Item 1. Financial
Statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED BALANCE
SHEETS
|
|
March
31,
|
|
|
|
|
|
|
2020
|
|
|
December
31,
|
|
|
|
(Unaudited)
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
26,389,021
|
|
|
$
|
12,232,418
|
|
Grants
and accounts receivable, net of allowance for doubtful accounts of $149,841 at March 31, 2020 and $145,313 at December
31, 2019
|
|
|
5,395,510
|
|
|
|
4,467,087
|
|
Inventories
|
|
|
1,967,174
|
|
|
|
2,113,897
|
|
Prepaid
expenses and other current assets
|
|
|
3,777,526
|
|
|
|
2,088,127
|
|
Total
current assets
|
|
|
37,529,231
|
|
|
|
20,901,529
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,993,911
|
|
|
|
1,925,325
|
|
Right
of use asset
|
|
|
970,182
|
|
|
|
1,070,762
|
|
Other
assets
|
|
|
3,733,172
|
|
|
|
3,484,894
|
|
Total
Assets
|
|
$
|
44,226,496
|
|
|
$
|
27,382,510
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,770,440
|
|
|
$
|
2,039,222
|
|
Current
maturities of long-term debt
|
|
|
4,166,667
|
|
|
|
1,666,666
|
|
Lease
liability – current portion
|
|
|
442,865
|
|
|
|
428,083
|
|
Accrued
expenses and other current liabilities
|
|
|
5,084,308
|
|
|
|
5,802,296
|
|
Total
current liabilities
|
|
|
11,464,280
|
|
|
|
9,936,267
|
|
Long-term
debt, net of current maturities and debt issuance costs
|
|
|
10,921,389
|
|
|
|
13,385,522
|
|
Lease
liability, net of current portion
|
|
|
527,317
|
|
|
|
642,679
|
|
Total
Liabilities
|
|
|
22,912,986
|
|
|
|
23,964,468
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred Stock,
Par Value $0.001, 5,000,000 shares authorized; -0- shares issued and outstanding at March 31, 2020 and December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
Common
Stock, Par Value $0.001, 100,000,000 shares authorized; 36,130,355 and 32,616,107 shares issued and outstanding at March 31,
2020 and December 31, 2019, respectively
|
|
|
36,130
|
|
|
|
32,616
|
|
Additional
paid-in capital
|
|
|
212,383,812
|
|
|
|
191,648,907
|
|
Accumulated
other comprehensive income
|
|
|
1,135,806
|
|
|
|
525,978
|
|
Accumulated
deficit
|
|
|
(192,242,238
|
)
|
|
|
(188,789,459
|
)
|
Total
Stockholders' Equity
|
|
|
21,313,510
|
|
|
|
3,418,042
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
44,226,496
|
|
|
$
|
27,382,510
|
|
See accompanying notes to
consolidated financial statements.
CYTOSORBENTS
CORPORATION
CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
CytoSorb
sales
|
|
$
|
8,155,969
|
|
|
$
|
4,509,779
|
|
Other
sales
|
|
|
—
|
|
|
|
66,800
|
|
Total
product sales
|
|
|
8,155,969
|
|
|
|
4,576,579
|
|
Grant
income
|
|
|
551,341
|
|
|
|
615,050
|
|
Total revenue
|
|
|
8,707,310
|
|
|
|
5,191,629
|
|
Cost of revenue
|
|
|
2,384,842
|
|
|
|
1,738,589
|
|
Gross margin
|
|
|
6,322,468
|
|
|
|
3,453,040
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,965,286
|
|
|
|
2,418,633
|
|
Legal,
financial and other consulting
|
|
|
519,002
|
|
|
|
561,516
|
|
Selling,
general and administrative
|
|
|
6,316,934
|
|
|
|
4,758,084
|
|
Total
expenses
|
|
|
8,801,222
|
|
|
|
7,738,233
|
|
Loss from operations
|
|
|
(2,478,754
|
)
|
|
|
(4,285,193
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(305,537
|
)
|
|
|
(205,179
|
)
|
Loss
on foreign currency transactions
|
|
|
(668,488
|
)
|
|
|
(393,455
|
)
|
Total
other expense, net
|
|
|
(974,025
|
)
|
|
|
(598,634
|
)
|
|
|
|
|
|
|
|
|
|
Loss before benefit
from income taxes
|
|
|
(3,452,779
|
)
|
|
|
(4,883,827
|
)
|
|
|
|
|
|
|
|
|
|
Benefit
from income taxes
|
|
|
—
|
|
|
|
—
|
|
Net
loss attributable to common shareholders
|
|
$
|
(3,452,779
|
)
|
|
$
|
(4,883,827
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.15
|
)
|
Weighted average
number of shares of common stock outstanding
|
|
|
33,981,262
|
|
|
|
31,931,215
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,452,779
|
)
|
|
$
|
(4,883,827
|
)
|
Other comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
Currency
translation adjustment
|
|
|
609,828
|
|
|
|
306,287
|
|
Comprehensive
loss
|
|
$
|
(2,842,951
|
)
|
|
$
|
(4,577,540
|
)
|
See accompanying notes to
consolidated financial statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months
ended March 31, 2020 and 2019 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31, 2019
|
|
|
32,616,107
|
|
|
$
|
32,616
|
|
|
$
|
191,648,907
|
|
|
$
|
525,978
|
|
|
$
|
(188,789,459
|
)
|
|
$
|
3,418,042
|
|
Stock-based compensation - employees, consultants and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
729,429
|
|
|
|
—
|
|
|
|
—
|
|
|
|
729,429
|
|
Other comprehensive income: foreign translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609,828
|
|
|
|
—
|
|
|
|
609,828
|
|
Proceeds from exercise of stock options
|
|
|
38,277
|
|
|
|
38
|
|
|
|
138,392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
138,430
|
|
Issuance of restricted stock units
|
|
|
54,734
|
|
|
|
55
|
|
|
|
328,884
|
|
|
|
—
|
|
|
|
—
|
|
|
|
328,939
|
|
Issuance of common stock, net of fees incurred
|
|
|
3,421,237
|
|
|
|
3,421
|
|
|
|
19,538,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,541,621
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,452,779
|
)
|
|
|
(3,452,779
|
)
|
Balance at March 31, 2020
|
|
|
36,130,355
|
|
|
$
|
36,130
|
|
|
$
|
212,383,812
|
|
|
$
|
1,135,806
|
|
|
$
|
(192,242,238
|
)
|
|
$
|
21,313,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
31,774,139
|
|
|
$
|
31,774
|
|
|
$
|
186,138,466
|
|
|
$
|
288,175
|
|
|
$
|
(169,523,815
|
)
|
|
$
|
16,934,600
|
|
Stock-based compensation - employees, consultants and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
227,658
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,658
|
|
Other comprehensive income: foreign translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
306,287
|
|
|
|
—
|
|
|
|
306,287
|
|
Proceeds from exercise of stock options
|
|
|
46,734
|
|
|
|
47
|
|
|
|
236,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236,070
|
|
Cashless exercise of stock options
|
|
|
967
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cashless exercise of warrants
|
|
|
9,029
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of restricted stock units
|
|
|
51,817
|
|
|
|
52
|
|
|
|
425,587
|
|
|
|
—
|
|
|
|
—
|
|
|
|
425,639
|
|
Proceeds from exercise of warrants
|
|
|
360,358
|
|
|
|
361
|
|
|
|
1,768,130
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,768,491
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,883,827
|
)
|
|
|
(4,883,827
|
)
|
Balance at March 31, 2019
|
|
|
32,243,044
|
|
|
$
|
32,243
|
|
|
$
|
188,795,855
|
|
|
$
|
594,462
|
|
|
$
|
(174,407,642
|
)
|
|
$
|
15,014,918
|
|
See accompanying notes
to consolidated financial statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
Three months
|
|
|
Three months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,452,779
|
)
|
|
$
|
(4,883,827
|
)
|
Adjustments to reconcile net
loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Non-cash
compensation
|
|
|
477,732
|
|
|
|
261,747
|
|
Depreciation
and amortization
|
|
|
181,368
|
|
|
|
138,175
|
|
Amortization
of debt costs
|
|
|
35,868
|
|
|
|
23,754
|
|
Bad
debt
|
|
|
7,862
|
|
|
|
14,193
|
|
Stock-based
compensation
|
|
|
729,429
|
|
|
|
227,658
|
|
Foreign
currency transaction loss
|
|
|
668,488
|
|
|
|
393,455
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Grants
and accounts receivable
|
|
|
(1,023,329
|
)
|
|
|
611,668
|
|
Inventories
|
|
|
134,270
|
|
|
|
(395,683
|
)
|
Prepaid
expenses and other current assets
|
|
|
87,107
|
|
|
|
435,423
|
|
Accounts
payable and accrued expenses
|
|
|
(1,055,356
|
)
|
|
|
(1,064,124
|
)
|
Net
cash used by operating activities
|
|
|
(3,209,340
|
)
|
|
|
(4,237,561
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(235,551
|
)
|
|
|
(292,458
|
)
|
Payments
for patent costs
|
|
|
(273,011
|
)
|
|
|
(181,769
|
)
|
Net
cash used by investing activities
|
|
|
(508,562
|
)
|
|
|
(474,227
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Equity
contributions – net of fees incurred
|
|
|
17,743,226
|
|
|
|
—
|
|
Proceeds
from exercise of stock options
|
|
|
138,430
|
|
|
|
236,070
|
|
Proceeds
from exercise of warrants
|
|
|
—
|
|
|
|
1,768,491
|
|
Net cash provided by financing
activities
|
|
|
17,881,656
|
|
|
|
2,004,561
|
|
Effect of
exchange rates on cash
|
|
|
(7,151
|
)
|
|
|
(14,236
|
)
|
Net change in cash and cash
equivalents
|
|
|
14,156,603
|
|
|
|
(2,721,463
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
12,232,418
|
|
|
|
22,368,837
|
|
Cash
and cash equivalents - end of period
|
|
$
|
26,389,021
|
|
|
$
|
19,647,374
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid
during the period for interest
|
|
$
|
318,879
|
|
|
$
|
227,681
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Settlement
of accrued bonuses with restricted stock units
|
|
$
|
328,939
|
|
|
|
425,639
|
|
Equity
contribution proceeds in transit
|
|
$
|
1,798,395
|
|
|
$
|
—
|
|
See accompanying notes to
consolidated financial statements.
CytoSorbents Corporation
Notes to Consolidated
Financial Statements
(UNAUDITED)
March 31, 2020
The interim consolidated
financial statements of CytoSorbents Corporation (the “Company”) have been prepared in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the Company
has made all necessary adjustments, which include normal recurring adjustments, for a fair statement of the Company’s consolidated
financial position and results of operations for the interim periods presented. Certain information and disclosures normally included
in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying
notes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission (the “SEC”) on March 5, 2020. The results for the three months ended March 31,
2020 and 2019 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future
year or period.
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.
As of March 31, 2020, the
Company had an accumulated deficit of $192,242,238, which included net losses of $3,452,779 for the three months ended March 31,
2020 and $4,883,827 for the three months ended March 31, 2019. The Company’s losses have resulted principally from costs
incurred in the research and development of the Company’s polymer technology, selling, general and administrative expenses
and clinical study activities. The Company intends to continue to conduct significant additional research, development, and clinical
study activities which, together with expenses incurred for the establishment of manufacturing arrangements and a marketing and
distribution presence and other selling, general and administrative expenses, are expected to result in continuing net losses
for the foreseeable future. The amount of future losses and when, if ever, the Company will achieve profitability are uncertain.
The Company’s ability to achieve profitability will depend, among other things, on successfully completing the development
of its technology and commercial products, obtaining additional requisite regulatory approvals in markets not covered by the CE
mark previously received for the Company’s CytoSorb product and for potential label extensions of the current CE mark, establishing
manufacturing and sales and marketing arrangements with third parties, and raising sufficient funds to finance the Company’s
activities. No assurance can be given that the Company’s product development efforts will be successful, that the Company’s
current CE mark will enable it to achieve profitability, that additional regulatory approvals in other countries will be obtained,
that any of the Company’s products will be manufactured at a competitive cost and will be of acceptable quality, or that
the Company will be able to achieve profitability or that profitability, if achieved, can be sustained. 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.
|
2.
|
PRINCIPAL
BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Business
The Company is a
leader in critical care immunotherapy using blood purification technology to treat deadly inflammation in critically-ill and cardiac
surgery patients around the world. The Company, through its subsidiary CytoSorbents Medical, Inc. (formerly known as CytoSorbents,
Inc.), is engaged in the research, development and commercialization of medical devices with its blood purification technology
platform which incorporates a proprietary adsorbent, porous polymer technology. The Company, through its wholly owned European
subsidiary, CytoSorbents Europe GmbH, conducts sales and marketing related operations for the CytoSorb device. In March
2016, the Company
formed CytoSorbents Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH. This subsidiary, which began operations
during the second quarter of 2016, provides marketing and direct sales services in Switzerland. In November 2018, the Company
formed CytoSorbents Poland Sp. z.o.o., a wholly-owned subsidiary of CytoSorbents Europe GmbH. This subsidiary, which began operations
during the first quarter of 2019, provides marketing and direct sales services in Poland. CytoSorb, the Company’s flagship
product, was approved in the European Union (“EU”) in March 2011, and is currently being marketed and distributed
in fifty-five countries around the world, as a safe and effective extracorporeal cytokine absorber, designed to reduce the “cytokine
storm” that could otherwise cause massive inflammation, organ failure and death in common critical illnesses such as sepsis,
burn injury, trauma, lung injury, and pancreatitis. In May 2018, the Company received a label extension for CytoSorb covering
use of the device for the removal of bilirubin and myoglobin which allows for the use of the device in the treatment of liver
failure and trauma, respectively. CytoSorb is also being used during and after cardiac surgery to remove inflammatory mediators,
such as cytokines and free hemoglobin, which can lead to post-operative complications, including multiple organ failure.
In April 2020, the Company
announced that the United States Food and Drug Administration (the “FDA”) granted Emergency Use Authorization (“EUA”)
of CytoSorb for use in critically-ill patients infected with COVID-19. Under the EUA, the Company can make CytoSorb available,
through commercial sales, to all hospitals in the United States for use in patients, 18 years of age or older, with confirmed
COVID-19 infection who are admitted to the intensive care unit (ICU) with confirmed or imminent respiratory failure who have early
acute lung injury or acute respiratory distress syndrome (ARDS), severe disease, or life-threatening illness resulting in respiratory
failure, septic shock, and/or multiple organ dysfunction or failure. The EUA will be effective until a declaration is made that
the circumstances justifying the EUA have terminated or until revoked by the FDA.
In
April 2020, we announced that the FDA has granted Breakthrough Designation to CytoSorb for the removal of ticagrelor in a cardiopulmonary
bypass circuit during emergent and urgent cardiothoracic surgery. The Breakthrough Devices Program provides for
more effective treatment of life-threatening or irreversibly debilitating disease or conditions, in this case the need to reverse
the effects of ticagrelor in emergent or urgent cardiac surgery that can otherwise cause a high risk of serious or life-threatening
bleeding. Through Breakthrough Designation, FDA will work with CytoSorbents to expedite the development, assessment, and
regulatory review of CytoSorb for the removal of ticagrelor, while maintaining statutory standards of regulatory approval (e.g.,
510(k), de novo 510(k) or premarket approval) consistent with the Agency’s mission to protect and promote
public health.
The technology is based upon biocompatible,
highly porous polymer sorbent beads that can actively remove toxic substances from blood and other bodily fluids by pore capture
and surface adsorption. The Company has numerous products under development based upon this unique blood purification technology,
which is protected by 21 issued U.S. patents and multiple international patents, with applications pending both in the U.S. and
internationally, including HemoDefend, ContrastSorb, DrugSorb, and others. These patents and patent applications are directed to
various compositions and methods of use related to our blood purification technologies and are expected to expire between 2020
and 2035, absent any patent term extensions. Management believes that any near term expiring patents will not have a significant
impact on our ongoing business.
Stock Market Listing
On December 17, 2014 the
Company’s common stock, par value $0.001 per share, was approved for listing on the Nasdaq Capital Market (“Nasdaq”),
and it began trading on Nasdaq on December 23, 2014 under the symbol “CTSO.” Previously, the Company’s common
stock traded in the over-the-counter-market on the OTC Bulletin Board.
Basis of Consolidation
and Foreign Currency Translation
The consolidated financial
statements include the accounts of CytoSorbents Corporation and its wholly-owned subsidiaries, CytoSorbents Medical, Inc. and
CytoSorbents Europe GmbH. In addition, the consolidated financial statements include CytoSorbents Switzerland GmbH and CytoSorbents
Poland Sp. z.o.o., wholly owned subsidiaries of CytoSorbents Europe GmbH, and CytoSorbents UK Limited, a wholly-owned subsidiary
of CytoSorbents Medical, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Translation gains and losses
resulting from the process of remeasuring into the United States Dollar, the foreign currency financial statements of CytoSorbents
Europe GmbH, for which the Euro is the functional currency, are included in operations. Foreign currency transaction loss included
in net loss amounted to approximately $(668,000) and $(393,000) for the three months ended March 31, 2020 and 2019, respectively.
The Company translates assets and liabilities of CytoSorbents Europe GmbH at the exchange rate in effect at the consolidated balance
sheet date. The Company translates revenue and expenses at the daily average exchange rates. The Company includes accumulated
net translation adjustments in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
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 and are included in Grants and Accounts Receivable.
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 its customers’ financial conditions. 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 amounted to approximately $150,000 and $145,000 at March 31, 2020 and December 31, 2019, respectively.
Inventories
Inventories are valued
at the lower of cost or net realizable value under the first in, first out (FIFO) method. At March 31, 2020 and December 31, 2019,
the Company’s inventory was comprised of finished goods, which amounted to $353,437 and $305,452, respectively; work in
process which amounted to $1,394,156 and $1,523,923, respectively; and raw materials, which amounted to $219,581 and $284,522,
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. Donated devices are removed from inventory and charged to
selling, general and administrative expenses.
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 consolidated
statements of operations and comprehensive loss 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.
Revenue Recognition
Product Sales: Revenues
from sales of products to both direct and distributor/strategic partner customers are recognized at the time when control passes
to the customer, in accordance with the terms of their respective contracts. Recognition of revenue occurs as each performance
obligation is completed.
Grant Income: Revenue
from grant income is based on contractual agreements. Certain agreements provide for reimbursement of costs; other agreements
provide for reimbursement of costs and an overhead margin and certain agreements are performance based, where revenue is earned
based upon the achievement of milestones outlined in the contract. Revenues are recognized when the associated performance obligation
is fulfilled. Costs are recorded as incurred. Costs subject to reimbursement by these grants have been reflected as costs of revenue.
Research and Development
All research and development
costs, payments to laboratories and research consultants are expensed when incurred.
Advertising Expenses
Advertising expenses are
charged to activities when incurred. Advertising expenses amounted to approximately $31,500 and $51,800 for the three months ended
March 31, 2020 and 2019, respectively, and are included in selling, general, and administrative expenses on the consolidated statements
of operations and comprehensive loss.
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. The Company has provided a valuation allowance against all deferred tax assets. Under Section 382 of the
Internal Revenue Code, the net operating losses generated prior to the previously completed 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 March 31, 2020 or December
31, 2019. The Company files tax returns in the U.S. federal and state jurisdictions.
The Company utilizes the
Technology Business Tax Certificate Transfer Program to sell a portion of its New Jersey Net Operating Loss carry forwards to
an industrial company.
Each of CytoSorbents Europe
GmbH, CytoSorbents Switzerland GmbH, CytoSorbents Poland Sp. Z.o.o. and CytoSorbents UK Limited file an annual corporate tax return,
VAT return and a trade tax return in Germany, Switzerland, Poland and the United Kingdom, respectively.
Use of Estimates
The preparation of consolidated
financial statements in conformity with U.S. GAAP 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. The valuation of options granted is a significant estimate in these consolidated financial statements.
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.
A significant portion of
our revenues are from product sales in Germany. Substantially all of our grant and other income are from grant agencies in the
United States. (See Note 4 for further information relating to the Company’s revenue.)
As of March 31, 2020, one
distributor accounted for approximately 10% of outstanding grants and accounts receivable. As of December 31, 2019, no agency,
distributor/strategic partners or direct customer represented more than 10% of outstanding grants and accounts receivables. For
the three months ended March 31, 2020 and 2019, no agency, distributor, or direct customer represented more than 10% of the Company’s
total revenue.
Financial Instruments
The carrying values of
cash and cash equivalents, grants and accounts receivable, accounts payable, notes payable, and other debt obligations approximate
their fair values due to their short-term nature.
Net Loss Per Common
Share
Basic earnings per share
is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per common share are computed using the treasury stock method on the basis of the weighted-average
number of shares of common stock plus the dilutive effect of potential common shares outstanding during the period. Dilutive potential
common shares include outstanding warrants, stock options and restricted shares. The computation of diluted earnings per share
does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings
(See Note 8).
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.
Shipping and Handling
Costs
The cost of shipping product
to customers and distributors is typically borne by the customer or distributor. The Company records other shipping and handling
costs in cost of revenue. Total freight costs amounted to approximately $133,000 and $146,500, respectively, for the three months
ended March 31, 2020 and 2019.
Preferred Stock
In June 2019, the Company
amended and restated its certificate of incorporation. The amended and restated certificate of incorporation authorizes the issuance
of up to 5,000,000 shares of “blank check” preferred stock, with such designation rights and preferences as may be
determined from time to time by the Board of Directors.
Common Stock
In June 2019, the Company
amended and restated its certificate of incorporation. The amended and restated certificate of incorporation increased the number
of shares of common stock from 50,000,000 shares authorized to be issued to 100,000,000 shares.
Shelf
Registration
On
July 26, 2018, the Company filed a registration statement on Form S-3 with the SEC (as amended, the “2018 Shelf”).
The 2018 Shelf, which was declared effective on August 7, 2018, enables the Company to offer and sell, in one or more offerings,
any combination of common stock, preferred stock, senior or subordinated debt securities, warrants and units, up to a total dollar
amount of $150 million.
Termination
of Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co.
On May 31, 2019,
the Company delivered to Cantor Fitzgerald & Co. (“Cantor”) written notice of termination (the “Termination
Notice”) of the Controlled Equity Offering Sales Agreement, dated November 4, 2015, by and between the Company and Cantor,
as amended by Amendment No. 1 to Sales Agreement, dated July 26, 2018 (collectively, the “Sales Agreement”). In accordance
with Section 13(b) thereof, the Sales Agreement terminated on June 10, 2019, ten (10) days after the delivery of the Termination
Notice. As provided in the Sales Agreement, the Sales Agreement terminated without liability of any party to any other party,
except that certain provisions of the Sales Agreement identified therein shall remain in full force and effect notwithstanding
the termination.
Pursuant to the Sales
Agreement, the Company offered and sold, from time to time through Cantor, shares of the Company’s common stock. In the
aggregate, the Company sold 2,094,140 shares pursuant to the Sales Agreement, at an average selling price of $8.72 per share,
generating net proceeds of approximately $17,718,000 from November 4, 2015 through December 31, 2018. There were no sales during
the year ended December 31, 2019.
Open Market Sale
Agreement with Jefferies LLC and B. Riley FBR, Inc.
On July 9, 2019 the
Company entered into an Open Market Sale Agreement (the “New Sale Agreement”) with Jefferies LLC and B. Riley FBR,
Inc. (each an “Agent” and, together, the “Agents”), pursuant to which the Company may sell, from time
to time, at its option, shares of the Company’s common stock having an aggregate offering price of up to $25,000,000 through
the Agents, as the Company’s sales agents. All shares of the Company’s common stock offered and sold,or to be offered
and sold under the New Sale Agreement were or will be issued and sold pursuant to the Company’s 2018 Shelf by methods deemed
to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended,
in block transactions or if specified by the Company, in privately negotiated transactions.
On April 20, 2020,
the Company and the Agents entered into an amendment to the Sale Agreement (the “Amendment”) to provide for an increase
in the aggregate offering amount under the Sales Agreement, such that as of April 20, 2020, the Company may offer and sell Shares
having an additional aggregate offering price of up to $25 million under the Sale Agreement, as amended by the Amendment (the
“Amended Sale Agreement”).
Subject to the terms of the Amended Agreement, the Agents are required
to use their commercially reasonable efforts consistent with their normal sales and trading practices to sell the shares of the
Company’s common stock from time to time, based upon the Company’s instructions (including any price, time or size
limits or other customary parameters or conditions the Company may impose). The Company will pay the Agents a commission of up
to 3.0% of the gross proceeds from the sale of the shares of the Company’s common stock sold thereunder, if any. The Company
has also agreed to provide the Agents with customary indemnification rights. The offering of the shares of the Company’s
common stock will terminate upon the earliest of (a) the sale of the maximum number or amount of the shares of the Company’s
stock permitted to be sold under the New Sale Agreement and (b) the termination of the New Sale Agreement by the parties thereto.
During the year ended December 31, 2019, the Company sold 191,244 shares pursuant to the New Sale Agreement, at an average selling
price of $4.11 per share, generating net proceeds of approximately $762,000. During the three months ended March 31, 2020, the
Company sold 3,421,237 shares pursuant to the New Sale Agreement, at an average selling price of $5.89 per share, generating net
proceeds of approximately $19,542,000. As of March 31, 2020, approximately $1,798,000 of these proceeds were in transit. These
proceeds were received in early April 2020. During the period from April 1, 2020 through April 2, 2020, the Company sold 15,279
shares pursuant to the New Sale Agreement, at an average selling price of $8.02 per share, generating net proceeds of approximately
$119,000. In the aggregate, the Company has sold 3,627,760 shares pursuant to the New Sale Agreement, at an average selling price
of $5.80 per share, generating net proceeds of approximately $20,422,000.
Stock-Based
Compensation
Total share-based
employee, director, and consultant compensation for the three months ended March 31, 2020 and 2019 amounted to approximately $729,000
and $228,000, respectively. These amounts are included in the statement of operations under general and administrative expenses.
The summary of the
stock option activity for the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (Years)
|
|
Outstanding, December 31, 2019
|
|
|
4,218,189
|
|
|
$
|
6.16
|
|
|
|
7.0
|
|
Granted
|
|
|
1,446,325
|
|
|
$
|
6.03
|
|
|
|
9.7
|
|
Forfeited
|
|
|
(2,967
|
)
|
|
$
|
5.52
|
|
|
|
—
|
|
Expired
|
|
|
(204,405
|
)
|
|
$
|
5.76
|
|
|
|
—
|
|
Exercised
|
|
|
(38,277
|
)
|
|
$
|
3.62
|
|
|
|
—
|
|
Outstanding, March 31, 2020
|
|
|
5,418,865
|
|
|
$
|
6.16
|
|
|
|
7.7
|
|
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 $5.68 to $6.57 per share) and expected life of the stock option (10 years), the current price of the underlying
stock and its expected volatility (69.8 percent), expected dividends (-0- percent) on the stock and the risk free interest rate
(ranging from 0.45 to 0.94 percent) for the expected term of the stock option.
The intrinsic value
is calculated at the difference between the market value as of March 31, 2020 of $7.73 and the exercise price of the shares.
Options
Outstanding
|
|
|
Number
|
|
Weighted
|
|
Weighted
|
Range of
|
|
Outstanding at
|
|
Average
|
|
Average
|
|
Aggregate
|
Exercise
|
|
March 31,
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
Price
|
|
2020
|
|
Price
|
|
Life
(Years)
|
|
Value
|
$2.23 - $14.50
|
|
5,418,865
|
|
$ 6.16
|
|
772
|
|
$8,977,748
|
Options Exercisable
|
Number
|
|
Weighted
|
|
|
Exercisable at
|
|
Average
|
|
Aggregate
|
March 31,
|
|
Exercise
|
|
Intrinsic
|
2020
|
|
Price
|
|
Value
|
3,258,410
|
|
$5.90
|
|
$6,253,699
|
The summary of the
status of the Company’s non-vested options for the three months ended March 31, 2020 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested, December 31, 2019
|
|
|
1,183,790
|
|
|
$
|
4.49
|
|
Granted
|
|
|
1,446,325
|
|
|
$
|
3.69
|
|
Forfeited
|
|
|
(3,025
|
)
|
|
$
|
3.35
|
|
Vested
|
|
|
(466,635
|
)
|
|
$
|
4.14
|
|
Non-vested, March 31, 2020
|
|
|
2,160,455
|
|
|
$
|
4.03
|
|
As
of March 31, 2020, the Company had approximately $3,300,000 of total unrecognized compensation cost
related to stock options which will be amortized over approximately 35 months.
Change
in Control-Based Awards of Restricted Stock Units:
The Board of Directors
has granted restricted stock units to members of the Board of Directors, to the Company’s executive officers, and to employees
of the Company. These restricted stock units will only vest upon a Change in Control of the Company, as defined in the Amended
and Restated CytoSorbents Corporation 2014 Long-Term Incentive Plan.
The following table
is a summary of these restricted stock units:
|
|
Restricted Stock Units
|
|
|
|
|
|
|
Board of
|
|
|
Executive
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
Management
|
|
|
Employees
|
|
|
Total
|
|
|
Intrinsic Value
|
|
December 31, 2019
|
|
|
277,200
|
|
|
|
604,500
|
|
|
|
1,205,050
|
|
|
|
2,086,750
|
|
|
$
|
8,033,988
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
158,700
|
|
|
|
158,700
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,500
|
)
|
|
|
(3,500
|
)
|
|
|
|
|
March 31, 2020
|
|
|
277,200
|
|
|
|
604,500
|
|
|
|
1,360,250
|
|
|
|
2,241,950
|
|
|
$
|
17,330,274
|
|
Due
to the uncertainty over whether these restricted stock units will vest, which only happens upon a Change in Control, no charge
for these restricted stock units has been recorded in the consolidated statement of operations for the three months ended March
31, 2020 and 2019.
Performance-Based
Awards of Restricted Stock Units:
Pursuant to a review
of the compensation of the senior management of the Company and managements’ performance in 2017, on February 28, 2018,
the Board of Directors granted 146,200 restricted stock units to certain senior managers of the Company in order to settle bonuses
accrued as of December 31, 2017. These awards were valued at approximately $1,148,000 at the date of issuance, based upon the
market price of the Company’s common stock at the date of the grant, and vest one third on the date of the grant one third
on the first anniversary of the date of the grant, and one third on the second anniversary of the date of the grant. For the three
months ended March 31, 2020 and 2019, the Company recorded a charge of approximately $0 and $107,000, respectively, related to
these restricted stock unit awards.
Pursuant to a review
of the compensation of the senior management of the Company and managements’ performance in 2018, on March 4, 2019 the Board
of Directors granted 22,220 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued
as of December 31, 2018. These awards were valued at approximately $179,000 at the date of issuance, based upon the market price
of the Company’s common stock at the date of the grant, and vest one third on the date of the grant one third on the first
anniversary of the date of the grant, and one third on the second anniversary of the date of the grant. For the three months ended
March 31, 2020 and 2019, the Company recorded a charge of approximately $9,000 and $5,000 respectively, related to these restricted
stock unit awards.
Pursuant to a review
of the compensation of the senior management of the Company and managements’ performance in 2019, on July 22, 2019 the Board
of Directors granted 180,300 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued
as of December 31, 2019. These awards were valued at approximately $1,300,000 at the date of issuance, based upon the market price
of the Company’s common stock at the date of the grant, and vest one third on the date of the grant, one third on the first
anniversary of the date of the grant, and one third on the second anniversary of the date of the grant. For the three months ended
March 31, 2020 and 2019, the Company recorded a charge of approximately $103,000 and $0, respectively, related to these restricted
stock unit awards.
Pursuant to a review
of the compensation of the senior management of the Company and managements’ performance in 2019, on February 28, 2020,
the Board of Directors granted 168,100 restricted stock units to certain senior managers of the Company in order to settle bonuses
accrued as of December 31, 2020. These awards were valued at approximately $1,014,000 at the date of issuance, based upon the
market price of the Company’s common stock at the date of the grant, and vest one third on the date of the grant one third
on the first anniversary of the date of the grant, and one third on the second anniversary of the date of the grant. For the three
months ended March 31, 2020 and 2019, the Company recorded a charge of approximately $366,000 and $0 respectively, related to
these restricted stock unit awards.
The following table
outlines the restricted stock unit activity for the three months ended March 31, 2020:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, January 1, 2020
|
|
|
167,872
|
|
|
$
|
7.52
|
|
Granted
|
|
|
168,100
|
|
|
$
|
6.03
|
|
Vested
|
|
|
(105,968
|
)
|
|
$
|
6.90
|
|
Non-vested, March 31, 2020
|
|
|
230,004
|
|
|
$
|
6.71
|
|
Warrants:
As of March 31, 2020, the Company had
no warrants outstanding. On December 31, 2019, the Company had warrants outstanding to purchase of 30,000 shares of the Company’s
common stock at an exercise price of $9.90. However, these warrants expired January 14, 2020.
The following table disaggregates
the Company’s revenue by customer type and geographic area for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Distributors/
|
|
|
Government
|
|
|
|
|
|
|
Direct
|
|
|
Strategic Partners
|
|
|
Agencies
|
|
|
Total
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Germany
|
|
|
4,913,588
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,913,588
|
|
All other countries
|
|
|
1,495,806
|
|
|
|
1,746,575
|
|
|
|
—
|
|
|
|
3,242,381
|
|
Total product revenue
|
|
|
6,409,394
|
|
|
|
1,746,575
|
|
|
|
—
|
|
|
|
8,155,969
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
—
|
|
|
|
—
|
|
|
|
551,341
|
|
|
|
551,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,409,394
|
|
|
$
|
1,746,575
|
|
|
$
|
551,341
|
|
|
$
|
8,707,310
|
|
The following table disaggregates
the Company’s revenue by customer type and geographic area for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Distributors/
|
|
|
Government
|
|
|
|
|
|
|
Direct
|
|
|
Strategic Partners
|
|
|
Agencies
|
|
|
Total
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
66,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66,800
|
|
Germany
|
|
|
3,098,176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,098,176
|
|
All other countries
|
|
|
816,229
|
|
|
|
595,374
|
|
|
|
—
|
|
|
|
1,411,603
|
|
Total product revenue
|
|
|
3,981,205
|
|
|
|
595,374
|
|
|
|
—
|
|
|
|
4,576,579
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
—
|
|
|
|
—
|
|
|
|
615,050
|
|
|
|
615,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,981,205
|
|
|
$
|
595,374
|
|
|
$
|
615,050
|
|
|
$
|
5,191,629
|
|
The Company has two primary
revenue streams: (1) sales of the CytoSorb device and related device accessories and (2) grant income from contracts with various
agencies of the United States government. Both of these revenue streams are within the scope of this accounting pronouncement.
The following is a brief description of each revenue stream.
CytoSorb Sales
The Company sells
its CytoSorb device using both its own sales force (direct sales) and through the use of distributors and/or strategic partners.
All sales of the device are outside the United States, as CytoSorb is not yet approved in the United States, other than in respect
of the EUA. Direct sales are fulfilled from the Company’s office in Berlin, Germany. Direct sales relate to sales to hospitals
located in Germany, Switzerland, Austria, Belgium, Luxembourg, Poland, the Netherlands, Sweden, Denmark and Norway. There are
no formal sales contracts with any direct customers relating to product price or minimum purchase requirements. However, there
are agreements in place with certain direct customers that provide for either free of charge product or rebate credits based upon
achieving minimum purchase levels. The Company records the value of these items earned as a reduction of revenue. These customers
submit purchase orders and the order is fulfilled and shipped directly to the customer. Prices to all direct customers are based
on a standard price list based on the packaged quantity (6 packs vs 12 packs).
Distributor and strategic
partner sales make up the remaining product sales. These distributors are located in various countries throughout the world. The
Company has a formal written contract with each distributor/strategic partner. These contracts have terms ranging from 1-5 years
in length, with three years being the typical term. In addition, certain distributors are eligible for volume discount pricing
if their unit sales are in excess of the base requirement per the contract.
Each distributor’s/strategic
partner’s contract has minimum annual purchase requirements in order to maintain exclusivity in their respective territories.
There is no additional
consideration or monetary penalty that would be required to be paid to CytoSorbents if a distributor does not meet the minimum
purchase commitments included in the contract, however, at the discretion of the Company, the distributor may lose its exclusive
rights in the territory if such commitments are not met.
Government Grants
The Company has been
the recipient of various grant contracts from various agencies of the United States government, primarily the Department of Defense,
to perform various research and development activities. These contracts fall into one of the following categories:
|
1.
|
Fixed
price – the Company invoices the contract amount in equal installments over the
term of the contract without regard to the timing of the costs incurred related to this
contract.
|
|
2.
|
Cost
reimbursement – the Company submits monthly invoices during the term of the contract
for the amount of direct costs incurred during that month plus an agreed percentage that
relates to allowable overhead and general and administrative expenses. Cumulative amounts
invoiced may not exceed the maximum amount of funding stipulated in the contract.
|
|
3.
|
Cost
plus – this type of contract is similar to a cost reimbursement contract but this
type also allows for the Company to additionally invoice for a fee amount that is included
in the contract.
|
|
4.
|
Performance
based – the Company submits invoices only upon the achievement of the milestones
listed in the contract. The amount to be invoiced for each milestone is documented in
the contract.
|
In summary, the contracts
the Company has with customers are the distributor/strategic partner contracts related to CytoSorb product sales, agreements with
direct customers related to free-of-charge product and credit rebates based upon achieving minimum purchase levels, and contracts
with various government agencies related to the Company’s grants. The Company does not currently incur any outside/third
party incremental costs to obtain any of these contracts. The Company does incur internal costs, primarily salary related costs,
to obtain the contracts related to the grants. Company employees spend time reviewing the program requirements and developing
the budget and related proposal to submit to the grantor agency. There may additionally be travel expenditures involved with meeting
with government agency officials during the negotiation of the contract. These internal costs are expensed as incurred.
The following table provides information about
receivables and contract liabilities from contracts with customers:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Receivables, which are included in grants
|
|
|
|
|
|
|
|
|
and accounts receivable
|
|
$
|
2,040,455
|
|
|
$
|
2,246,821
|
|
Contract liabilities
|
|
$
|
151,772
|
|
|
$
|
171,842
|
|
Contract liabilities represent
the value of free of charge goods and credit rebates earned in accordance with the terms of certain direct customer agreements
during the periods ended March 31, 2020 and December 31, 2019, and deferred revenue on distributor/strategic partner contracts.
Deferred revenue is the difference between the average selling price anticipated for the year ended 2020 and the actual price
invoiced during the three months ended March 31, 2020. At March 31, 2020, deferred revenue amounted to approximately $32,300 and
is included in contract liabilities above. There was no deferred revenue liability as of December 31, 2019.
On June 30, 2016,
the Company and its wholly-owned subsidiary, CytoSorbents Medical, Inc. (together, the “Borrower”), entered into a
Loan and Security Agreement with Bridge Bank, a division of Western Alliance Bank, (the “Bank”), pursuant to which
the Company borrowed $10 million in two equal tranches of $5 million (the “Original Term Loans”). On March 29, 2018
(the “Closing Date”), the Original Term Loans were refinanced with the Bank pursuant to an Amended and Restated Loan
and Security Agreement by and between the Bank and the Borrower (the “Amended and Restated Loan and Security Agreement”),
under which the Bank agreed to loan the Borrower up to an aggregate of $15 million to be disbursed in two tranches (1) one tranche
of $10 million (the “Term A Loan”), which was funded on the Closing Date and used to refinance the Original Term Loans,
and (2) a second tranche of $5 million which may be disbursed at the Borrower’s sole request prior to March 31, 2019 provided
certain conditions are met (the “Term B Loan” and together with the Term A Loan, the “Term Loans”). On
July 31, 2019 (the “Settlement Date”), the Borrower entered into the First Amendment to the Amended and Restated Loan
and Security Agreement (the “First Amendment”) with the Bank, which amended certain provisions of the Amended and
Restated Loan and Security Agreement and the 2018 Success Fee Letter (the “2018 Letter”). In connection with the execution
of the First Amendment, the draw period for the Term B Loan was extended to August 15, 2019 and the Company drew down the full
$5.0 million Term B Loan on the Settlement Date, bringing the total outstanding debt to $15,000,000 at July 31, 2019. The proceeds
of Term Loans were used for general business requirements in accordance with the Amended and Restated Loan and Security Agreement.
The outstanding balances on Term Loans bear interest at the prime rate reported in the Wall Street Journal plus 3.66%. This rate
was 6.91% at March 31, 2020.
On the Closing
Date, the Company was required to pay a non-refundable closing fee of $25,000, expenses incurred by the Bank related to the Amended
and Restated Loan and Security Agreement of $11,000 and a portion of the final fee for the period the Original Term Loans were
outstanding of $85,938. In addition, the Company incurred legal expenses related to the Amended and Restated Loan and Security
Agreement of $20,050 and $4,212 related to the First Amendment. As of the Settlement Date, the total unamortized loan costs related
to the Term Loans amounted to $90,925. These costs have been presented as a direct deduction from the proceeds of the loan on
the consolidated balance sheet in accordance with the provisions of ASC 850. These costs are being amortized over the loan period
as a charge to interest expense. For the three months ended March 31, 2020 and 2019, the Company recorded interest expense amounting
to $8,524 and $8,129, respectively related to these costs. After accounting for the various costs outlined above, the effective
interest rate on the Term A Loan was 9.1% as of March 29, 2018. Under the terms of the First Amendment, commencing on the first
calendar day of the calendar month after Term B Loan was made, the Company is required to make monthly payments of interest-only
through April 2020. The interest-only period will be further extended through November 2020 provided the Borrower has been compliant
with its obligations under the financial covenant revenue test set forth in the Amended and Restated Loan and Security Agreement
for all months from the month immediately after the month in which the Term B Loan is funded through March 2020. Since the Company
has complied with its obligations under the financial covenant revenue test through March 2020, commencing on November 1, 2020,
the Company shall make equal monthly payments of principal of $833,333, together with accrued and unpaid interest. All unpaid
principal and accrued and unpaid interest shall be due and payable in full on April 1, 2022. In addition, the Amended and Restated
Loan and Security Agreement requires the Company to pay a non-refundable final fee equal to 2.5% of the principal amount of each
Term Loan funded upon the earlier of the (i) April 1, 2022 maturity date or (ii) termination of the Term Loan via acceleration
or prepayment. This final fee is being accrued and charged to interest expense over the term of the loan. For the three
months ended March 31, 2020 and 2019, the Company recorded interest expense of $27,344 and 15,625, respectively, related to the
final fee. The Term Loans are evidenced by a secured promissory notes issued to the Bank by the Company. If the Company elects
to prepay the Term Loans pursuant to the terms of the Amended and Restated Loan and Security Agreement, it will owe a prepayment
fee to the Bank, as follows: (1) for a prepayment made on or after the funding date of a Term Loan through and including the first
anniversary of such funding date, an amount equal to 2.0% of the principal amount of such Term Loan prepaid; (2) for a prepayment
made after the first anniversary of the funding date of a Term Loan through and including the second anniversary of such funding
date, an amount equal to 1.5% of the principal amount of such Term Loan prepaid; and (3) for a prepayment made after the second
anniversary of the funding date of a Term Loan through April 1, 2022, an amount equal to 1.0% of the principal amount of such
Term Loan prepaid.
Events of default
which may cause repayment of the Term Loans to be accelerated include, among other customary events of default, (1) non-payment
of any obligation when due, (2) the failure to perform any obligation required under the Amended and Restated Loan and Security Agreement
and to cure such default within a reasonable time frame, (3) the occurrence of a Material Adverse Event (as defined in the Amended
and Restated Loan and Security Agreement), (4) the attachment or seizure of a material portion of the Borrower’s assets
if such attachment or seizure is not released, discharged or rescinded within 10 days, and (5) if the Borrower becomes insolvent
or starts an insolvency proceeding or if an insolvency proceeding is brought by a third party against the Borrower and such proceeding
is not dismissed or stayed within 30 days. The Amended and Restated Loan and Security Agreement includes customary loan conditions,
Borrower representations and warranties, Borrower affirmative covenants and Borrower negative covenants for secured transactions
of this type. The Company is in substantial compliance with these covenants.
The Company’s
and CytoSorbents Medical, Inc.’s obligations under the Amended and Restated Loan and Security Agreement are joint and severable
and are secured by a first priority security interest in favor of the Bank with respect to the Company’s Shares (as defined
in the Amended and Restated Loan and Security Agreement) and the Borrower’s Collateral (as defined in the Amended and Restated
Loan and Security Agreement, which definition excludes the Borrower’s intellectual property and other customary exceptions).
2018 Success Fee
Letter:
Pursuant to the amended
2018 Letter, the Borrower shall pay to the Bank a success fee in the amount equal to 6.37% of the funded amount of the Term B
Loan (as defined in the Restated Loan and Security Agreement) (the “Success Fee”) upon the first occurrence of any
of the following events: (a) a sale or other disposition by the Borrower of all or substantially all of its assets; (b) a merger
or consolidation of the Borrower into or with another person or entity, where the holders of the Borrower’s outstanding
voting equity securities as of immediately prior to such merger or consolidation hold less than a majority of the issued and outstanding
voting equity securities of the successor or surviving person or entity as of immediately following the consummation of such merger
or consolidation; (c) a transaction or a series of related transactions in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of a sufficient
number of shares of all classes of stock then outstanding of the Borrower ordinarily entitled to vote in the election of directors,
empowering such “person” or “group” to elect a majority of the Board of Directors of the Borrower, who
did not have such power before such transaction; or (d) the closing price per share for the Company’s common stock on the
Nasdaq Capital Market being the greater of (i) 70% or more over $7.05, the closing price of the Company’s common stock on
March 29, 2018 (after giving effect to any stock splits or consolidations effected after the date thereof) for five successive
business days, or (ii) at least 26.13% more than the average price of Company’s common stock for the 365 day period ending
on the date of the funding of the Term B Loan.
Long-term debt consists of the following
at March 31, 2020:
Principal amount
|
|
$
|
15,000,000
|
|
Less unamortized debt acquisition costs
|
|
|
(68,194
|
)
|
Plus accrued final fee
|
|
|
156,250
|
|
Subtotal
|
|
|
15,088,056
|
|
Less current maturities
|
|
|
(4,166,667
|
)
|
Long-term debt net of current maturities
|
|
$
|
10,921,389
|
|
Principal payments of long-term debt are
due as follows during the year ended March 31:
2021
|
|
|
$
|
4,166,667
|
|
2022
|
|
|
|
10,000,000
|
|
2023
|
|
|
|
833,333
|
|
Total
|
|
|
$
|
15,000,000
|
|
|
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Employment Agreements
On July 30, 2019, CytoSorbents Corporation
entered into amended and restated executive employment agreements with its principal executives, Dr. Phillip P. Chan, Chief Executive
Officer, Vincent Capponi, President and Chief Operating Officer, and Kathleen P. Bloch, Chief Financial Officer. Each of the agreements
has an initial term of three years, and was retroactively effective as of January 1, 2019. On April 12, 2020, CytoSorbents Corporation
entered into an executive employment agreement with Dr. Ethymios Deliargyris, to start as Chief Medical Officer no later than May
18, 2020, with an initial term that expires on December 31, 2021. After the expiration of the initial terms, the employment agreements
will automatically renew for additional terms of one year unless either party provides written notice of non-renewal at least 60
days prior to a renewal.
The foregoing employment
agreements each provide for base salary and other customary benefits which include participation in group insurance plans, paid
time off and reimbursement of certain business related expenses, including travel and continuing educational expenses, as well
as bonus and/or equity awards at the discretion of the Board of Directors. In addition, the agreements provide for certain termination
benefits in the event of termination without “Cause” or voluntary termination of employment for “Good Reason”,
as defined in each agreement. The agreements also provide for certain benefits in the event of a “Change of Control”
of the Company, as defined in each agreement.
Litigation
The Company is from time
to time subject to claims and litigation arising out of the ordinary course of business. The Company intends to defend vigorously
against any future claims and litigation. The Company is not currently a party to any legal proceedings.
Royalty Agreements
Pursuant to an agreement
dated August 11, 2003, an 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, which such rights were assigned to an existing investor in 2017.
For the three months ended March 31, 2020 and 2019, the Company has recorded royalty costs of approximately $242,000 and $134,000,
respectively.
License Agreements
In March 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 three months ended March 31, 2020 and 2019,
per the terms of the license agreement, the Company has recorded royalty costs of approximately $404,000 and $224,000, respectively.
The Company leases its
operating facilities in both the United States and Germany under operating lease agreements. In the United States, in January
2019, the Company entered into an Eighteenth Amendment to Lease with the landlord which became effective February 1, 2019. This
amendment expands the Company’s space to 19,920 square feet and extends the term of the lease to May 31, 2020. The Company’s
base rent is approximately $32,000 per month. In addition, the Company is obligated to pay monthly operating expenses of approximately
$29,000 per month. The amendment also includes a one year renewal option. The base rent for the renewal term will increase by
the greater of five percent or the increase in the Consumer Price Index. There were no lease incentives and no initial direct
costs were incurred related to this lease amendment.
In Germany, the Company
leases its operating facility under two operating lease agreements. These leases require combined base rent payments amounting
to approximately $8,800 per month. The initial lease term of both leases ends August 31, 2021. In addition, the Company is obligated
to monthly operating expenses of approximately $2,900 per month. Both leases have a five year option to renew that would extend
the lease term to August 31, 2026. There are no provisions in the leases to increase the base rent during the renewal period.
There were no lease incentives and no initial direct costs were incurred related to these leases.
Initial Measurement of
Right-Of-Use Asset and Lease Liability:
Under the provisions of
this ASU, the Company has adjusted its consolidated balance sheet at December 31, 2018 to reflect the value of the right-of-use
asset and related lease liability. This value was calculated based on the present value of the remaining base rent lease payments.
The remaining lease payments include the renewal periods for both facilities as the Company has determined that it is probable
that the renewal options will be exercised under each of the lease agreements. The discount rate used was the Company’s
incremental borrowing rate, which is 9.16%, as the Company could not determine the rate implicit in the lease. As a result, the
value of the right-of-asset and related lease liability is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Right-of-use asset
|
|
$
|
970,182
|
|
|
$
|
1,070,762
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
970,182
|
|
|
$
|
1,070,762
|
|
Less current portion
|
|
|
(442,865
|
)
|
|
|
(428,083
|
)
|
Lease liability, net of current portion
|
|
$
|
527,317
|
|
|
$
|
642,679
|
|
The maturities of the lease liabilities
are as follows during the year ended March 31:
2021
|
|
|
$
|
442,865
|
|
2022
|
|
|
|
136,098
|
|
2023
|
|
|
|
75,308
|
|
2024
|
|
|
|
82,503
|
|
2025
|
|
|
|
90,385
|
|
Thereafter
|
|
|
|
143,023
|
|
Total
|
|
|
$
|
970,182
|
|
For the three months ended March 31, 2020 and
2019, operating cash flows paid in connection with operating leases amounted to approximately $234,000 and $215,000, respectively.
As of March 31, 2020 and December 31, 2019,
the weighted average remaining lease term was 3.96 years and 4.01 years, respectively.
Basic loss per share and
diluted loss per share for the three months ended March 31, 2020 and 2019 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 options
and restricted stock awards representing approximately 7,891,000 and 5,716,000 incremental shares at March 31, 2020 and 2019,
respectively, have been excluded from the computation of diluted loss per share as they are anti-dilutive.
During the period from April 1, 2020 through
April 2, 2020, the Company sold 15,279 shares pursuant to the New Sale Agreement at an average selling price of $8.02 per share,
generating net proceeds of approximately $119,000 (see Note 3).
On April 13, 2020, the Company received
approximately $1,411,000 in loan proceeds from the Payroll Protection Program (the “PPP”) administered by the Small
Business Administration (the “SBA”) of the United States government. This program was established under the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”). On April 29, 2020, following a reassessment of the Company’s
current favorable financial and operating position, including cash on hand and access to public capital markets, we repaid the
PPP loan.
On April 20, 2020, the Company and the
Agents entered into the Amendment to provide for an increase in the aggregate offering amount under the New Sale Agreement, such
that as of April 20, 2020, the Company may offer and sell Shares having an additional aggregate offering price of up to $25 million
under the New Sale Agreement (see Note 3).
On April 12, 2020, the Company entered
into an executive employment contract with Efthymios N. Deliargyris, MD, FACC, FESC, FSCAI as Chief Medical Officer, to start as
Chief Medical Officer no later than May 18, 2020, with an initial term that expires on December 31, 2021. Dr. Deliargyris commenced
employment on May 1, 2020 (see Note 6).
On May 4, 2020, Vincent J. Capponi was promoted to President
and Chief Operating Officer.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Notes Regarding
Forward Looking Statements
This Quarterly report
on Form 10-Q includes “forward-looking statements” within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our
plans, objectives, representations and contentions and our expectations of the effects of the COVID-19 pandemic and are not historical
facts and typically are identified by use of terms such as “may,” “should,” “could,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
“continue” and similar words, although some forward-looking statements are expressed differently. You should be aware
that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual
results, events and performance could differ materially from those in the forward-looking statements.
Factors which could
cause or contribute to such differences include, but are not limited to, the risks discussed in our Annual Report on Form 10-K,
as updated by the risks reported in our Quarterly Reports on Form 10-Q, in any prospectus or prospectus supplement filed with
the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, and in the press releases and other communications
to stockholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect
our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise, other than as required under the Federal securities laws.
Overview
This discussion of our
financial condition and the results of operations should be read together with the financial statements, including the notes contained
elsewhere in this Quarterly Report on Form 10-Q, and the financial statements, including the notes thereto, contained in our Annual
Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 5, 2020.
We are a leader in critical care immunotherapy,
investigating and commercializing our CytoSorb blood purification technology to reduce deadly uncontrolled inflammation in hospitalized
patients around the world, with the goal of preventing or treating multiple organ failure in life-threatening illnesses and cardiac
surgery. Organ failure is the cause of nearly half of all deaths in the intensive care unit (“ICU”), with little to
improve clinical outcome. CytoSorb, our flagship product, is approved in the European Union (“EU”) as a safe and effective
extracorporeal cytokine filter and is designed to reduce the “cytokine storm” that could otherwise cause massive inflammation,
organ failure and death in common critical illnesses such as sepsis, burn injury, trauma, lung injury, and pancreatitis. These
are conditions where the mortality is extremely high, yet no effective treatments exist. In May 2018, we received a label expansion
for CytoSorb covering use of the device for the removal of bilirubin and myoglobin in the treatment of liver disease and trauma,
respectively, and in January 2020, we received a further label expansion for CytoSorb covering the use of the device for the removal
of the anti-platelet agent, ticagrelor, in patients undergoing cardiothoracic surgery requiring cardiopulmonary bypass. In April
2020, the United States Food and Drug Administration (the “FDA”) granted Breakthrough Designation to CytoSorb for the
removal of ticagrelor in a cardiopulmonary bypass circuit during emergent and urgent cardiothoracic surgery.
CytoSorb is used during and after cardiac
surgery to remove inflammatory mediators, such as cytokines, activated complement and free hemoglobin that can lead to post-operative
complications, such as acute kidney injury, lung injury, shock, and stroke. We believe CytoSorb has the potential to be used in
many other inflammatory conditions, including the treatment of autoimmune disease flares, cytokine release syndrome in cancer immunotherapy,
and other applications in cancer, such as cancer cachexia. CytoSorb has been used globally in more than 88,000 human treatments
to date in critical illnesses and in cardiac surgery. Our purification technologies are based on biocompatible, highly porous polymer
beads that can actively remove toxic substances from blood and other bodily fluids by pore capture and surface adsorption. . The
technology is protected by 21 issued U.S. patents and multiple international patents, with applications pending both in the U.S.
and internationally. We have numerous product candidates under development based upon this unique blood purification technology,
including HemoDefend, ContrastSorb, DrugSorb, and others.
In March 2011, CytoSorb was “CE Marked”
in the EU as an extracorporeal cytokine filter indicated for use in clinical situations where cytokines are elevated, allowing
for commercial marketing. The CE Mark demonstrates that a conformity assessment has been carried out and the product complies with
the Medical Devices Directive. The goal of CytoSorb is to prevent or treat organ failure by reducing cytokine storm and the potentially
deadly systemic inflammatory response syndrome (“SIRS”) in diseases such as sepsis, trauma, burn injury, acute respiratory
distress syndrome, pancreatitis, liver failure, and many others. Organ failure is the leading cause of death in the ICU, and remains
a major unmet medical need, with little more than supportive care therapy (e.g., mechanical ventilation, dialysis, vasopressors,
fluid support, etc.) as treatment options. By potentially preventing or treating organ failure, CytoSorb may improve clinical outcome,
including survival, while reducing the need for costly ICU treatment, thereby potentially saving significant healthcare costs.
Our CE Mark enables CytoSorb to be sold
throughout the European Union and member states of the European Economic Area. In addition, many countries outside the EU accept
the CE Mark for medical devices, but may also require registration with or without additional clinical studies. The broad indication
for which CytoSorb is CE Marked allows it to be used “on-label” in diseases where cytokines are elevated including,
but not limited to, critical illnesses such as those mentioned above, autoimmune disease flares, cancer cachexia, and many other
conditions where cytokine-induced inflammation plays a detrimental role.
As part of the CE Mark approval process,
we completed our randomized, controlled, European Sepsis Trial amongst 14 trial sites in Germany in 2011, with enrollment of 100
patients with sepsis and respiratory failure. The trial established that CytoSorb was sufficiently safe in this critically-ill
population, and that it was able to broadly reduce key cytokines in the blood of these patients. In this first study, CytoSorb
was used intermittently, 6 hours a day. CytoSorb is currently used to treat patients continuously, which is deemed to be more effective.
We plan to conduct larger, prospective studies in septic patients in the future to confirm the European Sepsis Trial findings.
In addition to CE Marking,
we also achieved ISO 13485:2003 Full Quality Systems certification, an internationally recognized quality standard designed to
ensure that medical device manufacturers have the necessary comprehensive management systems in place to safely design, develop,
manufacture and distribute medical devices in the EU. We manufacture CytoSorb at our manufacturing facilities in New Jersey for
commercial sales abroad and for additional clinical studies, the expansion of which we officially completed in June 2018. Upon
expanding our facility we quadrupled our manufacturing capacity and completed an audit upgrade from an ISO 13485:2003 certification
to an ISO 13485:2016 certification.
In late June 2012, following
the establishment of our European subsidiary, CytoSorbents Europe GmbH, a wholly-owned operating subsidiary of CytoSorbents Corporation,
we began the commercial launch of CytoSorb in Germany with the hiring of Dr. Christian Steiner as Vice President of Sales and
Marketing and three additional sales representatives who joined us and completed their sales training during the third quarter
of 2012. The fourth quarter of 2012 represented the first quarter of direct sales with the full sales team in place. During this
period, we expanded our direct sales efforts to include both Austria and Switzerland.
Fiscal year 2013 represented
the first full year of CytoSorb commercialization. We focused our direct sales efforts in Germany, Austria and Switzerland with
four sales representatives. The focus of the team was to encourage acceptance and usage by key opinion leaders (“KOLs”)
throughout these countries. We believe our relationships with KOLs are essential to drive adoption and recurrent usage of CytoSorb,
facilitate purchases by hospital administration, arrange reimbursement, and generate data for papers and presentations. As of
the end of 2019, we had hundreds of KOLs in our commercialized territories worldwide in critical care, cardiac surgery, and blood
purification, who were either using CytoSorb or supporting its use in clinical practice or clinical trials.
In March 2016, we
established CytoSorbents Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH, to conduct marketing and direct
sales in Switzerland. This subsidiary began operations during the second quarter of 2016. In 2017, we further expanded our direct
sales efforts into Belgium and Luxembourg.
In May 2018, the approved uses of CytoSorb
in the EU were expanded to include the removal of bilirubin in liver disease, and the removal of myoglobin in trauma.
On March 5, 2019,
we announced the expansion of direct sales of CytoSorb for all applications to Poland and the Netherlands, and critical care applications
to Sweden, Denmark and Norway. As part of this effort we established CytoSorbents Poland Sp. z.o.o., a wholly-owned subsidiary
of CytoSorbents Europe GmbH.
In the third quarter of
2019, we established CytoSorbents UK Limited, a wholly-owned subsidiary of CytoSorbents Medical, Inc., to manage our clinical
trial activities in the United Kingdom.
In August 2019, we announced
that CytoSorb had received renewal of its European Union CE Mark through May 2024 and ISO 13485:2016 Full Quality Assurance System
certification of its manufacturing facility through September 2022.
In addition, we now have
more than 50 investigator-initiated studies and additional Company sponsored trials that are currently planned, enrolling or completed
in Europe and elsewhere outside of the United States. We believe that these trials, which are conducted and supported by what
we believe to be well-known university hospitals and KOLs, are the equivalent of Phase 3 and Phase 4 clinical studies. We believe
they will provide invaluable information regarding the success of the device in the treatment of sepsis, cardio-pulmonary bypass
surgery, trauma, and many other indications, and if successful, may be integral in helping to drive additional usage and adoption
of CytoSorb.
In January 2020, we received CE-Mark label
expansion approving the use of CytoSorb to remove the anti-platelet agent, ticagrelor, in cardiac patients during surgery requiring
cardiopulmonary bypass.
In April 2020, we announced that the FDA
has granted Emergency Use Authorization (“EUA”) of CytoSorb for use in patients with COVID-19 infection. Under the
EUA, we can make CytoSorb available, through commercial sales, to all hospitals in the United States for use in patients, 18 years
of age or older, with confirmed COVID-19 infection who are admitted to the ICU with confirmed or imminent respiratory failure who
have early acute lung injury or acute respiratory distress syndrome (ARDS), severe disease, or life-threatening illness resulting
in respiratory failure, septic shock, and/or multiple organ dysfunction or failure, as described in FDA's authorization. Under
the EUA, we plan to ramp the availability of CytoSorb in a controlled manner, to clinical centers that will work with us to generate
data and leverage our knowledge of how to use the device most effectively. The CytoSorb device has been authorized by FDA under
an EUA. It has neither been cleared nor approved for the indication to treat patients with COVID-19 infection. The EUA will be
effective until a declaration is made that the circumstances justifying the EUA have terminated or until revoked by the FDA.
In
April 2020, we announced that the FDA has granted Breakthrough Designation to CytoSorb for the removal of ticagrelor in a cardiopulmonary
bypass circuit during emergent and urgent cardiothoracic surgery. The Breakthrough Devices Program provides for
more effective treatment of life-threatening or irreversibly debilitating disease or conditions, in this case the need to reverse
the effects of ticagrelor in emergent or urgent cardiac surgery that can otherwise cause a high risk of serious or life-threatening
bleeding. Through Breakthrough Designation, FDA will work with CytoSorbents to expedite the development, assessment, and
regulatory review of CytoSorb for the removal of ticagrelor, while maintaining statutory standards of regulatory approval (e.g.,
510(k), de novo 510(k) or premarket approval (PMA)) consistent with the Agency’s mission to protect and
promote public health.
As of May 1, 2020, our European commercialization
team included 79 people.
Overall, we have established either direct
sales or distribution (via distributors or strategic partners) of CytoSorb in 58 countries worldwide. Registration of CytoSorb
is typically required in each of these countries prior to active commercialization. With CE Mark approval, this can be typically
achieved within several months in EU countries. Outside of the EU, the process is more variable and can take several months to
more than a year due to different requirements for documentation and clinical data. Variability in the timing of registration affects
the initiation of active commercialization in these countries, which affects the timing of expected CytoSorb sales. We actively
support all of our distributors and strategic partners in the product registration process. We cannot generally predict the timing
of these registrations, and there can be no guarantee that we will ultimately achieve registration in countries where we have established
distribution. For example, in August 2014 we announced exclusive distribution of CytoSorb in Taiwan with Hemoscien Corporation.
However, in March 2015, due to the complexity we encountered with Taiwanese product registration, we elected to terminate our agreement
with Hemoscien. Outside of the EU, CytoSorb has distribution in Turkey, India, Sri Lanka, Australia, New Zealand, Russia, Serbia,
Norway, Vietnam, Malaysia, Hong Kong, Chile, Panama, Costa Rica, Colombia, Brazil, Mexico, Iceland, Israel, UAE, Iran, Saudi Arabia
and other Middle Eastern countries, and South Korea. We cannot guarantee that we will generate meaningful sales in the countries
where we have established registration, due to other factors such as market adoption and reimbursement. For example, in December
2019, we discontinued our distributor relationship with Dr. Reddy’s in South Africa. We continuously evaluate other potential
distributor and strategic partner networks in other countries that accept CE Mark approval.
In February 2020, we announced an agreement
with China Medical System Holdings Limited (“CMS”), a well-established, innovation-driven specialty pharma with a focus
on sales and marketing in China and Asia, to bring CytoSorb to mainland China to treat critically-ill patients with COVID-19 SARS-CoV-2
coronavirus infection. Under the terms of the agreement, CytoSorbents and CMS partnered together to earn regulatory clearance to
import CytoSorb into China under the “fast-track” review process established by the National Medical Products Administration
of the People’s Republic of China (NMPA) to respond to the COVID-19 pandemic. CytoSorbents donated the initial CytoSorb devices
and provided product, training, and support to CMS to introduce CytoSorb initially into four hospitals in the Wuhan, China area.
The therapy was evaluated in 17 severe COVID-19 coronavirus patients with a systemic inflammatory response who were treated with
either continuous renal replacement therapy (CRRT) or extracorporeal membrane oxygenation (ECMO). During the initial term of the
agreement, CytoSorbents and CMS will explore the possibility for future commercial collaboration in China. The use of CytoSorb
for the treatment of patients with severe COVID-19 coronavirus infection is considered exploratory in nature, and is currently
not yet approved for commercial purposes in mainland China.
We have been working to
expand the number and scope of our strategic partnerships. In September 2013, we entered into a distribution agreement with Biocon
Ltd. (“Biocon”), India’s largest biopharmaceuticals company, under which Biocon was granted exclusive commercialization
rights to the CytoSorb therapy in India and select emerging markets, initially focused on sepsis. Biocon committed to annual minimum
purchases to maintain exclusivity. In October 2014, the Biocon partnership was expanded to include all critical care applications
and cardiac surgery. In addition, Biocon committed to higher annual minimum purchases of CytoSorb to maintain distribution exclusivity
and committed to conduct and publish results from multiple investigator initiated studies and patient case studies. Under the
terms of the expanded partnership, the term of the distribution agreement was extended to December 2022.
In December 2014, we entered
into a multi-country strategic partnership with Fresenius Medical Care AG & Co KGaA (together with its affiliates, as appropriate,
“Fresenius”) to commercialize the CytoSorb therapy. Under the agreement reflecting the terms of the partnership, Fresenius
was granted exclusive rights to distribute CytoSorb for critical care applications in France, Poland, Sweden, Denmark, Norway,
and Finland. The partnership allows Fresenius to offer an innovative and easy way to use blood purification therapy for removing
cytokines in patients that are treated in the ICU. To promote the success of CytoSorb, Fresenius agreed to also engage in the
ongoing clinical development of the product. This includes the support and publication of a number of small case series and patient
case reports as well as the potential for future larger, clinical collaborations. In May 2016, Fresenius launched the product
in the six countries for which it was granted exclusive distribution rights. In January 2017, the Fresenius partnership was expanded
pursuant to a revised three-year agreement. The terms of the revised agreement extended Fresenius’ exclusive distributorship
of CytoSorb for all critical care applications in their existing territories through 2019 and include guaranteed minimum quarterly
orders and payments, evaluable every one and a half years.
At the same time, we entered
into a comprehensive co-marketing agreement with Fresenius. Under the terms of the co-marketing agreement, CytoSorbents and Fresenius
agreed to jointly market CytoSorb to Fresenius’ critical care customer base in all countries where CytoSorb is being actively
commercialized. CytoSorb continues to be sold by our direct sales force or through our international network of distributors and
partners, while Fresenius sells all ancillary products to their customers. Fresenius further provides written endorsements of
CytoSorb for use with their multiFiltrate and multiFiltratePRO acute care dialysis machines that can be used by us and our distribution
partners to promote CytoSorb worldwide. Training and preparation for this co-marketing program began in five initial countries
in 2017 and is continuing, with implementation of the co-marketing program in additional countries planned for the future.
In December 2018, the Fresenius
agreement signed in December 2014 was amended, to grant Fresenius exclusive distribution rights for the Czech Republic and Finland
and all critical care medicine and ICU applications on dialysis or ECMO machines for France. In addition, in 2019, Poland, Sweden,
Denmark, and Norway were transitioned into the co-marketing program. Finally, the guaranteed minimum quarterly purchases and payments
requirements were removed for 2019.
In addition, also in December 2018, we
entered into agreements to expand the partnership with Fresenius into South Korea and Mexico. Under the terms of these agreements,
Fresenius has exclusive rights to distribute CytoSorb for acute care and other hospital applications in Korea and Mexico. In March
2020, we announced that CytoSorb has been approved to be marketed and sold in Mexico the
Federal Committee for Protection from Sanitary Risks or Comisión Federal para la Protección contra Riesgos Sanitarios,
the country's health authority. With this approval, commercial promotional activities and sales of CytoSorb may now officially
commence in Mexico. Commercial sales of CytoSorb are expected to commence in South Korea after securing market registration
clearance from the country’s health authorities. These multi-year agreements include an initial stocking order and are subject
to annual minimum purchases of CytoSorb to maintain exclusivity. These agreements, which commenced on January 1, 2019, have an
initial term of three years and will automatically renew for an additional two years unless terminated by either party.
In 2015, we entered into
a distribution agreement with Aferetica s.r.l., a distributor based in Bologna, Italy that specializes in the sale of certain
medical products and devices, specifically extracorporeal therapies, in the critical care, cardiac surgery and liver disease markets
(“Aferetica”). Under the terms of the agreement, we granted Aferetica the exclusive right to distribute CytoSorb in
Italy, San Marino and the Vatican for application in CRRT (Continuous Renal Replacement Therapies), dialysis and hemoperfusion
machine run treatments, as described in the agreement. In connection with the grant of distribution rights, Aferetica agreed to
certain minimum purchase and inventory requirements. Aferetica further agreed not to market or sell products competitive with
CytoSorb in Italy, San Marino and the Vatican. The agreement expired by its terms on December 31, 2019. In January 2020, the agreement
was amended extending the term to December 2023 and will automatically renew for an additional two years unless terminated by
either party.
In addition, in September
2017, we announced a partnership with Aferetica to provide dedicated, branded sorbent cartridges for use with Aferetica’s
proprietary PerLife™ ex-vivo organ perfusion system, with the goal of rehabilitating or preserving the function solid organs
destined for eventual transplant. In July 2018, Aferetica and CytoSorbents debuted the PerLife™ system for organ preservation
at the 27th International Congress of the Transplantation Society. Aferetica is currently seeking CE Mark registration
of the system.
In September 2016, we entered
into a multi-country strategic partnership with Terumo Cardiovascular Group (“Terumo”) to commercialize CytoSorb for
cardiac surgery applications. Under the terms of the agreement, Terumo has exclusive rights to distribute the CytoSorb cardiopulmonary
bypass (“CPB”) procedure pack for intra-operative use during cardiac surgery in France, Sweden, Denmark, Norway, Finland
and Iceland. Terumo launched the product in these six countries in December 2016.
We continuously evaluate
other potential distributor and strategic partner networks in other countries where we are approved to market the device.
Concurrent with our commercialization
plans, we intend to conduct or support additional clinical studies in sepsis, cardiac surgery, and other critical care diseases
to generate additional clinical data to expand the scope of clinical experience for marketing purposes, to increase the number
of treated patients, and to support potential future publications. In 2014, we completed a single arm, dose ranging trial in Germany
amongst several clinical trial sites to evaluate the safety and efficacy of CytoSorb when used 24 hours per day for seven days,
each day with a new device, and are conducting final statistical analysis of the data. Patients were stratified for age, cytokine
levels, and co-morbid illnesses in this matched pairs analysis.
In addition to the dosing
study, we plan to use data generated and published in the more than 50 investigator-initiated studies and additional Company sponsored
trials that are currently planned, enrolling or completed in Europe and elsewhere. We believe that these trials, which are conducted
and supported by what we believe to be well-known university hospitals and KOLs, are the equivalent of Phase 3 and Phase 4 clinical
studies. They will provide invaluable information regarding the success of the device in the treatment of sepsis, cardio-pulmonary
bypass surgery, trauma, and many other indications, and if successful, may be integral in helping to drive additional usage and
adoption of CytoSorb.
In addition to sepsis and
other critical care applications, cardiac surgery is an important application for CytoSorb. There are approximately one million
cardiac surgery procedures performed annually in the U.S. and EU combined including, for example, coronary artery bypass graft
surgery, valve replacement surgery, heart and lung transplant, congenital heart defect repair, aortic reconstruction, and left
ventricular assist device (“LVAD”) implantation. Cardiac surgery can result in inflammation and the production of
high levels of inflammatory cytokines, an activation of complement, and hemolysis, leading to the release of toxic plasma free
hemoglobin. These can lead to post-operative complications such as respiratory failure, circulatory failure, and acute kidney
injury. CytoSorb has a unique competitive advantage as a cytokine and free hemoglobin removal technology that can be used during
the operative procedure and can be easily installed in a bypass circuit in a heart-lung machine without the need for an additional
pump. Direct cytokine and hemoglobin removal with CytoSorb enables it to replace the existing market for leukoreduction filters
in cardiac surgery that attempt to indirectly reduce cytokines by capturing cytokine-producing leukocytes – an inefficient
and suboptimal approach.
In February 2015, the U.S.
Food and Drug Administration (the “FDA”) approved our Investigational Device Exemption (“IDE”) application
to commence a planned U.S. cardiac surgery feasibility study called REFRESH I (REduction of FREe Hemoglobin) amongst 20 patients
and three U.S. clinical sites. The FDA subsequently approved an amendment to the protocol, expanding the study to a 40-patient
randomized controlled study (20 treatment, 20 control) in eight clinical centers. REFRESH I represented the first part of a larger
clinical trial strategy intended to support the approval of CytoSorb in the U.S. for intra-operative use during cardiac surgery.
The REFRESH I study was
designed to evaluate the safety and feasibility of CytoSorb when used intra-operatively with a heart-lung machine to reduce plasma
free hemoglobin (pfHb) and cytokines in patients undergoing complex cardiac surgery. The study was not powered to measure
effect on clinical outcomes. The length, complexity and invasiveness of these procedures cause hemolysis and inflammation, leading
to high levels of plasma free hemoglobin, cytokines, activated complement, and other substances. These inflammatory mediators
are correlated with the incidence of serious post-operative complications such as kidney injury, renal failure and other organ
dysfunction. The goal of CytoSorb is to actively remove these inflammatory and toxic substances as they are being generated
during the surgery and reduce complications. Enrollment was completed with 46 patients. A total of 38 patients were evaluable
for pfHb and completed all aspects of the study.
The primary safety and
efficacy endpoints of the study were the assessment of serious device related adverse events and the change in plasma free hemoglobin
levels, respectively. On October 5, 2016, we announced positive top-line safety data. In addition, following a detailed
review of all reported adverse events in a total of 46 enrolled patients, the independent Data Safety Monitoring Board (“DSMB”)
found no serious device related adverse events with the CytoSorb device, achieving the primary safety endpoint of the study. In
addition, the therapy was well-tolerated and technically feasible, implementing easily into the cardiopulmonary bypass circuit
without the need for an additional external blood pump. The REFRESH I study represented the first randomized controlled
study demonstrating the safety of intra-operative CytoSorb use in patients undergoing high risk cardiac operations.
Investigators of the REFRESH
I study submitted an abstract with data, including free hemoglobin data, from the REFRESH I study which was selected for a podium
presentation at the American Association of Thoracic Surgery conference on May 1, 2017. On May 5, 2017, we announced additional
REFRESH I data, including data from the study on the reduction of pfHb and activated complement, and in May 2019, the manuscript
of the REFRESH I study was electronically published in the journal, Seminars in Thoracic and Cardiovascular Surgery.
In December 2017, the FDA approved our
IDE application for our REFRESH 2-AKI study, permitting us to conduct this pivotal study designed to provide the key safety and
efficacy data needed to support United States regulatory approval for CytoSorb in cardiac surgery, which we plan to pursue via
the PMA pathway. The REFRESH 2-AKI study is a randomized, controlled, multi-center, clinical study designed to evaluate intraoperative
CytoSorb use as a therapy to reduce the incidence and severity of AKI, as measured by Kidney Disease Improving Global Outcomes
(KDIGO) criteria, following complex cardiac surgery. Postoperative AKI following cardiac surgery is common and is associated
with 1-5 year mortality, and is a risk factor for developing chronic kidney disease requiring hemodialysis in the future. The study
will enroll up to 400 patients at increased risk of cardiovascular surgery-associated AKI, undergoing elective, non-emergent open-heart
surgery for either valve replacement, or aortic reconstruction with hypothermic cardiac arrest. In April 2018, we announced the
first patient enrollment into the pivotal U.S. REFRESH 2-AKI study. Based on the recommendations of key clinical advisors, a protocol
amendment was submitted to the FDA on July 19, 2018 to improve operational aspects of the patient screening process and expand
the inclusion criteria. It was the preference of clinical trial sites to defer enrollment until the amendment was approved
by the FDA, announced in September 2018. On November 25, 2019 the Company announced a pause in enrollment for the REFRESH 2-AKI
study. The study’s Data Monitoring Committee (the “DMC”) recommended this pause following a blinded, interim,
milestone review of clinical study data. The DMC requested that additional clinical data and data analysis, not pre-specified
in the current version of the protocol, be provided by Company. In addition, the Company appointed NAMSA as the new contract research
organization (“CRO”) for the study to improve the monitoring of patient safety endpoints. As of November 25, 2019,
the study had enrolled 153 patients at 25 initiated sites. Based on multiple reports, we believe that clinical trial activity in
the U.S. and in many countries abroad, with the exception of studies related to COVID-19, has slowed significantly due to the COVID-19
pandemic Because of this, we currently do not have good visibility on when the REFRESH 2-AKI trial will resume, if at all. As an
example, assuming a timely restart of the study in mid-year 2020 at the majority of our REFRESH 2-AKI trial sites, we believe we
can reach a pre-specified interim analysis at 200 patients enrolled, where the DMC will evaluate the trial for safety and futility,
by Q4 2020-Q1 2021. Assuming no changes to the trial by the DMC, and assuming steady enrollment at our trial sites, we may be able
to complete enrollment of the targeted 400 patients in the REFRESH 2-AKI study by the end of 2021. However, there can be no assurance
the study will be restarted or will enroll patients in a timely manner. We cannot predict the outcome of a DMC-led interim analysis,
which could have a number of different outcomes such as: 1) continuation of the trial unchanged 2) continuation of trial but with
modifications such as an expansion of the study or a change in the protocol 3) discontinuation of the study due to futility 4)
termination of the study by the FDA or DMC due to potential new safety signals, or 5) other outcomes. These outcomes may trigger
business and/or clinical decisions on the trial based on factors such as the cost, timing, probability of success of the study,
and other factors. Because of this, there can be no assurances that trial will continue or have a positive outcome. However, if
the study is successful, we plan to submit a PMA application to the FDA in 2022 for U.S. regulatory approval.
The German government, via the German Federal
Ministry of Education and Research, is funding a 250 patient, multi-center randomized, controlled study (“REMOVE”)
using CytoSorb during valve replacement open heart surgery in patients with infective endocarditis. The study enrolled its first
patient in January 2018. An interim analysis of the first 50 patients has been completed. On February 4, 2019, Prof. Dr. med. Frank
Brunkhorst, Director of the Center for Clinical Studies at Jena University Hospital, who is providing management and oversight
to the REMOVE study, and Prof. Dr. med. Torsten Doenst, Director of the Clinic for Cardiac and Thoracic Surgery at the University
of Jena, provided the following joint statement, “The Scientific Advisory Board (SAB) of the Center of Sepsis Control and
Care (CSCC) and the Data Safety Monitoring Board (DSMB) of the REMOVE study recommended continuation of the study, based upon results
of a pre-specified interim analysis that analyzed cytokine and vasoactive mediator levels as an indicator of the mechanistic mode
of action of the device in 28 CytoSorb-treated patients and 22 control patients. There were no device-associated adverse
events in the CytoSorb group.” As of March 31, 2020, the study has completed enrollment with 288 patients enrolled. Analysis
of the study data and issuance of the study report is anticipated to be completed by mid- 2020.
In September 2019, we announced that Hannover
Medical School in Germany will begin the first clinical study, called CYTORELEASE, evaluating the use of CytoSorb in treating
cytokine release syndrome (CRS) and inflammation of the brain called CAR-related Encephalopathy Syndrome (“CRES”),
following CAR-T cell immunotherapy. The CYTORELEASE trial, entitled “Effectivity of Extracorporeal Cytokine Adsorption
(CytoSorb) as Additive Treatment of CAR-T Cell Associated Cytokine Release Syndrome (“CRS”) and Encephalopathy Syndrome
(“CRES”),” is a randomized, controlled pilot study in 34 cancer patients who have received CAR-T cell immunotherapy
and who have developed either severe CRS or CRES for a duration less than 6 hours. Patients will receive either standard
of care therapy versus standard of care therapy plus CytoSorb hemoadsorption. The primary endpoint of the study is a plasma
reduction of the pro-inflammatory cytokine interleukin-6 (IL-6). Secondary and exploratory endpoints will examine other potential
clinical benefits such as improvements in CRES, shock, and other organ injury. The trial has been approved by the Hannover
Medical School ethics committee and has been screening patients for enrollment.
In September 2019, a new
publication entitled, "Hemoadsorption with CytoSorb showed a decreased observed versus expected 28-day all-cause mortality
in ICU patients with septic shock: a propensity-score-weighted retrospective study," in the journal Critical Care. In this
study, clinical researchers at Maasstad Hospital and at Erasmus University Medical Center in Rotterdam, Netherlands conducted
a retrospective evaluation of 116 patients with septic shock, who required vasopressors to increase their blood pressure, and
renal replacement therapy (RRT) due to kidney failure. Of these, 49 patients received standard of care therapy, and 67 were
treated with standard of care plus CytoSorb. Both groups were compared by stabilized Inverse Probability of Treatment Weights
(sIPTW) to overcome baseline differences in the type of sepsis, age, comorbidities, surgery vs no surgery, Sequential Organ Failure
Assessment (SOFA) score, use of the vasopressor noradrenaline, and lactate levels. Patients treated with standard of care and
CytoSorb had a statistically significant reduction in 28-day all-cause mortality compared to standard of care alone (53% vs 72%
control, p<0.04), based on the sIPTW analysis. In addition, observed 28-day all-cause mortality in the CytoSorb treatment group
was significantly lower than the predicted mortality (48% observed vs 75% predicted, p<0.001), based on SOFA score.
In October 2019, CytoSorbents initiated
TISORB (Ticagrelor CytoSorb Hemoadsorption), a Company-sponsored, multicenter study in the United Kingdom to prospectively evaluate
the removal of ticagrelor during cardiopulmonary bypass in patients on ticagrelor undergoing emergent cardiothoracic surgery. Ticagrelor
(Brilinta®, Astra Zeneca) is a potent platelet inhibitor and antithrombotic therapy and recognized as a standard of care to
reduce the risk of heart attacks and strokes in patients with advanced cardiovascular disease. Unfortunately, given the absence
of an approved treatment to reverse the antithrombotic effects of ticagrelor, the approximately 4% of patients requiring emergency
cardiothoracic surgery experience an up to 65% risk of severe or massive perioperative bleeding with potential negative clinical
outcomes or death, with significantly increased costs to the hospital and healthcare system. On October 5, 2019, we presented
data showing the projected cost effectiveness of CytoSorb when used intraoperatively to remove ticagrelor in patients undergoing
emergency open heart surgery at the 33rd Annual Meeting of the European Association for Cardio-Thoracic Surgery
(EACTS). This study predicts an average cost savings of £3,982 per patient (approximately $5,000 USD per
patient), including the cost of the CytoSorb adsorber. The primary endpoint of the TISORB study is the change in platelet reactivity
and ticagrelor blood concentration before and after cardiopulmonary bypass for patients undergoing CytoSorb hemoadsorption removal
of ticagrelor from their blood. A protocol amendment was submitted to expand the population of eligible patients to now include
patients requiring urgent cardiac surgery, and third-party consent. These changes were approved by the UK Medicines and Healthcare
products Regulatory Agency (MHRA) at the end of February, with approvals pending from the key regional ethics committees (RECs).
We intend to enroll thirty patients who will have received ticagrelor within 48 hours of undergoing emergent or urgent cardiothoracic
surgery with cardiopulmonary bypass. As of May 1, 2020, we have initiated eight sites and one patient has been enrolled. However,
due the COVID-19 pandemic, the trial has paused and not enrolled additional patients, and we cannot predict when the trial will
resume. In January 2020, CytoSorb received European Union CE Mark label expansion to include the removal of ticagrelor during cardiopulmonary
bypass in patients undergoing cardiothoracic surgery.
In addition to cardiac surgery, a market
focus for CytoSorb is the prevention or treatment of organ failure in life-threatening conditions, including commonly seen illnesses
in the ICU such as infection and sepsis, trauma, burn injury, liver failure, pancreatitis, lung injury, ARDS, and others. Severe
sepsis and septic shock, a potentially life-threatening systemic inflammatory response to a serious infection, accounts for approximately
10% to 20% of all ICU admissions and is one of the largest target markets for CytoSorb. Sepsis is a major unmet medical need that
accounts for 1 in every 5 deaths worldwide, with no approved products in the U.S. or Europe to treat it. As with other critical
care illnesses, multiple organ failure is the primary cause of death in sepsis. When used with standard of care therapy, that includes
antibiotics, the goal of CytoSorb in sepsis is to reduce excessive levels of cytokines and other inflammatory toxins, to help reduce
the SIRS response and either prevent or treat organ failure.
We intend to conduct or
support additional clinical studies in sepsis, cardiac surgery, and other critical care diseases where CytoSorb could be used,
such as ARDS, trauma, severe burn injury, acute pancreatitis, and in other acute conditions that may benefit by the reduction
of cytokines in the bloodstream. We intend to generate additional clinical data to expand the scope of clinical experience for
marketing purposes, to increase the number of treated patients, and to support potential future publications.
Our proprietary hemocompatible
porous polymer bead technology forms the basis of a broad technology portfolio. Some of our products include:
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CytoSorb
– an extracorporeal hemoperfusion cartridge approved in the EU for cytokine removal, with the goal of reducing SIRS
and sepsis and preventing or treating organ failure.
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CytoSorb
XL – an intended next generation successor to CytoSorb currently in advanced pre-clinical testing designed to reduce
a broad range of cytokines and inflammatory mediators, including lipopolysaccharide (LPS) endotoxin, from blood.
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VetResQ
– a broad spectrum blood purification adsorber designed to help treat deadly inflammation and toxic injury in animals
with critical illnesses such as septic shock, toxic shock syndrome, severe systemic inflammation, toxin-mediated diseases,
pancreatitis, trauma, liver failure, and drug intoxication. VetResQ is being commercialized in the United States.
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HemoDefend – a development-stage blood purification technology designed to remove non-infectious contaminants in blood transfusion products, with the goal of reducing transfusion reactions and improving the quality and safety of blood. With the support of NHLBI, we plan to file an IDE application for a U.S. pivotal trial designed to support U.S. FDA approval, by Q4 2020-Q1-2021.
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K+ontrol
– a development-stage blood purification technology designed to reduce excessive levels of potassium in the blood that
can be fatal in severe hyperkalemia.
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ContrastSorb
– a development-stage extracorporeal hemoperfusion cartridge designed to remove IV contrast from the blood of high risk
patients undergoing CT imaging with contrast, or interventional radiology procedures such as cardiac catheterization. The
goal of ContrastSorb is to prevent contrast-induced nephropathy.
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DrugSorb
– a development-stage extracorporeal hemoperfusion cartridge designed to remove toxic chemicals from the blood (e.g.,
drug overdose, high dose regional chemotherapy).
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BetaSorb
– a development-stage extracorporeal hemoperfusion cartridge designed to remove mid-molecular weight toxins, such as
b2-microglobulin,
that standard high-flux dialysis cannot remove effectively. The goal of BetaSorb is to improve the efficacy of dialysis or
hemofiltration.
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COVID-19 Business
Update
A significant problem
relating to the COVID-19 pandemic is that an increasing number of COVID-19 patients are developing life-threatening complications,
such as ARDS, shock (i.e. a potentially fatal drop in blood pressure), kidney failure, acute cardiac injury and secondary bacterial
infections. The underlying cause for these complications is often a cytokine storm that results in a massive, systemic inflammatory
response, leading to the damage of vital organs such as the lungs, heart, and kidneys, and ultimately multiple organ failure and
death in many cases. CytoSorb, has been used in more than 88,000 treatments as an approved treatment of cytokine storm in the
European Union and is distributed in 58 countries around the world, where it has helped physicians control severe inflammation
while helping to reverse shock and improve respiratory and other organ function.
The use of CytoSorb in patients infected
with COVID-19 in Italy, China, Germany and France began in March 2020. CytoSorb has now been used in more than 750 COVID-19 patients
to help treat cytokine storm and the related life-threatening complications in these countries. Based upon initial, preliminary
verbal reports from physicians treating these complications, CytoSorb use has generally been associated with a marked reduction
in cytokine storm and inflammation, improved lung function, weaning from mechanical ventilation, and a reversal of shock. Also
based on these preliminary reports, CytoSorb has been specifically recommended in the Italy Brescia Renal COVID Task Force Guidelines
to treat patients with severe COVID-19 infection and Stage 3 renal failure on continuous renal replacement therapy. CytoSorb has
also been recommended in the National Treatment Guidelines from Panama for Adult COVID-19 Patients if patients have either refractory
shock, or have severe or refractory respiratory failure requiring either high ventilator support or extracorporeal membrane oxygenation.
The use of CytoSorb has not been approved
in the U.S. by FDA. However, under certain circumstances, investigational medical devices that have not yet been FDA-approved may
be made available for emergency use in the U.S. under the FDA’s Expanded Access Program. On April 13, 2020, we announced
that the FDA granted Emergency Use Authorization (“EUA”) of CytoSorb for use in U.S. patients infected with COVID-19.
Under the EUA, CytoSorbents can make CytoSorb available, through commercial sales, to all hospitals in the U.S. for use in patients,
18 years of age or older, with confirmed COVID-19 infection who are admitted to the intensive care unit with confirmed or imminent
respiratory failure who have early acute lung injury or ARDS, severe disease, or life-threatening illness resulting in respiratory
failure, septic shock, and/or multiple organ dysfunction or failure. Before and after the announcement of the EUA, we have been
contacted by approximately 200 U.S. hospitals concerning the potential use of CytoSorb for patients infected with COVID-19. The
CytoSorb device has been authorized by FDA under an EUA. It has neither been cleared nor approved for the indication to treat patients
with COVID-19 Infection. The EUA will be effective until a declaration is made that the circumstances justifying the EUA have terminated
or until revoked by the FDA.
To meet the growing demand for CytoSorb
worldwide, our manufacturing facility is currently running 24 hours a day, seven days a week and are contemplating adding additional
teams per shift to reach full capacity. We are seeking government funding to scale our manufacturing, to subsidize our efforts
to provide CytoSorb to hospitals for emergency use and to help fund a clinical study in COVID-19 patients. Primarily due to the
demand for the CytoSorb device to treat COVID-19 patients, we had a sales backlog of approximately $2,700,000 as of March 31, 2020.
Government
Grants
We have been successful
in obtaining technology development contracts from governmental agencies such as the National Institutes of Health and the U.S.
Department of Defense, including the Defense Advanced Research Projects Agency (“DARPA”), the U.S. Army, U.S. Special
Operations Command (“USSOCOM”), the U.S. Air Force, Air Force Material Command (“USAF/AFMC”) and others.
In August 2012, we were
awarded a $3.8 million, five-year contract by DARPA for our “Dialysis-Like Therapeutics” (“DLT”) program
to treat sepsis. DARPA has been instrumental in funding many of the major technological and medical advances since its inception
in 1958, including development of the Internet, development of GPS, and robotic surgery. The DLT program in sepsis sought to develop
a therapeutic blood purification device that was capable of identifying the cause of sepsis (e.g., cytokines, toxins, pathogens,
activated cells) and remove these substances in an intelligent, automated, and efficient manner. Our contract was for advanced
technology development of our hemocompatible porous polymer technologies to remove cytokines and a number of pathogen and biowarfare
toxins from blood. We have completed our work under the contract with DARPA and SSC Pacific under Contract No. N66001-12-C-4199,
which provided for maximum funding of approximately $3,825,000. We received approximately $3,825,000 in funding under this contract
and no funding remains. Our performance under this contract has been completed.
In September 2012, we were
awarded a Phase II SBIR contract by the U.S. Army Medical Research and Material Command to evaluate our technology for the treatment
of trauma and burn injury in large animal models. In 2013, we finalized the Phase II SBIR contract which provided for a maximum
funding of approximately $803,000 with the granting agency. This work is supported by the U.S. Army Medical Research and Material
Command under an amendment to Contract W81XWH-12-C-0038. In June 2016, this contract was further amended to increase the maximum
funding by $443,000 to approximately $1,246,000. We received approximately $1,246,000 in funding under this contract and no funding
remains. Our performance under this contract has been completed.
In September 2013, the
National Heart Lung and Blood Institute (“NHLBI”) awarded us a Phase I Small Business Innovation Research (“SBIR”)
contract, (number HHSN-268201-300044C), valued at $203,351, to further advance our HemoDefend blood purification technology for
pRBC transfusions. The University of Dartmouth collaborated with us as a subcontractor on the project, entitled “Elimination
of blood contaminants from pRBCs using HemoDefend hemocompatible porous polymer beads.” The overall goal of this program
was to reduce the risk of potential side effects of blood transfusions, and help to extend the useful life of pRBCs. Our performance
under this contract has been completed.
In October 2015, we were
awarded a Phase II SBIR contract by the NHLBI and USSOCOM to help advance our HemoDefend blood purification technology towards
commercialization for the purification of pRBC transfusions. The contract, entitled “pRBCs Contaminant Removal with Porous
Polymer Beads”, (contract number HHSN-268201-600006C), provided for maximum funding of approximately $1,524,000 over a two-year
period. We received approximately $1,524,000 under this contract and no funding remains. Our performance under this contract has
been completed.
In March 2016, we were
awarded a Phase I SBIR contract for a development program entitled “Mycotoxin Adsorption with Hemocompatible Porous Polymer
Beads.” The purpose of this contract was to develop effective blood purification countermeasures for weaponized mycotoxins
that can be easily disseminated in water, food and air. This work was funded by the U.S. Joint Program Executive Office for Chemical
and Biological Defense, or JPEO-CBD, under contract number W911QY-16-P-0048 and provided for maximum funding of $150,000.
We received approximately $150,000 and no funding remains under this contract. Our performance under this contract has been completed.
In June 2016, we were awarded
a Phase I Small Business Technology Transfer (“STTR”) contract for its development program entitled “Use of
Highly Porous Polymer Beads to Remove Anti-A and Anti-B antibodies from Plasma for Transfusion”. The purpose of this contract
was to develop our HemoDefend blood purification technology to potentially enable universal plasma. This work was funded by the
USAMRAA under contract W81XWH-16-C-0025 and provided for maximum funding of $150,000. We received approximately $150,000 and no
funding remains under this contract. Our performance under this contract has been completed.
In July 2016, we were awarded
a Phase I SBIR contract for its development program entitled “Investigation of a sorbent-based potassium adsorber for the
treatment of hyperkalemia induced by traumatic injury and acute kidney injury in austere conditions”. The objective of this
Phase I project was to develop two novel and distinct treatment options for life-threatening hyperkalemia. This work was funded
by the U.S. Army Medical Research Acquisition Activity (“USAMRAA”) under contract W81XWH-16-C-0080 and provided for
maximum funding of approximately $150,000. We received approximately $150,000 and no funding remains under this contract. Our
performance under this contract has been completed.
In January 2017, we were
awarded a Phase II SBIR contract to continue development of CytoSorb for fungal mycotoxin blood purification. This program focused
on demonstrating the ability of CytoSorb to adsorb mycotoxins in vivo and improve survival in animals. This contract, W911QY-17-C-0007,
provided for maximum funding of $999,996 over two years. This program was funded by the Joint Program Executive Office - Chemical
and Biological Defense (“CBD”) SBIR program. We received approximately $999,996 in funding under this contract and
no further funding remains under this contract. Our performance under this contract has been completed.
In May 2017, we were awarded
a Phase II STTR contract entitled “Use of Highly Porous Polymer Beads to Remove Anti-A and Anti-B Antibiotics from Plasma
Transfusion”. The purpose of this contract is to continue development of our HemoDefend blood purification technology to
potentially enable universal plasma. We collaborate with researchers at Penn State University on this project. This contract provides
for maximum funding of $999,070 over two years. This work is being funded by the USAMRAA under contract number W81XWH-17-C-0053.
We received approximately $999,070 and no further funding remains under this contract. Our performance under this contract has
been completed.
In May 2017, the Company
was awarded a Congressionally Directed Medical Research Program (“CDMRP”) Phase I contract to improve delayed evacuation
and prolonged field care for severe burn injury via novel hemoadsorptive and hydration therapies. This work is being funded by
the USAMRAA under contract number W81WH-17-2-0013. This contract provides for maximum funding of $719,000 over four years. As
of March 31, 2020, we received approximately $564,000 and have approximately $155,000 remaining under this contract.
In September 2017, the
Company was awarded a Phase II SBIR contract for its development program entitled “Investigation of a sorbent-based potassium
adsorber for the treatment of hyperkalemia induced by traumatic injury and acute kidney injury”. The purpose of this contract
is to continue development of two novel and distinct treatment options for life-threatening hyperkalemia. This work is being funded
by the USAMRAA under contract W81XWH-17-C-0142 and provides for maximum funding of approximately $999,871. As of March 31, 2020,
we received approximately $999,871 and no further funding remains under this contract. Our performance under this contract has
been completed.
In August 2018, the Company
was awarded a Phase IIB Bridge SBIR contract by the NHLBI to facilitate and accelerate the commercialization of our HemoDefend
blood purification technology for the purification of pRBC transfusions. The contract, entitled “pRBCs Contaminant Removal
with Hemocompatible Porous Polymer Beads” (award number 2R44HL141928-03), provides for maximum funding of approximately
$2,971,000 over a three-year period. As of March 31, 2020, we received approximately $1,404,000 in funding under this contract
and have approximately $1,567,000 remaining under this contract. Under the terms of this contract, we must make a matching contribution
equal to the funds awarded thereunder.
In September 2019, the
Company was awarded a Rapid Innovation Fund contract by the USAF/AFMC to develop a simple, easy-to-use renal support system to
treat severe hyperkalemia. The contract, entitled “K+ontrol Renal Support System for Reduction of Hyperkalemia” (award
number FA8650-19-C-6065), provides for maximum funding of approximately $2,960,000 over a two-year period. As of March 31, 2020,
we received approximately $359,000 in funding and have approximately $2,601,000 remaining under this contract.
Results of Operations
Comparison for the
three months ended March 31, 2020 and 2019:
Revenues:
Revenue from product sales was approximately
$8,156,000 for the three months ended March 31, 2020, as compared to approximately $4,577,000 for the three months ended March
31, 2019, an increase of approximately $3,579,000, or 78%. This increase was driven by an increase in direct sales of approximately
$2,428,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor
sales of approximately $1,151,000. Though difficult to quantitate, we estimate that approximately $1.5 to $1.7 million of product
sales in the first quarter of 2020 was due to the demand for CytoSorb to treat COVID-19 patients. In addition, sales were negatively
impacted by approximately $237,000 as a result of the decrease in the average exchange rate of the Euro to the U.S. dollar. For
the three months ended March 31, 2020, the average exchange rate of the Euro to the U.S. dollar was $1.10 as compared to an average
exchange rate of $1.13 for the three months ended March 31, 2019.
Grant income was approximately
$551,000 for the three months ended March 31, 2020 as compared to approximately $615,000 for the three months ended March 31,
2019, a decrease of approximately $64,000 or 10%. This decrease was a result of the timing of certain grant revenue.
Total revenues were approximately
$8,707,000 for the three months ended March 31, 2020, as compared to total revenues of approximately $5,192,000 for the three
months ended March 31, 2019, an increase of approximately $3,515,000, or 68%.
Cost of Revenues:
For the three months ended
March 31, 2020 and 2019, cost of revenue was approximately $2,385,000 and $1,739,000, respectively, an increase of approximately
$646,000. Product cost of revenues increased approximately $783,000 during the three months ended March 31, 2020 as compared to
the three months ended March 31, 2019 due to increased sales. Product gross margins were approximately 76% for the three months
ended March 31, 2020 and approximately 74% for the three months ended March 31, 2019, as a result of production efficiencies achieved.
Research and Development
Expenses:
For the three months ended
March 31, 2020, research and development expenses were approximately $1,965,000 as compared to research and development expenses
of approximately $2,419,000 for the three months ended March 31, 2019. The decrease of approximately $454,000 was due to a decrease
in clinical trial and related costs of approximately $974,000, which is due primarily to the pause in our REFRESH 2-AKI study.
This decrease was offset by an increase in direct labor and other costs being deployed toward grant-funded activities of approximately
$137,000, which had the effect of increasing the amount of our non-reimbursable research and development costs, an increase in
new product development costs of approximately $104,000, an increase in non-clinical research and development salary related costs
of approximately $71,000 and an increase in non-grant related research and development costs of approximately $208,000.
Legal, Financial
and Other Consulting Expense:
Legal, financial and other
consulting expenses were approximately $519,000 for the three months ended March 31, 2020, as compared to approximately $562,000
for the three months ended March 31, 2019. The decrease of approximately $43,000 was due to a decrease in legal fees of approximately
$97,000 and a decrease in consulting fees of approximately $9,000. These decreases were offset by an increase in accounting fees
of approximately $32,000 and an increase in employment agency fees of approximately $31,000.
Selling, General
and Administrative Expense:
Selling, general and administrative
expenses were approximately $6,317,000 for the three months ended March 31, 2020, as compared to approximately $4,758,000 for
the three months ending March 31, 2019, an increase of $1,559,000. This increase is related to an increase in salaries, commissions
and related costs of approximately $501,000, additional sales and marketing costs, which include advertising and conference attendance
of approximately $47,000, an increase in royalty expenses of approximately $289,000 due to the increase in product sales, and
an increase in non-cash restricted stock expense of approximately $216,000 related to restricted stock units granted to the Company’s
executive officers, an increase in non-cash stock compensation expense of approximately $502,000 and an increase in office supplies
and other general and administrative costs of approximately $165,000. These increases were offset by a decrease in travel and
entertainment expenses of approximately $161,000.
Interest Expense,
net:
For the three months ended
March 31, 2020, interest expense was approximately $306,000, as compared to interest expense of approximately $205,000 for the
three months ended March 31, 2019. This increase in interest expense of approximately $101,000 was primarily a result of the additional
interest incurred related to the draw down of the $5,000,000 Term B Loan with Bridge Bank on July 31, 2019.
Gain (Loss) on Foreign
Currency Transactions:
For the three months ended
March 31, 2020, the non-cash loss on foreign currency transactions was approximately $(668,000) as compared to a loss of approximately
$(393,000) for the three months ended March 31, 2019. The 2020 loss was directly related to the decrease in the exchange rate
of the Euro to the U.S. dollar at March 31, 2020 as compared to December 31, 2019. The exchange rate of the Euro to the U.S. dollar
was $1.10 per Euro at March 31, 2020, as compared to $1.12 per Euro at December 31, 2019. The 2019 loss was directly related to
the decrease in the exchange rate of the Euro to the U.S. dollar at March 31, 2019 as compared to December 31, 2018. The exchange
rate of the Euro to the U.S. dollar was $1.12 per Euro at March 31, 2019, as compared to $1.15 per Euro at December 31, 2018.
History of Operating
Losses:
We have experienced substantial
operating losses since inception. As of March 31, 2020, we had an accumulated deficit of approximately $192,242,000, which included
losses of approximately $3,453,000 and $4,884,000 for the three month periods ended March 31, 2020 and 2019, respectively. Historically,
losses have resulted principally from costs incurred in the research and development of our polymer technology, clinical studies,
and general and administrative expenses.
Liquidity and Capital
Resources
Since inception, our operations
have been primarily financed through the issuance of debt and equity securities. At March 31, 2020, we had current assets of approximately
$37,529,000 including cash on hand of approximately $26,389,000 and current liabilities of approximately $11,464,000. On April
17, 2020, the Company received approximately $1,093,000 in proceeds from the sale of its New Jersey Net Operating Loss carry forwards
under the Technology Business Tax Certificate Transfer Program. In addition, in early April 2020, the Company received approximately
$1,917,000 in proceeds related to the sale of shares pursuant to the Open Market Sale Agreement with Jefferies LLC and B. Riley
FBR, Inc. On July 31, 2019, the Company executed an Amendment to its Loan Agreement with Bridge Bank and, simultaneous with this
Amendment, received $5 million in proceeds from an additional term loan. In addition, the Amendment extends the interest-only
period of the loan through October 2020.
We believe that we have
sufficient cash to fund our operations into 2021. We will need to raise additional capital to support our ongoing operations in
the future. In addition, we will need to raise additional funds to support clinical trials in the U.S. and in Europe.
COVID-19 Impact on Financial Results
First quarter 2020 product revenues were
positively impacted by underlying strength in our critical care and cardiac surgery business, and the use of CytoSorb to treat
critically-ill COVID-19 patients in the ICU. Though difficult to quantitate, we estimate that approximately $1.5 million to $1.7
million of our first quarter 2020 revenues were related to COVID-19. Given the order patterns we are currently experiencing, we
expect that the COVID-19 pandemic will continue to have a positive impact on product revenues in the second quarter of 2020. Primarily
due to the demand for the CytoSorb device to treat COVID-19 patients, we had a sales backlog of approximately $2,700,000 as of
March 31, 2020.
In addition, due to the EUA granted by
the FDA on April 11, 2020, we began shipping CytoSorb to hospitals in the United States. We are continuing to actively receive
inquiries and orders for CytoSorb. However, at this time, we cannot predict the overall impact this will have on our 2020 product
sales.
As the impact of the COVID-19 pandemic
eases, we may experience a decrease in revenue in the second half of 2020 as compared to the first half of 2020 as the impact of
this catalyst for revenue growth is reduced.
Grant revenues have been negatively impacted
by the COVID-19 pandemic. Our research and development employees have either been deployed to work-from-home status or reassigned
to assist production activities to increase production of CytoSorb. This may reduce grant revenue until such time as the pandemic
is over, however this is not expected to have a material impact on our financial results because of the low gross margins associated
with grant activities.
There has been a worldwide slowdown in
clinical trial activities as medical providers focus on COVID-19 patients and this has resulted in the temporary pause in enrollment
of our TISORB study in the United Kingdom and other clinical trials in Europe. Together with the previously disclosed pause in
enrollment of our REFRESH 2-AKI trial, this has resulted in an approximately $1 million reduction in our quarterly clinical trial
expenses which has a corresponding reduction in our reported operating loss and quarterly cash burn. These clinical trial activities
are expected to resume to normal levels once the pandemic is over.
There has been an approximately $400,000
decrease in our first quarter 2020 selling, general, and administrative expenses due to the restrictions on travel and the cancelling
of medical and investor conferences during the pandemic. This is also a temporary situation.
There has been no adverse impact on our
ability to access capital. We have the ability to access capital through our ATM facility and through the equity markets, if needed.
There has also been no adverse impact on our ability to comply with the covenants associated with our debt facility with Bridge
Bank. We do not expect that this will change materially in the near future.
Contractual
Obligations
In January 2019, the Company
entered into an Eighteenth Amendment to Lease Agreement with Princeton Corporate Plaza, LLC, which expands our space to approximately
19,920 square feet. The lease for our corporate headquarters and manufacturing facility expires May 31, 2020. Effective February
1, 2019, the Company’s base rent obligation increased to $32,443 per month. In addition, the lease amendment provides the
Company with an option to extend the term of the lease for an additional one year period through May 31, 2021.
In September 2016, the
Company’s wholly-owned subsidiary, CytoSorbents Europe GmbH, entered into a five year lease agreement with Klimik GmbH for
760 square meters of office and warehouse space. In May 2018, CytoSorbents Europe GmbH entered into an additional lease agreement
with Klimik GmbH which expanded its office and warehouse space to 960 square meters. The leases have a total rent obligation of
$8,827 per month. Both leases expire on August 31, 2021. The leases also provide the Company with an option to extend the terms
for an additional five year period through August 31, 2026.
Off-balance Sheet Arrangements
We have no off-balance
sheet arrangements.
Going Concern
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. We believe that we have adequate cash for more than the next 12 months of operations,
however, we may need to raise additional capital to support clinical trials in the U.S. and/or elsewhere. We will be better able
to address this need once the specific protocols of these trials are finalized.
As of March 31, 2020, we
had an accumulated deficit of approximately $192,242,000, which included net losses of approximately $3,453,000 for the three
months ended March 31, 2020 and $4,884,000 for the three months ended March 31, 2019. In part due to these losses, our 2019 audited
consolidated financial statements were prepared assuming we will continue as a going concern, and the auditors’ report on
the 2019 financial statements expressed substantial doubt about our ability to continue as a going concern. Our losses have resulted
principally from costs incurred in the research and development of our polymer technology, clinical studies and selling, general
and administrative expenses. We intend to continue to conduct significant additional research, development, and clinical study
activities which, together with expenses incurred for the establishment of manufacturing arrangements and a marketing and distribution
presence, and other selling, general and administrative expenses, are expected to result in continuing operating losses for the
foreseeable future. The amount of future losses and when, if ever, we will achieve profitability are uncertain. Our ability to
achieve profitability will depend, among other things, on successfully completing the development of our technology and commercial
products, obtaining additional requisite regulatory approvals in markets not covered by the CE mark and for potential label extensions
of our current CE mark, establishing manufacturing and sales and marketing arrangements with third parties, and raising sufficient
funds to finance our activities. No assurance can be given that our product development efforts will be successful, that our current
CE mark will enable us to achieve profitability, that additional regulatory approvals in other countries will be obtained, that
any of our products will be manufactured at a competitive cost and will be of acceptable quality, or that the we will be able
to achieve profitability or that profitability, if achieved, can be sustained. These interim consolidated financial statements
do not include any adjustments related to the outcome of this uncertainty.