CytoSorbents Corporation — Q1 2017 Form 10-Q
Business context and reporting period
The filing reports unaudited results for the three months ended March 31, 2017, compared with Q1 2016. CytoSorbents develops and commercializes blood-purification devices based on its polymer technology. Its flagship CytoSorb device is CE-marked in the EU and marketed in 43 countries. The company reported more than 23,000 human treatments to date. It continues to develop other products, including HemoDefend, ContrastSorb, DrugSorb and BetaSorb.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 or comparator |
|---|---|---|
| Product sales | $2.596 million | $1.597 million; up 63% |
| Grant income | $0.517 million | $0.213 million |
| Total revenue | $3.114 million | $1.810 million; up 72% |
| Gross profit / gross margin | $1.859 million / 59.7% | $0.991 million / 54.7% |
| Operating expenses | $3.417 million | $3.081 million |
| Operating loss | $1.557 million | $2.090 million |
| Net loss | $1.378 million; $0.05 per share | $1.836 million; $0.07 per share |
| Cash used in operations | $1.984 million | $1.261 million |
Product gross margin was approximately 68%, versus 62% in Q1 2016, which management attributed to a favorable sales-price mix. Selling, general and administrative expense rose $697,000 to $2.667 million, while research and development expense fell $387,000 to $470,000. Interest expense was $120,000, compared with $4,000 of interest income a year earlier, reflecting the Bridge Bank financing.
Cash and cash equivalents were $3.240 million at March 31, down from $5.245 million at December 31, 2016. Current assets were $6.281 million and current liabilities $6.183 million, implying approximately $98,000 of working capital. Total liabilities were $9.860 million, including $5.0 million principal debt; stockholders’ deficit was $1.571 million. The first $5 million tranche of a loan facility of up to $10 million was drawn; a second $5 million tranche was subject to conditions and company discretion.
Material changes and significant events
- Sales increased on higher direct sales to new and repeat customers and higher distributor sales. Germany accounted for $1.530 million of product sales; all other countries accounted for $1.066 million.
- Grant income grew due to new grants and billable milestones. R&D expense declined partly because more labor and costs were allocated to grant-funded work and clinical-study costs were lower.
- SG&A growth reflected added personnel and sales costs, higher royalties, marketing and travel, and stock-based compensation.
- After quarter-end, the company sold 2,555,555 shares in an April public offering for $11.5 million gross and approximately $10.3 million net proceeds. The offering also reduced the exercise price of certain 2014 warrants to $4.50; those warrants remain exercisable only for cash.
- At March 31, 2017, two distributors represented approximately 37% of grants and accounts receivable. No customer, distributor or grant agency contributed more than 10% of quarterly revenue.
Outlook, risks and contingencies
Management said the April financing and potential additional debt availability were expected to fund operations into the second half of 2018, but additional capital might be needed to fund pivotal trials in the United States and/or Germany. The company expects continuing operating losses for the foreseeable future and gave no specific revenue or profitability guidance. The financial statements disclose substantial doubt about the company’s ability to continue as a going concern; they were prepared on a going-concern basis without adjustments for that uncertainty.
Clinical and regulatory progress remains important. REFRESH I, a U.S. cardiac-surgery feasibility study, had enrolled 46 patients by March 31, with 38 evaluable and completing the study; the independent safety board identified no device-related safety concerns. Management planned to discuss results with the FDA and pursue an IDE application for a pivotal REFRESH 2 trial in 2017. CytoSorb also depends on market adoption, reimbursement, continued regulatory compliance, manufacturing scale-up and third-party distribution. Other stated risks include continuing losses and financing needs, reliance on Germany and euro-denominated sales, foreign-exchange exposure, clinical and regulatory uncertainty, intellectual-property disputes and competition. The company reported no current legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth, particularly in Germany and through distributors, continues and translates into recurring product sales and improved cash generation.
- Current cash burn, the timing and conditions for any second loan tranche, and the adequacy of capital for planned clinical trials and operations.
- Progress, complete results and FDA pathway for REFRESH I and the proposed pivotal REFRESH 2 study.
- Reimbursement status, market adoption and regulatory approvals in key markets, as well as production capacity to meet demand.
- The effect of equity issuance and warrant repricing on dilution, and the company’s ability to address the disclosed going-concern uncertainty.