CytoSorbents Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. CytoSorbents develops and commercializes blood-purification devices; its CytoSorb product was CE-marked in the EU and marketed in 44 countries. The company reported more than 31,000 human treatments to date.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Product sales | $3.449 million | $2.143 million | $9.086 million | $5.593 million |
| Grant income | $0.376 million | $0.269 million | $1.418 million | $0.851 million |
| Total revenue | $3.824 million | $2.412 million | $10.504 million | $6.444 million |
| Gross profit | $2.307 million | $1.448 million | $6.251 million | $3.788 million |
| Operating loss | $(2.149) million | $(2.144) million | $(6.037) million | $(6.922) million |
| Net loss | $(2.054) million | $(2.188) million | $(5.314) million | $(6.857) million |
| Net loss per share, basic and diluted | $(0.07) | $(0.09) | $(0.21) | $(0.27) |
- Management attributed sales growth to new and repeat direct customers and higher distributor sales. Revenue increased 59% in Q3 and 63% for the nine-month period year over year.
- Product gross margin was 69% in Q3 versus 68% and 67% for the nine months versus 66%. The filing attributes the improvement mainly to sales mix.
- Q3 research and development expense declined to $0.538 million from $1.172 million; nine-month expense fell to $1.628 million from $3.120 million, reflecting lower clinical-study costs and more activity charged to grants. SG&A rose to $3.680 million in Q3 and $9.698 million for nine months, including higher stock-based compensation, sales and marketing, personnel, and royalties.
- Foreign-currency transaction gains were $0.349 million in Q3 and $1.221 million for nine months, versus $0.073 million and $0.176 million, respectively, in 2016. The gains materially offset operating losses. Interest expense was $0.254 million in Q3 and $0.498 million for nine months.
- Operating cash used was $6.051 million for nine months; investing activities used $1.096 million. Financing provided $17.215 million, including $11.775 million net equity contributions and $5.0 million in debt proceeds. Cash increased by $10.155 million to $15.400 million.
- At September 30, 2017, current assets were $19.386 million, including $15.400 million cash, and current liabilities were $5.778 million. Total debt principal was $10.0 million; reported long-term debt, net of current maturities and costs, was $6.966 million. Total liabilities were $12.745 million.
Changes, financing, and unusual items
- April 2017 public offering generated approximately $10.3 million net proceeds. The company also raised approximately $1.7 million net through its at-the-market facility in Q3 and approximately $1.0 million from October 1 to November 7, 2017. These issuances increased shares outstanding and may dilute existing holders.
- The company drew the second $5.0 million tranche of its Bridge Bank facility on June 30, bringing principal debt to $10.0 million. The loan is secured by substantially all company assets except intellectual property, bears interest at 30-day LIBOR plus 7.75% (8.98% at September 30), and matures July 1, 2020. Principal payments are scheduled to begin February 2018. A covenant requires trailing six-month product sales of at least 75% of the company’s projections supplied to the lender.
- The filing adopted ASU 2017-11 and restated current and comparative statements for warrants with down-round provisions. The warrant liability was removed from the balance sheet and historical earnings effects were adjusted; the 2017 repricing also produced a $335,731 dividend adjustment to income available to common stockholders.
- Germany accounted for $5.360 million of nine-month product sales; the company identified Germany as its primary market. Euro movements affected reported results. No customer, distributor, or agency represented more than 10% of revenue during the 2017 three- or nine-month periods, though two distributors together represented about 33% of receivables at September 30.
Outlook, risks, and contingencies
- Management said available liquidity was expected to fund operations into 2019, while also noting possible additional capital needs for U.S. and/or German clinical trials once protocols are finalized. The filing provides no revenue or earnings guidance and says continuing operating losses are expected for the foreseeable future; profitability timing is uncertain.
- The financial statements are prepared on a going-concern basis. The filing describes substantial doubt about the company’s ability to continue as a going concern, citing accumulated deficit of $149.166 million and expected future losses. It also states management believes cash is adequate for more than the next 12 months.
- Management was preparing for a planned fourth-quarter 2017 launch of REFRESH 2, intended as a pivotal U.S. cardiac-surgery registration trial, following discussions with the FDA. Trial timing, design, regulatory approval, and outcomes remain uncertain. CytoSorb had CE Mark authorization, but U.S. approval and additional international approvals were not assured.
- Key risks include clinical and regulatory failure or delay, reimbursement and market adoption, future financing needs, manufacturing scale-up and product quality, dependence on distributors and key personnel, foreign exchange exposure, and concentration of sales in Germany. The company reported no current legal proceedings and no off-balance-sheet arrangements.
- Management concluded disclosure controls were effective as of period-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and improving product margins continue, and how much is attributable to repeat use, distributor orders, or grant revenue.
- Cash runway against ongoing operating cash use, scheduled loan principal payments, clinical-trial spending, and the possibility of further equity financing.
- Compliance with Bridge Bank’s revenue covenant and the effect of the loan’s interest, fees, collateral, and repayment terms.
- REFRESH 2’s actual initiation, trial design, funding requirements, results, and regulatory implications; also monitor other clinical and reimbursement milestones.
- Effects of Germany and distributor concentration, Euro fluctuations, and the warrant-accounting restatement on reported earnings and per-share comparisons.