CytoSorbents Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Amounts are in U.S. dollars.
Business context
CytoSorbents develops and commercializes blood-purification devices based on its polymer technology. Its CytoSorb device had CE Mark approval and was marketed in 32 countries; the company also had development-stage products and government-funded research programs. In March 2016, it formed a Swiss subsidiary, expected to begin marketing and direct sales in Q2 2016.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $1.81 million | $0.72 million; up 150% |
| Product sales | $1.60 million | $0.70 million; up 127% |
| Grant income | $0.21 million | $0.02 million |
| Gross margin | $0.99 million; 54.7% of total revenue | $0.42 million; 57.9% of total revenue. Product gross margin was 62% versus 59%. |
| Operating expenses | $3.08 million | $2.68 million |
| Operating loss | $2.09 million | $2.26 million |
| Net loss | $1.84 million; $0.08 per share | $4.72 million; $0.19 per share |
| Operating cash flow | $(1.26) million | $(1.96) million |
| Cash and short-term investments | $6.03 million at March 31 | Cash alone was $5.32 million at December 31, 2015; short-term investments were $2.19 million. |
| Current assets / current liabilities | $8.04 million / $3.25 million | At December 31, 2015: $9.86 million / $3.04 million |
Cash and cash equivalents fell by $1.78 million during the quarter. The balance sheet shows no debt balance. The company reported an accumulated deficit of $134.36 million and stockholders’ equity of $6.26 million at March 31, 2016.
Material changes and unusual items
- Sales growth reflected new and repeat direct customers and higher distributor sales. Management attributed higher grant revenue to new grants and milestones achieved.
- SG&A rose $455,000, mainly from staffing and commissions, royalties, and sales and marketing activity. R&D expense fell $95,000, partly because more labor and other costs were charged to reimbursable grant work.
- Q1 2016 net loss included a $232,000 foreign-currency transaction gain and an $18,000 gain from revaluing warrant liabilities. In Q1 2015, the corresponding items were a $449,000 foreign-currency loss and a $2.01 million warrant-liability charge. These non-operating items materially affect the year-over-year net-loss comparison; operating loss is a more direct comparison of operating performance.
- Revenue concentration decreased: no customer or agency represented more than 10% of Q1 2016 revenue, while three distributors accounted for about 42% in Q1 2015. At March 31, 2016, one distributor and one government agency represented approximately 30% of receivables.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected continuing operating losses for the foreseeable future and stated that the timing of profitability was uncertain.
- Management said available cash was expected to fund operations into Q4 2016, but also stated the company did not believe it had adequate funding for more than the next 12 months and would need to raise additional capital. It may need funding for pivotal U.S. and/or German trials, commercialization, clinical studies, manufacturing expansion, and working capital. The $25 million at-the-market facility was available; no shares were sold under it during Q1.
- The filing and the prior-year auditor’s report cite substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the outcome of that uncertainty.
- As of April 30, 2016, the U.S. REFRESH I cardiac-surgery study was approximately 60% enrolled and expected to finish by mid-2016. The company also reported more than 55 investigator-initiated studies planned, with 12 at an advanced stage, 13 ready to enroll, and four completed.
- Key risks include dependence on additional financing, clinical and regulatory outcomes, market adoption and reimbursement, manufacturing scale-up, intellectual-property protection and disputes, foreign-exchange exposure, and potential dilution from future share sales. The company reported no current legal proceedings and no off-balance-sheet arrangements.
- The headquarters and manufacturing lease was extended through May 31, 2017; monthly rent was to increase to $23,950 effective June 1, 2016.
Most important facts for investors to verify
- Whether cash burn and available financing support operations and planned clinical programs, given management’s runway statements and going-concern warning.
- Whether sales growth continues and product gross margin holds as commercial volumes, markets, and distribution channels expand.
- REFRESH I completion and results, and the regulatory evidence required for U.S. approval and other potential indications.
- Actual milestones, timing, and funding received under government grants, and whether additional capital is raised on acceptable terms.
- Potential dilution and warrant-liability effects, as well as foreign-currency movements that can materially affect reported results.