CytoSorbents Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. The filing is unaudited.
Business context
CytoSorbents develops blood-purification devices and related technologies for critical-care applications. Its lead product, CytoSorb, had CE Mark approval and was marketed in 29 countries. During the quarter, the company expanded commercial partnerships, including a February 2015 distribution agreement with Fresenius Medical Care for six European countries. The FDA also approved an IDE for a planned U.S. cardiac-surgery feasibility study.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Product sales | $703,658 | $569,243; up 24% |
| Grant income | $18,583 | $491,262 |
| Total revenue | $723,074 | $1,062,172; down 32% |
| Gross margin | $418,593 | $399,635 |
| Operating expenses | $3,130,222 | $1,553,829 |
| Operating loss | $(2,711,629) | $(1,154,194) |
| Net loss | $(4,716,942) | $(975,083); 2014 included $1,114,516 in preferred dividends |
| Basic and diluted loss per share | $(0.19) | $(0.20) |
| Net cash used in operations | $(2,408,979) | $(800,108) |
- Management reported product gross margin of 59%, versus 61% in Q1 2014.
- At March 31, cash and cash equivalents were $10.42 million and short-term investments were $2.94 million. Current assets totaled $14.88 million and current liabilities $6.20 million.
- Cash increased by $6.81 million during the quarter, principally reflecting $10.01 million in financing cash flow, including net proceeds from the January public offering and warrant exercises. The company raised approximately $9.41 million net from selling 1.25 million shares.
- The balance sheet reports a $4.99 million warrant liability. The company reported no separate debt balance in the presented balance sheet; convertible notes had been converted to common stock in 2014.
Material changes and notable items
- Product sales rose, but lower grant income—following the conclusion of significant grants during 2014—drove the decline in total revenue.
- Research and development expense rose to $951,028 from $236,774, reflecting less work charged to reimbursable grants, higher clinical-study costs and increased salaries. Selling, general and administrative expense increased to $1,963,676 from $1,080,522, including higher foreign-exchange losses, personnel, sales and marketing, and European operating costs.
- A $2.01 million noncash charge from remeasuring the warrant liability was a major contributor to the larger net loss; Q1 2014 instead included $316,200 of warrant-related income. The warrant liability is remeasured as the share price changes.
- Management said euro weakness reduced Q1 2015 product sales by approximately $112,000, or 16% of sales. Foreign-currency effects also weighed on expenses and results.
- Three distributors accounted for approximately 42% of Q1 2015 revenue and 55% of grants and accounts receivable at quarter-end.
Outlook, risks and contingencies
- Management said available funding was expected to support operations into 2016 and for more than the next 12 months, but additional capital might be needed, particularly for pivotal trials, commercialization, clinical studies and production expansion. No specific revenue or earnings guidance was provided.
- The company expected continuing operating losses for the foreseeable future. Its filing discusses substantial doubt about its ability to continue as a going concern, while stating that the interim statements were prepared on a going-concern basis.
- Key risks include the need for additional financing; clinical and regulatory uncertainty, including U.S. approvals; market acceptance and reimbursement; manufacturing scale-up; dependence on commercial partners and key personnel; foreign-currency volatility; competition; and intellectual-property disputes.
- The company disclosed royalty costs in the quarter of approximately $20,000 under a 3% CytoSorb gross-revenue royalty and $28,000 under a separate license arrangement. It reported no current legal proceedings.
- Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2015, with no material changes in internal controls during the quarter.
Important facts for investors to verify
- Whether CytoSorb sales growth and distributor expansion can offset declining grant revenue and increased operating costs.
- Actual cash consumption and the timing and financing requirements of planned clinical trials, especially pivotal U.S. or German studies.
- Progress and results of the U.S. cardiac-surgery study, ongoing European studies, and regulatory or reimbursement developments.
- The warrant-liability valuation and its potential effect on reported earnings, separately from operating performance.
- The filing contains an apparent discrepancy in the accumulated-deficit disclosure: the balance sheet reports $129.11 million, while one MD&A passage states $129.61 million. Verify against the filed financial statements.