Business context and reporting period
CytoSorbents Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company develops and sells blood-purification devices, principally CytoSorb, marketed in 65 countries. CytoSorb had EU authorization and received FDA Emergency Use Authorization (EUA) for specified critically ill adult COVID-19 patients; the EUA is not FDA clearance or approval.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $9.795 million | $6.233 million | $18.502 million | $11.424 million |
| Product sales | $9.520 million | $5.850 million | $17.676 million | $10.427 million |
| Gross margin dollars | $6.545 million | $4.398 million | $12.868 million | $7.851 million |
| Operating loss | $(3.298) million | $(3.630) million | $(5.776) million | $(7.915) million |
| Net loss | $(2.867) million | $(3.547) million | $(6.320) million | $(8.431) million |
| Loss per share, basic and diluted | $(0.08) | $(0.11) | $(0.18) | $(0.26) |
Product gross margin was 70% in Q2 and 72% for the first half, compared with 76% and 75%, respectively, in 2019. Management attributed the decline to a higher share of lower-margin distributor sales and costs of rapidly increasing production. Operating expenses were $9.843 million in Q2 and $18.644 million for the first half. Q2 selling, general and administrative expense rose to $6.591 million from $4.507 million, while research and development expense declined to $2.406 million from $2.930 million.
At June 30, cash and cash equivalents were $35.114 million; current assets were $41.948 million and current liabilities $15.664 million. Total debt principal was $15.0 million, with $6.667 million classified as current; the loan was secured and principal payments of about $833,000 monthly were scheduled to begin in November 2020. Six-month operating cash use was $1.271 million and investing cash use was $1.006 million. Financing provided $25.115 million, principally from equity issuance. Cash increased $22.881 million during the period. Management described six-month cash burn as approximately $2.273 million.
After quarter-end, the company sold 6,052,631 shares at $9.50 each in an underwritten offering, receiving approximately $54.0 million net. It also reported approximately $2.414 million of net proceeds from post-quarter ATM sales. Management stated that the offering increased cash to approximately $89 million and removed the going-concern risk, with expected funding well beyond the next 12 months. Shares outstanding were 36,811,870 at June 30 and 43,157,879 at July 31.
Material changes versus the prior comparable period
- Q2 product sales increased 63% and total revenue increased 57% year over year; first-half product sales rose 70% and total revenue rose 62%.
- Management estimated COVID-19-related demand contributed $2.4–$2.6 million of Q2 product sales and $3.9–$4.3 million of first-half product sales. Q2 U.S. hospital sales under the EUA were approximately $667,000.
- Despite higher revenue, lower product gross margins partly offset the benefit. Net losses narrowed year over year, aided by revenue growth and reduced clinical-trial spending.
- First-half R&D expense fell by $977,000, mainly because COVID-19 restrictions paused or slowed company-sponsored trials. SG&A increased by $3.643 million, including higher salaries, commissions, royalties and stock-based compensation.
- Equity financing materially strengthened liquidity but increased the share count. The company raised approximately $24.0 million net through ATM sales during the first half, in addition to the post-quarter offering and ATM proceeds.
Outlook, commentary, risks and unusual items
- Management expected the pandemic to continue supporting product revenue in Q3 2020 based on then-current orders, but cautioned that the effect could change with containment and that it could not predict the full-year impact. It warned revenue could decline as the COVID-19 catalyst eases.
- Manufacturing was operating 24 hours a day, seven days a week, with potential further capacity expansion. The filing notes that rapid demand growth could still cause supply constraints or delivery delays.
- Clinical activity was disrupted: enrollment in the TISORB study and other trials was paused, and management had limited visibility on restarting the pivotal REFRESH 2-AKI trial. After a favorable July 24, 2020 DMC safety opinion, resumption was recommended with minor modifications, but management gave no assurance the trial would restart or succeed. REMOVE topline data were expected in Q3 2020, subject to delays.
- The FDA EUA permits specified U.S. COVID-19 use only while the authorization remains effective; CytoSorb is not FDA-cleared or approved for that indication. The filing also reports FDA Breakthrough Device designation for ticagrelor removal, which is not a marketing approval.
- Foreign exchange affected results: the company reported a Q2 foreign-currency transaction gain of $705,000, while first-half product sales were estimated to have been reduced by about $393,000 from Euro exchange-rate movements.
- CytoSorb sales carry royalty obligations: the company reported Q2 royalty costs of approximately $748,000 under two agreements and first-half costs of approximately $1.394 million. Other risks include reimbursement and market adoption, regulatory approvals and CE-mark renewal under EU medical-device rules, clinical-trial outcomes, manufacturing capacity, dependence on Germany and the Euro, and potential future dilution or financing needs.
- The company reported no significant legal proceedings and no off-balance-sheet arrangements. It repaid a $1.411 million PPP loan in April 2020 after reassessing its finances. A July 2020 U.S. Army award of up to $4.421 million for HemoDefend was disclosed as a subsequent event.
Important facts for investors to verify
- Whether COVID-19-related demand persists, and how much future sales depend on it; compare reported orders and revenue with management’s estimates of pandemic-related sales.
- Whether gross margins recover as production scales and the sales mix changes, and whether manufacturing can meet demand without delays.
- Whether REFRESH 2-AKI, TISORB and other trials resume, enroll on schedule and produce results supporting regulatory or commercial claims; distinguish trial recommendations and early reports from established outcomes.
- Cash use, debt service beginning in November 2020, remaining financing capacity, and the effect of equity issuance on share count and per-share value.
- Regulatory status and duration of the COVID-19 EUA, progress toward U.S. approval for other indications, and continued EU certification and reimbursement access.