During the six months ended June 30, 2014 and 2013, -0- and
198.27 Series B Preferred Shares were converted into -0- and 547,707 shares of Common Stock, respectively. During the six months
ended June 30, 2014 and 2013, no Series A Preferred Shares were converted into shares of Common Stock. For the period from January
22, 1997 (date of inception) to June 30, 2014, 22,784.49 Series B Preferred Shares and 9,558,112 Series A Preferred Shares were
converted into 62,912,304 and 43,728,457 shares of Common Stock, respectively.
Notes to Consolidated Financial Statements
(UNAUDITED)
June 30, 2014
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the requirements of Form 10-Q of the Securities and Exchange Commission (the “Commission”)
and include the results of CytoSorbents Corporation (the “Parent”), CytoSorbents, Inc., its wholly-owned operating
subsidiary (the “Subsidiary”), and CytoSorbents Europe GmbH, its wholly-owned European subsidiary (the “European
Subsidiary”), collectively referred to as “the Company.”
Accordingly, certain information and footnote disclosures required
in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have
been condensed or omitted. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's
accounts for the year ended December 31, 2014. In the opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary
for the fair presentation of the Company's consolidated financial position as of June 30, 2014 and the results of its operations
and cash flows for the six and three month periods ended June 30, 2014 and 2013, and for the period January 22, 1997 (date of inception)
to June 30, 2014. Results for the six months ended June 30, 2014 and 2013 are not necessarily indicative of results that may be
expected for the entire year. The unaudited interim consolidated financial statements should be read in conjunction with the audited
financial statements of the Company and the notes thereto as of and for the year ended December 31, 2013 as included in the Company’s
Form 10-K filed with the Commission on March 31, 2014.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course
of business. The Company has experienced negative cash flows from operations since inception and has a deficit accumulated during
the development stage at June 30, 2014 of $111,123,221. The Company is not currently generating significant revenue and is dependent
on the proceeds of present and future financings to fund its research, development and commercialization program. The Company currently
has adequate funding for more than the next twelve months of operations; however, it may have to raise additional capital to fund
future operations. Although the Company has historically been successful in raising additional capital through equity and debt
financings, there can be no assurance that the Company will be successful in raising additional capital in the future or that it
will be on favorable terms. Furthermore, if the Company is successful in raising the additional financing, there can be no assurance
that the amount will be sufficient to complete the Company's plans. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. These consolidated financial statements do not include any adjustments related to the outcome
of this uncertainty.
The Company is a development stage company and has generated
limited revenues. Since inception, the Company's expenses relate primarily to research and development, organizational activities,
clinical manufacturing, regulatory compliance and operational strategic planning. Although the Company has made advances on these
matters, there can be no assurance that the Company will continue to be successful regarding these issues, nor can there be any
assurance that the Company will successfully implement its long-term strategic plans.
|
2.
|
PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
Nature of Business
The Company, through its subsidiary CytoSorbents, Inc., is engaged
in the research, development and commercialization of medical devices with its platform blood purification technology incorporating
a proprietary adsorbent polymer technology. The Company, through CytoSorbents Europe, GmbH, its European subsidiary, has commenced
initial sales and marketing related operations for the CytoSorb
®
device in the European Union. The Company is focused
on developing this technology for multiple applications in the medical field, specifically to provide improved blood purification
for the treatment of acute and chronic health complications associated with blood toxicity. In March 2011, the Company received
CE Mark approval for its CytoSorb
®
device. As of June 30, 2014, the Company had only limited commercial operations and,
accordingly, is in the development stage. The Company has yet to generate any significant revenue and has no assurance of future
revenue.
The technology is based upon biocompatible, highly porous polymer
sorbent beads that are capable of extracting unwanted substances from blood and other bodily fluids. The technology is protected
by 32 issued U.S. patents with multiple patent applications pending both in the U.S. and internationally. Our intellectual property
consists of composition of matter, materials, methods of production systems incorporating the technology, and multiple medical
uses with expiration dates ranging from 3 to 12 years.
Principles of Consolidation
The consolidated financial statements include the accounts of
CytoSorbents Corporation, the Parent, and its wholly-owned subsidiaries, CytoSorbents, Inc. and CytoSorbents Europe GmbH. All significant
intercompany transactions and balances have been eliminated in consolidation.
Development Stage Corporation
The accompanying consolidated financial statements have been
prepared in accordance with the provisions of accounting and reporting by development stage enterprises.
Cash and Cash Equivalents
The Company considers
all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Grants and Accounts Receivable
Grants receivable represent amounts due from U.S. government
agencies. Accounts receivable are unsecured, non-interest bearing customer obligations due under normal trade terms. The Company
sells its devices to various hospitals and distributors. The Company performs ongoing credit evaluations of customers’ financial
condition. Management reviews accounts receivable periodically to determine collectability. Balances that are determined to be
uncollectible are written off to the allowance for doubtful accounts. The allowance for doubtful accounts contains a general accrual
for estimated bad debts and had a balance of $1,801 at June 30, 2014 and $-0- at December 31, 2013.
Short-Term Investments
Short-term investments include certificates of deposit with
original maturities of greater than three months. The cost of the certificates of deposit approximates fair value.
Inventories
Inventories are valued at the lower of cost or market. At June
30, 2014 and December 31, 2013, the Company’s inventory was comprised of finished goods, which amounted to approximately
$115,000 and $107,000, respectively; work in process which amounted to approximately $170,000 and $101,000, respectively; and raw
materials, which amounted to approximately $18,000 and $38,000, respectively. Devices used in clinical trials or for research and
development purposes are removed from inventory and charged to research and development expenses at the time of their use.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation of property and equipment is provided for by the straight-line method over the estimated useful lives
of the related assets. Leasehold improvements are amortized over the lesser of their economic useful lives or the term of the related
leases. Gains and losses on depreciable assets retired or sold are recognized in the statements of operations in the year of disposal.
Repairs and maintenance expenditures are expensed as incurred.
Patents
Legal costs incurred to establish and successfully defend patents
are capitalized. When patents are issued, capitalized costs are amortized on the straight-line method over the related patent term.
In the event a patent is abandoned, the net book value of the patent is written off.
Impairment or Disposal of Long-Lived Assets
The Company assesses the impairment of patents and other long-lived
assets under accounting standards for the impairment or disposal of long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment
loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based
on the difference between the carrying amount and fair value.
Warrant Liability
The Company recognizes the fair value of the warrants as of
the date of the warrant grant using the binomial lattice valuation model. At each subsequent reporting date, the Company again
measures the fair value of the warrants, and records a change to the warrant liability as appropriate, and the change is reported
in the statement of operations.
Revenue Recognition
Product Sales
: Revenues from sales of products
are recognized at the time of delivery when title and risk of loss passes to the customer. Recognition of revenue also requires
reasonable assurance of collection of sales proceeds and completion of all performance obligations.
Grant Revenue
:
Revenue from grant income
is based on contractual agreements. Certain agreements provide for reimbursement of costs, while other agreements provide for reimbursement
of costs and an overhead margin. Revenues are recognized when milestones have been achieved and revenues have been earned. Costs
are recorded as incurred. Costs subject to reimbursement by these grants have been reflected as costs of revenue.
Deferred Revenue
:
The Company defers
revenue that has been received but not yet earned on government contracts and product sales. This revenue will be recognized as
income in the period in which the revenue is earned. All deferred revenue is expected to be earned within a one year of the balance
sheet date.
Research and Development
All research and development costs, payments to laboratories
and research consultants are expensed when incurred.
Advertising Expenses
Advertising costs are charged to activities when incurred. Advertising
expenses amounted to approximately $63,000 and $10,000 for the six months ended June 30, 2014 and 2013, respectively, and is included
in selling, general, and administrative expenses on the consolidated statement of operations.
Income Taxes
Income taxes are accounted for under the asset and liability
method prescribed by accounting standards for accounting for income taxes. Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect
the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is
provided if it is more likely than not that some or all of the deferred tax asset will not be realized. Under Section 382 of the
Internal Revenue Code, the net operating losses generated prior to the reverse merger may be limited due to the change in ownership.
Additionally, net operating losses generated subsequent to the reverse merger may be limited in the event of changes in ownership.
The Company follows accounting standards associated with uncertain
tax positions. The Company had no unrecognized tax benefits at June 30, 2014 or December 31, 2013. The Company files tax returns
in the U.S. federal and state jurisdictions. The Company currently has no open years prior to December 31, 2010 and has no income
tax related penalties or interest for the periods presented in these financial statements.
The Company’s European subsidiary, CytoSorbents Europe
GmbH annually files a corporate tax return, VAT return and a trade tax return in Germany.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ
from these estimates. Significant estimates in these financials are the valuation of options granted, the valuation of preferred
shares issued as stock dividends, valuation methods used to determine the fair value of the warrant liability, and valuation methods
used in determining any debt discount associated with convertible securities.
Concentration of Credit Risk
The Company maintains cash balances, at times, with financial
institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Management monitors the soundness of these
institutions in an effort to minimize its collection risk of these balances.
As of June 30, 2014, one U.S. government agency, two distributors,
and two hospitals accounted for approximately 74.2% of outstanding grant and accounts receivable. At December 31, 2013, one U.S.
government agency accounted for approximately 66% of outstanding accounts receivable. For the six months ended June 30, 2014, approximately
11.5% of revenues were from one U.S. government agency, and no other agency, distributor, or direct customer represented more than
10% of the Company’s revenue. For the six months ended June 30, 2013, approximately 44.9% of revenue was from one U.S. government
grant agency.
Financial Instruments
The carrying values of cash and cash equivalents, short-term
investments, accounts payable, notes payable, and other debt obligations approximate their fair values due to their short-term
nature.
Net Loss Per Common Share
Basic EPS is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to
all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (See Note 7).
Stock-Based Compensation
The Company accounts for its stock-based compensation under
the recognition requirements of accounting standards for accounting for stock-based compensation, for employees and directors whereby
each option granted is valued at fair market value on the date of grant. Under these accounting standards, the fair value of each
option is estimated on the date of grant using the Black-Scholes option pricing model.
The Company also follows the guidance of accounting standards
for accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods
or services for equity instruments issued to consultants.
Effects of Recent Accounting Pronouncements
Accounting Standards Update (“ASU”) 2014-10, which for public business entities will be effective
for annual reporting periods beginning after December 15, 2014 and interim periods therein, removes the definition of a development
stage entity from the Accounting Standards Codification, thereby eliminating the financial reporting distinction between development
stage entities from U.S. GAAP. Specifically eliminated are the requirements to (1) present inception-to-date information in the
statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity,
(3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year
in which the entity is no longer a development state entity that in prior years it had been in the development stage. The Company
will adopt ASU 2014-10 no later than with the December 31, 2014 financial statements.
In May 2014, the Financial Account Standards Board (“FASB”)
issued ASU 2014-09, “Revenue with Contracts from Customers.” ASU 2014-09 supercedes the current revenue recognition
guidance, including industry-specific guidance. The ASU introduces a five-step model to achieve its core principal of the entity
recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods and services. The updated guidance is effective for interim and annual
periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of
the updated guidance, but the Company does not believe that the adoption of ASU 2014-09 will have a significant impact on its consolidated
financial statements.
Shipping and Handling Costs
The costs of shipping product to customers and distributors
is typically borne by the customer or distributor. The Company records other shipping and handling costs in Research and Development.
Total freight costs amounted to approximately $48,000 and $13,000 for the six months ended June 30, 2014 and June 30, 2013, respectively.
On June 21, 2013 (the “June Closing
Date”), the Company issued convertible notes to certain accredited investors (the “June Purchasers”), whereby
the Company agreed to sell and the June Purchasers agreed to purchase the convertible notes in the aggregate principal amount of
$1,098,000 (the “June Notes”). The June Notes were to mature one (1) year from the June Closing Date (the “June
Maturity Date”), bear interest at an annual rate of 8%, and automatically convert into shares of the Company’s common
stock, $0.001 par value per share (the “Common Stock”), at a conversion price of $0.125 at maturity or earlier at the
option of the June Purchaser. In connection with the issuance of the June Notes, the Company issued warrants to purchase shares
of Common Stock, providing 50% coverage, exercisable at $0.15 per share (the “June Warrants”). On June 21, 2014, the
June Notes were converted into 9,486,720 shares of Common Stock, consisting of 8,784,000 shares related to the principal value
of the June Notes and 702,720 shares for payment of interest earned on the June Notes.
On September 30, 2013 (the “September
Closing Date”), the Company issued convertible notes to certain accredited investors (the “September Purchasers”),
whereby the Company agreed to sell and the September Purchasers agreed to purchase the convertible notes in the aggregate principal
amount of $745,000 (the “September Notes”). The September Notes mature one (1) year from the September Closing Date
(the “September Maturity Date”), bear interest at an annual rate of 8%, and automatically convert into shares of Common
Stock, at a conversion price of $0.10 at maturity or earlier at the option of the September Purchaser. Full conversion of the principal
value of the September Notes would result in the issuance of 7,450,000 shares of Common Stock. In connection with the issuance
of the September Notes, the Company issued warrants to purchase shares of Common Stock, providing 50% coverage, exercisable at
$0.125 per share (the “September Warrants”).
At June 30, 2014, the Company had convertible
notes (“Convertible Notes”) totaling approximately $745,000 net of debt discount of approximately $36,000. The Convertible
Notes stipulate that in the event at any time during the term of the Convertible Note, the Company closes on any debt or equity
financing in an aggregate amount greater than or equal to $750,000, the noteholders will have the right to exchange the note for
the equivalent dollar amount of securities sold in the new financing. The Company is not required to repay the Convertible Notes
in cash, and there are no registration rights on the common stock underlying the Convertible Notes or Warrants.
The Company allocates
the proceeds associated with the issuance of convertible notes based on the relative fair value of the convertible notes and warrants.
Additionally, the Company evaluates if the embedded conversion option results in a beneficial conversion feature by comparing the
relative fair value allocated to the convertible notes to the market value of the underlying Common Stock subject to conversion.
In connection with the convertible note issuances during the years ended December 31, 2013, the Company received proceeds of $1,843,000.
The Company allocated the proceeds in accordance with FASB Codification Topic 470 based on the related fair value as follows: $1,511,883
was allocated to the convertible notes and $171,012 to the warrants. Additionally, the embedded conversion feature resulted in
a beneficial conversion feature in the amount of $160,105. The value assigned to the warrants resulting from the relative fair
value calculation as well as the value of the beneficial conversion feature is recorded as a debt discount and is presented in
the consolidated balance sheets. The debt discount is being amortized to interest expense over the term of the convertible notes.
During the six months ended June 30, 2014 and 2013, debt discount of approximately $163,000 and $181,000, respectively, was charged
to interest expense.
|
4.
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
On
March 7, 2014, the Company entered into subscription agreements with certain investors providing for the issuance and sale by
the Company (the “Offering”) of 40,800,000 units (the “Units”) for an aggregate purchase price of
$10,200,000. Each Unit is comprised of one share of Common Stock, priced at $0.25 per share, and a warrant to purchase
0.50 shares of Common Stock at an exercise price of $0.3125 per share. The warrants are convertible into a total of 20,400,000
shares of Common Stock. Each warrant is
exercisable for a period of five (5) years beginning on March 11, 2014, the
date of the closing of the sale of these securities, and are only exercisable for cash and are only exercisable if there is an
effective registration statement registering the warrants and shares underlying the warrants. The Common Stock underlying these
warrants were registered in the registration statement on Form S-1 (File No. 333-193053) which was declared effective by the Securities
and Exchange Commission on February 14, 2014 and an additional registration statement on Form S-1 (File No. 333-194394).
The Company received
net proceeds from the Offering of approximately $9,451,000 million. The net proceeds received by the Company from the Offering
is being used for building additional sales and marketing infrastructure, clinical studies, working capital and general corporate
purposes.
The Company conducted
the Offering pursuant to a registration statement on Form S-1 (File No. 333-193053) which was declared effective by the Securities
and Exchange Commission on February 14, 2014 and an additional registration statement on Form S-1 (File No. 333-194394) to register
an additional amount of securities having a proposed maximum aggregate offering price of $2,762,500, which increased the total
registered amount to $16,575,000 assuming the full cash exercise of the warrants for cash. The Company filed a final prospectus
on March 7, 2014, disclosing the final terms of the Offering.
In connection
with the Offering, on March 7, 2014, the Company entered into a placement agency agreement with Brean Capital, LLC pursuant to
which the placement agent agreed to act as the Company’s exclusive placement agent for the Offering and sale of the Units.
In connection
with the successful completion of the Offering, the placement agent received an aggregate cash placement agent fee equal to 6%
of the gross proceeds of the sale of the Units in the Offering, or $612,000, and a warrant to purchase 1,224,000 shares of Common
Stock at an exercise price of $0.30 per share exercisable for five years from the effective date of the placement agency agreement.
The placement agent warrant contains piggy-back registration rights which expire on the fifth anniversary of the effective date
of the registration statement. The Company has also agreed to reimburse the placement agent for actual out-of-pocket expenses up
to a maximum of 2% of gross proceeds from the transaction. The Company also granted the placement agent a right of first refusal
to participate in any subsequent offering or placement of its securities that takes place within twelve months following the effective
date of the registration statement.
During the six months ended June 30, 2014, the Company recorded
non-cash stock dividends totaling $2,488,761 in connection with the issuance of 4,016.46 shares of Series B Preferred Stock and
89,087 shares of Series A Preferred Stock as stock dividends to its preferred shareholders.
During the six months ended June 30, 2014, the Company incurred
stock-based compensation expense due to the issuance of stock options, and amortization of unvested stock options. The aggregate
expense for the six months ended June 30, 2014 is approximately $105,000, of which approximately $93,000 was recorded in general
and administrative expenses and approximately $12,000 was recorded as research and development expenses.
The summary of the stock option activity for the six months
ended June 30, 2014 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Average
Remaining
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2014
|
|
|
47,923,642
|
|
|
$
|
0.20
|
|
|
|
5.1
|
|
Granted
|
|
|
15,775,000
|
|
|
$
|
0.20
|
|
|
|
9.4
|
|
Cancelled
|
|
|
(5,395,250
|
)
|
|
$
|
0.12
|
|
|
|
8.0
|
|
Exercised
|
|
|
(1,616,300
|
)
|
|
$
|
0.04
|
|
|
|
3.8
|
|
Expired
|
|
|
(51,809
|
)
|
|
$
|
0.83
|
|
|
|
—
|
|
Outstanding June 30, 2014
|
|
|
56,635,283
|
|
|
$
|
0.21
|
|
|
|
6.5
|
|
The fair value of each stock option was estimated using the
Black-Scholes pricing model which takes into account as of the grant date the exercise price (ranging from $0.195 to $0.274 per
share) and expected life of the stock option (ranging from 5-10 years), the current price of the underlying stock and its expected
volatility (approximately 28%), expected dividends on the stock (0%) and the risk free interest rate (0.8 to 1.9%) for the term
of the stock option.
At June 30, 2014, the aggregate intrinsic value of options outstanding
and currently exercisable amounted to approximately $4,268,000.
The summary of the status of the Company’s non-vested
options for the six months ended June 30, 2014 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested, January 1, 2014
|
|
|
13,418,000
|
|
|
$
|
0.034
|
|
Granted
|
|
|
15,775,000
|
|
|
$
|
0.058
|
|
Cancelled
|
|
|
(4,561,250
|
)
|
|
$
|
0.031
|
|
Vested
|
|
|
(2,287,250
|
)
|
|
$
|
0.044
|
|
|
|
|
|
|
|
|
|
|
Non-vested, June 30, 2014
|
|
|
22,344,500
|
|
|
$
|
0.051
|
|
As of June 30, 2014, the Company had approximately $196,000
of total unrecognized compensation cost related to stock options. In March 2014, the Board of Directors set aside a pool of 14,010,000
options to be awarded to the Company’s employees if the Company achieves certain specific, predetermined milestones.
The
grant date fair value of these unvested options amounted to approximately $791,000. Due to the uncertainty over whether these options
will vest, which only occurs if the Company meets the predetermined milestones, no charge for these options has been recorded in
the consolidated statements of operations for the six months ended June 30, 2014. The Company will evaluate on an ongoing basis
the probability and likelihood of any of these performance milestones being achieved and will accrue charges as it becomes likely
that they will be achieved
.
As of June 30, 2014, the Company has the following warrants
to purchase Common Stock outstanding:
Number of Shares
|
|
|
Warrant
Exercise
|
|
|
Warrant
|
To be Purchased
|
|
|
Price per Share
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
397,825
|
|
|
$
|
0.0362
|
|
|
September 30, 2014
|
|
1,750,000
|
|
|
$
|
0.1000
|
|
|
August 16, 2015
|
|
1,600,000
|
|
|
$
|
0.1250
|
|
|
August 16, 2015
|
|
1,333,333
|
|
|
$
|
0.1500
|
|
|
August 16, 2015
|
|
490,000
|
|
|
$
|
0.1000
|
|
|
October 22, 2015
|
|
196,000
|
|
|
$
|
0.1250
|
|
|
October 22, 2015
|
|
163,333
|
|
|
$
|
0.1500
|
|
|
October 22, 2015
|
|
500,000
|
|
|
$
|
0.1000
|
|
|
November 19, 2015
|
|
200,000
|
|
|
$
|
0.1250
|
|
|
November 19, 2015
|
|
166,667
|
|
|
$
|
0.1500
|
|
|
November 19, 2015
|
|
700,000
|
|
|
$
|
0.1000
|
|
|
February 15, 2016
|
|
1,540,000
|
|
|
$
|
0.1250
|
|
|
February 15, 2016
|
|
1,416,666
|
|
|
$
|
0.1500
|
|
|
February 15, 2016
|
|
240,125
|
|
|
$
|
1.2500
|
|
|
October 24, 2016
|
|
1,166,667
|
|
|
$
|
0.1750
|
|
|
February 10, 2017
|
|
4,392,000
|
|
|
$
|
0.1500
|
|
|
June 21, 2018
|
|
3,725,000
|
|
|
$
|
0.1250
|
|
|
September 30, 2018
|
|
20,400,000
|
|
|
$
|
0.3125
|
|
|
March 11, 2019
|
|
1,224,000
|
|
|
$
|
0.3000
|
|
|
March 11, 2019
|
|
41,601,616
|
|
|
|
|
|
|
|
In addition, during the six months ended June 30, 2014, the
Company issued 750,000 shares of Common Stock to a vendor for consulting services, 1,616,300 options were exercised for 1,601,070
shares of Common Stock, and warrants to purchase 6,460,000 shares of Common Stock were exercised for 3,958,716 shares of Common
Stock. On June 21, 2014, $1,098,000 in convertible notes matured. In accordance with the terms of the notes, the note holders
were issued 9,486,720 shares of Common Stock which included 8,784,000 shares of Common Stock for payment of the convertible notes
and 702,720 shares representing payment of interest accrued on the convertible notes.
In December 2011, the Company terminated
a purchase agreement with Lincoln Park Capital Fund, LLC (“LPC”) and executed a new purchase agreement (the “New
Purchase Agreement”), and a registration rights agreement with LPC. Under the New Purchase Agreement, LPC is obligated, under
certain conditions, to purchase from the Company up to $8.5 million of our Common Stock, from time to time, over a thirty-two (32)
month period.
The Company has the right, but not the obligation, to direct
LPC to purchase up to $8,500,000 of its Common Stock in amounts up to $50,000 as often as every two business days under certain
conditions. The Company can also accelerate the amount of its Common Stock to be purchased under certain circumstances. No sales
of Common Stock may occur at a purchase price below $0.10 per share or without a registration statement having been declared effective.
The purchase price of the Common Stock will be based on the market prices of our Common Stock at the time of sale as computed under
the New Purchase Agreement without any fixed discount. The Company may at any time at its sole discretion terminate the New Purchase
Agreement without fee, penalty or cost upon one business days’ notice.
There was no up-front commitment fee paid to LPC for entering
into the New Purchase Agreement. In the event the Company directs LPC to purchase up to $8,500,000 of its Common Stock, the Company
is obligated to issue up to an additional 1,634,615 commitment fee shares of Common Stock on a pro rata basis. LPC may not assign
any of its rights or obligations under the New Purchase Agreement.
During the six months ended June 30, 2014 the Company received
approximately $300,000 as proceeds from the sale of 2,425,709 shares of Common Stock per the terms of the New Purchase Agreement
with LPC at an average price of approximately $0.124 per share of Common Stock. Per the terms of the New Purchase Agreement, the
Company also issued an additional 57,690 shares of Common Stock as additional commitment fee shares.
As of June 30, 2014, $2,400,000 remained available under the
New Purchase Agreement with LPC. The Company has not sold any shares of its Common Stock under the New Purchase Agreement since
January 17, 2014. The New Purchase Agreement terminates in August 2014.
In connection with its March 11, 2014 financing, the Company
issued warrants to purchase 20,400,000 shares of Common Stock. The Company recognizes these warrants as liabilities at their fair
value on the date of grant, then measures the fair value of the warrants on each reporting date, and records a change to the warrant
liability as appropriate. The warrants have certain pricing provisions which apply if the Company sells or issues Common Stock
or Common Stock equivalents at a price that is less than the exercise price of the warrants, over the life of the warrants, excluding
certain exempt issuances.
The Company recognized an initial warrant liability for the
warrants issued in connection with the Offering completed in March 2014. The initial warrant liability recognized on the related
warrants totaled $862,920, which was based on the March 11, 2014 five-day weighted average closing price per share of our Common
Stock of $0.24. On June 30, 2014, the five day weighted average closing price per share of Common Stock was $0.243. Due to the
fluctuations in the market value of our common stock from March 11, 2014 through June 30, 2014, we recorded a change in the fair
value of the warrant liability of $26,520 during the six months ended June 30, 2014.
The assumptions used in connection with the valuation of warrants
issued utilizing the binomial lattice valuation model were as follows:
|
|
June 30,
2014
|
|
|
Initial
Measurement
March 11,
2014
|
|
|
|
|
|
|
|
|
Number of shares underlying the warrants
|
|
|
20,400,000
|
|
|
|
20,400,000
|
|
Exercise price
|
|
$
|
0.3125
|
|
|
$
|
0.3125
|
|
Volatility
|
|
|
28.3
|
%
|
|
|
28.3
|
%
|
Risk-free interest rate
|
|
|
1.62
|
%
|
|
|
1.62
|
%
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
Expected warrant life (years)
|
|
|
4.70
|
|
|
|
5
|
|
Stock Price
|
|
$
|
0.242
|
|
|
$
|
0.240
|
|
|
6.
|
COMMITMENTS AND CONTINGENCIES
|
Employment Agreements
The Company is currently in the process of renewing employment
agreements with certain key executives.
Litigation
We are from time to time subject to claims and litigation arising
out of the ordinary course of business. We intend to defend vigorously against any future claims and litigation. We are not currently
a party to any legal proceedings.
Royalty Agreements
Pursuant to an agreement dated August 11, 2003, an existing
investor agreed to make a $4 million equity investment in the Company. These amounts were received by the Company in 2003. In connection
with this agreement, the Company granted the investor a future royalty of 3% on all gross revenues received by the Company from
the sale of its CytoSorb
®
device. For the six months ended June 30, 2014 the Company has recorded royalty costs of approximately
$38,000.
License Agreements
In September 2006, the Company entered into a license agreement
which provides the Company the exclusive right to use its patented technology and proprietary know how relating to adsorbent polymers
for a period of 18 years. Under the terms of the agreement, the Company has agreed to pay royalties of 2.5% to 5% on the sale of
certain of its products if and when those products are sold commercially for a term not greater than 18 years commencing with the
first sale of such product. For the six months ended June 30, 2014 per the terms of the license agreement the Company has recorded
royalty costs of approximately $30,000.
Warrant Agreement
As inducement to invest additional funds in the private placement
of Series B Preferred Stock, additional consideration was granted to the participants of the Series B Preferred Stock offering
in the event that litigation is commenced against the Company prior to June 30, 2018, claiming patent infringement on certain of
the Company’s issued patents. In the event this litigation arises the Company may be required to issue warrants to purchase
in the aggregate up to a maximum of ten million shares of Common Stock subject to certain adjustments. Through June 30, 2014 no
such litigation has arisen and due to the deemed low probability of this potential outcome; the Company has not booked a contingent
liability for this agreement.
Basic loss per share and diluted loss per share for the three
months ended June 30, 2014 and 2013 have been computed by dividing the net loss for each respective period by the weighted average
number of shares outstanding during that period.
All outstanding warrants and options representing approximately
98,236,899 and 75,510,523 incremental shares at June 30, 2014 and 2013, respectively, as well as shares issuable upon conversion
of Series A and Series B Preferred Stock representing approximately 231,866,000 and 210,634,000 incremental shares at June 30,
2014 and 2013, respectively, as well as potential shares issuable upon Note conversion into Common Stock representing approximately
7,450,000 and 8,784,000 incremental shares at June 30, 2014 and 2013, respectively, have been excluded from the computation of
diluted loss per share as they are anti-dilutive.
In August 2014, the Company announced exclusive
distribution of CytoSorb® in Taiwan with Hemoscien Corporation.