CytoSorbents Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company develops and commercializes blood-purification medical devices. Its CytoSorb device was CE-marked and marketed in Europe and other countries; U.S. cardiac-surgery use remained under clinical investigation.
Financial highlights
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $964,000 | $1,025,000 | $1,687,000 | $2,087,000 |
| Product sales | $773,000 | $663,000 | $1,477,000 | $1,232,000 |
| Gross profit | $499,000 | $359,000 | $917,000 | $758,000 |
| Operating loss | $(2,227,000) | $(1,363,000) | $(4,491,000) | $(2,506,000) |
| Net income (loss) | $1,434,000 | $(1,854,000) | $(3,283,000) | $(2,829,000) |
- Product gross margin was approximately 63% in Q2 and 61% for the first half, versus 65% and 63%, respectively, in the prior-year periods.
- Q2 net income was driven by a $3.597 million noncash gain from revaluing warrant liabilities; the company still had a $2.227 million operating loss. For the first half, the warrant revaluation generated $1.589 million of other income.
- Cash and cash equivalents were $8.017 million at June 30, 2015, and short-term investments were $3.188 million. Current assets totaled $13.041 million; current liabilities were $2.528 million. Warrant liability was $1.393 million. The balance sheet reports no conventional borrowings.
- First-half operating cash use was $4.559 million; investing cash use was $1.481 million; financing provided $10.476 million. Cash increased $4.412 million from year-end. Financing included $9.409 million net proceeds from a January stock offering and $818,000 from warrant exercises.
Material changes and operating developments
- First-half product sales increased 20%, reflecting direct-sales and distributor growth, but total revenue declined 19% as grant income fell to $198,000 from $850,000 following the completion of significant grants. Management estimated the weaker euro reduced first-half sales by about $259,000.
- Operating expenses rose to $5.408 million from $3.264 million in the first half. R&D expense increased to $1.753 million, primarily reflecting more clinical-study costs and costs no longer allocated to grant-funded work; SG&A rose to $3.142 million amid higher staffing, marketing, and public-company costs.
- Commercial expansion included distributor agreements in Italy, Israel, Australia, and New Zealand, and a February 2015 Fresenius Medical Care partnership in six European countries. The filing describes a U.S. cardiac-surgery study expanded to a 40-patient randomized design and additional studies in Europe.
- At June 30, the company had 24.891 million common shares outstanding, compared with 23.305 million at year-end. Options and warrants create additional potential dilution.
Outlook, risks, and unusual items
- Management said available funding was expected to support operations into 2016 and believed funding was adequate for more than the next 12 months, but warned that additional capital may be needed, including for pivotal trials, commercialization, and capacity expansion. The filing also reports substantial doubt about the company’s ability to continue as a going concern, given recurring losses and an accumulated deficit of $127.677 million.
- Management expected continuing operating losses for the foreseeable future and gave no specific revenue, earnings, or profitability guidance. Profitability depends on clinical and product development, regulatory approvals, manufacturing, commercial adoption, and financing.
- Key risks include clinical-trial outcomes and enrollment, regulatory approval and ongoing compliance, reimbursement and market acceptance, manufacturing scale-up, foreign-exchange exposure, financing needs, and reliance on commercial partners. Three distributors represented about 61% of receivables at June 30.
- A July 29, 2015 shelf registration permits potential offerings of up to $100 million in securities; it is not committed financing. Executive employment agreements were signed July 14. No current legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether product-sales growth and distributor partnerships translate into sustained revenue and improved product margins, particularly given the euro’s impact.
- Cash runway and expected funding needs against clinical-trial, sales, and manufacturing plans; distinguish management’s runway estimate from the going-concern warning.
- The warrant-liability valuation and its large noncash effect on reported quarterly earnings.
- Clinical-study progress, regulatory milestones, reimbursement coverage, and the terms and purchase commitments of distribution partnerships.
- Potential dilution from outstanding options, warrants, equity incentives, and any securities issued under the shelf registration.