $1.85 million | $0.77 million | $3.45 million | $1.48 million |
| Grant income | $0.37 million | $0.18 million | $0.58 million | $0.20 million |
| Gross profit | $1.35 million | $0.50 million | $2.34 million | $0.92 million |
| Operating loss | $(2.69) million | $(2.23) million | $(4.78) million | $(4.49) million |
| Net income (loss) | $(3.01) million | $1.43 million | $(4.84) million | $(3.28) million |
| Basic and diluted EPS | $(0.12) | $0.06 basic; $0.05 diluted | $(0.19) | $(0.13) |
- Revenue increased 130% in Q2 and 139% for the first half, driven by higher direct and distributor product sales and increased grant income. Management attributed higher product gross margins to a favorable sales-price mix: 68% in Q2 versus 63%, and 65% for the first half versus 61%.
- Operating expenses rose to $4.04 million in Q2 and $7.12 million for the first half. Higher selling, general and administrative costs reflected added sales staff, commissions, marketing, royalties and stock-based compensation; research and development spending also increased, particularly for clinical studies.
- Q2 2015 reported net income principally because of a $3.60 million noncash gain from revaluing warrant liabilities. In Q2 2016, warrant revaluation instead generated $0.19 million of expense. For the first half, warrant revaluation shifted from $1.59 million of income in 2015 to $0.17 million of expense in 2016. Foreign-currency results also varied between periods.
- Cash and cash equivalents were $8.67 million at June 30, 2016, with $0.25 million of short-term investments. Current assets were $11.07 million and current liabilities $3.93 million. Operating activities used $3.18 million of cash in the first half; cash increased by $3.35 million, mainly reflecting financing and investment activity.
- The company drew the first $5 million tranche of a bank loan on June 30. Long-term debt, net of $0.12 million of financing costs, was $4.88 million. The loan bears interest at 30-day LIBOR plus 7.75% (8.1993% at closing); the second $5 million tranche was available subject to the agreement and at the company’s discretion. The loan is secured, includes fees and prepayment charges, and matures July 1, 2020.
- Accumulated deficit was $137.37 million and stockholders’ equity was $3.90 million at period end, compared with $8.21 million at December 31, 2015.
Changes, outlook and risks
- Management reported higher sales from new customers, repeat orders and distributors, and expanded direct sales activity, including through a new Swiss subsidiary. A distribution agreement for Spain and Portugal was announced in June 2016.
- Clinical and development activity continued: the U.S. REFRESH I cardiac-surgery study had enrolled 44 patients by August 1, against a target of 40 completing the study. The company also reported more than 55 investigator-initiated studies at various stages. Government research contracts provide additional, generally milestone-based grant funding.
- No formal revenue or earnings guidance is provided. Management expects continuing operating losses as it funds research, clinical studies, manufacturing and commercialization. It stated both that cash was believed sufficient for the next 12 months and, elsewhere, that funding was not adequate beyond the next 12 months and additional capital would be required. It also said additional financing may be needed to fund pivotal U.S. and/or German trials and commercial growth.
- The financial statements identify substantial doubt about the company’s ability to continue as a going concern. Profitability depends on successful product development and clinical work, regulatory approvals, commercial adoption, manufacturing and access to additional capital. The filing gives no assurance these conditions will be met.
- Other material risks include limited U.S. and international regulatory approvals, uncertain reimbursement and market acceptance, competition, manufacturing scale-up, dependence on distribution partners and key personnel, foreign-exchange exposure, intellectual-property disputes and possible dilution. The company reported no current legal proceedings and no off-balance-sheet arrangements.
- A lease amendment disclosed after quarter-end extended the headquarters and manufacturing-facility lease through May 31, 2018, with a conditional one-year extension option; expanded space and rent of $24,756 per month were effective August 1, 2016.
Important facts for investors to verify
- Reconcile management’s differing statements about whether available funding covers the next 12 months, and assess the going-concern warning against the cash balance, cash use and financing needs.
- Track product-sales growth separately from grant revenue, and assess whether sales growth and reported product margins persist as commercialization expands.
- Review the Bridge Bank agreement’s covenants, collateral, interest, fees, second-tranche conditions and repayment schedule; distinguish the $5 million funded from the additional $5 million potentially available.
- Monitor clinical-study progress, regulatory approvals and reimbursement, especially the REFRESH I program and any pivotal trials requiring additional capital.
- Assess potential share dilution from outstanding options, warrants, restricted stock units and the $25 million at-the-market equity sales authorization. No at-the-market shares were sold in the first half of 2016.