Item 1A. Risk Factors
Described below are various risks and uncertainties
that may affect our business. These risks and uncertainties are not the only ones we face. You should recognize that other significant
risks and uncertainties may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might
affect us to a greater or different degree than expected. Certain risks and uncertainties, including ones that we currently deem
immaterial or that are similar to those faced by other companies in our industry or business in general, may also affect our business.
If any of the risks described below actually occur, our business, financial condition or results of operations could be materially
and adversely affected.
We have a history
of losses and expect to incur substantial future losses, and the report of our auditor on our consolidated financial statements
expresses substantial doubt about our ability to continue as a going concern
.
We have experienced substantial operating
losses since inception. As of March 31, 2016, we had an accumulated deficit of approximately $134,362,000, which included net losses
of approximately $1,836,000 for the three months ended March 31, 2016 and $4,717,000 for the three months ended December 31, 2015.
In part due to these losses, our audited consolidated financial statements have been prepared assuming we will continue as a going
concern, and the auditors’ report on those financial statements express 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
and general and administrative expenses. We intend 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 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, that we will be able to achieve profitability or
that profitability, if achieved, can be sustained, or our ability to raise additional capital when needed or on terms acceptable
to us. Our failure with respect to any or all of the matters would have a material adverse effect on our business, operating results,
financial condition and prospects.
We will require additional capital
in the future to fund our operations.
As of March 31, 2016, we had current assets
of approximately $8,041,000 including cash on hand of approximately $3,537,000, short-term investments of approximately $2,490,000,
and current liabilities of approximately $3,248,000. For the three months ended March 31, 2016, our cash burn was approximately
$1.8 million. Our current and historical cash burn is not necessarily indicative of our future use of cash and cash equivalents.
We will require additional financing in
the future in order to complete additional clinical studies and to support the commercialization of our proposed products. There
can be no assurance that we will be successful in our capital raising efforts. Our long-term capital requirements are expected
to depend on many factors, including:
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continued progress and cost of our research and development programs;
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progress with pre-clinical studies and clinical studies;
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the time and costs involved in obtaining regulatory clearance in other countries and/or for other indications;
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costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
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costs of developing sales, marketing and distribution channels;
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market acceptance and reimbursement of our products; and
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cost for training physicians and other health care personnel.
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Although we entered into a Controlled Equity
Offering
SM
Sales Agreement with Cantor Fitzgerald & Co. in November 2015 for the offer and sale of up to an aggregate
of $25,000,000 of shares of our common stock, we may need additional financing. Should the financing we require be unavailable
or on terms unacceptable to us when we require it, the consequences could be a material adverse effect on our business, operating
results, financial condition and prospects.
In addition, in the event that additional
funds are obtained through arrangements with collaborative partners or other sources, we may have to relinquish economic and/or
proprietary rights to some of our technologies or products under development that we would otherwise seek to develop or commercialize
by ourselves.
Although historically we have been
a research and development company, we are in the process of commercializing our products. There can be no assurance that we will
be successful in developing and expanding commercial operations or balancing our research and development activities with our commercialization
activities
.
We have historically been engaged primarily
in research and development activities and have generated limited revenues to date. With the launch of our CytoSorb product in
the EU and abroad, there can be no assurance that we will be able to successfully manage the balance of our research and development
operations with our planned commercial enterprise. Potential investors should be aware of the problems, delays, expenses and difficulties
frequently encountered by an enterprise in balancing development, which include unanticipated problems relating to testing, product
registration, regulatory compliance and manufacturing, with commercialization, which includes problems with market adoption, reimbursement,
marketing problems and additional costs. Our products and product candidates will require significant additional research and testing,
and we will need to overcome significant regulatory burdens prior to commercialization in other countries, such as the U.S., and
for ongoing compliance for our CE Mark. We will also need to raise significant additional funds to complete additional clinical
studies and obtain regulatory approvals in other countries before we can begin selling our products in markets not covered by our
CE Mark. In addition, we may be required to spend significant funds on building out our commercial operations. There can be no
assurance that after the expenditure of substantial funds and efforts, we will successfully develop and commercialize any products,
generate any significant revenues or ever achieve and maintain a substantial level of sales of our products.
We depend upon key personnel who
may terminate their employment with us at any time.
As of May 1, 2016 we currently have 57
full-time employees and several temporary employees. Our success will depend to a significant degree upon the continued services
of our key management team and advisors, including, Dr. Phillip Chan, our Chief Executive Officer; Kathleen P. Bloch, our Chief
Financial Officer; Vincent Capponi, our Chief Operating Officer and Dr. Robert Bartlett, our Chief Medical Officer, who works with
us on a consulting basis. Although these individuals have long-term employment and consulting agreements, there can be no assurance
that key management personnel or other members of our management team and advisors will continue to provide services to us. In
addition, our success will depend on our ability to attract and retain other highly skilled personnel. We may be unable to recruit
such personnel on a timely basis, if at all. Management and other employees may voluntarily terminate their employment with us
at any time. The loss of services of key personnel, or the inability to attract and retain additional qualified personnel, could
result in delays in development or approval of our products, loss of sales and diversion of management resources.
Our Chief Medical Officer works with
us on a consulting basis.
Our Chief Medical Officer, Dr. Robert Bartlett,
works with us on a consulting basis. Because of the part time nature of his consulting agreement, Dr. Bartlett may not always be
available to provide us with his services when needed by us in a timely manner.
Acceptance of our medical devices
in the marketplace is uncertain, and failure to achieve market acceptance will prevent or delay our ability to generate revenues.
Our future financial performance will depend,
at least in part, upon the introduction and customer acceptance of our products. Even with CE Mark approval for our CytoSorb device
as a cytokine filter, our products and product candidates may not achieve market acceptance in the countries that recognize and
accept the CE Mark. Additional approvals from other regulatory authorities (such as the FDA) will be required before we can market
our device in countries not covered by the CE Mark. There is no guarantee that we will be able to achieve additional regulatory
approvals, and even if we do, our products may not achieve market acceptance in the countries covered by such approvals. The degree
of market acceptance will depend upon a number of factors, including:
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the receipt of regulatory clearance of marketing claims for the uses that we are developing;
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the establishment and demonstration of the advantages, safety and efficacy of our polymer technology;
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pricing and reimbursement policies of government and third-party payers such as insurance companies, health maintenance organizations and other health plan administrators;
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our ability to attract corporate partners, including medical device companies, to assist in commercializing our products; and
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our ability to effectively market our products.
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Physicians, patients, payers or the medical community in general
may be unwilling to accept, utilize or recommend any of our products. Approval of our CytoSorb device as a cytokine filter as well
as the data we have gathered in our clinical studies to support device usage in this indication may not be sufficient for market
acceptance in the medical community. We may also need to conduct additional clinical studies to gather additional data for marketing
purposes. If we are unable to obtain regulatory approval or commercialize and market our products when planned, we may not achieve
any market acceptance or generate revenue.
If we are unable to obtain and maintain
patent protection for our products and product candidates, or if the scope of the patent protection obtained is not sufficiently
broad, our competitors could develop and commercialize products and product candidates similar or identical to ours, and our ability
to successfully commercialize our products and product candidates may be adversely affected.
Our commercial success will depend, in
part, on our ability to obtain and maintain patent protection in the United States and other countries with respect to our products
and product candidates. We seek to protect our proprietary position by filing patent applications in the United States and abroad
related to our products and product candidates that are important to our business. We cannot be certain that patents will be issued
or granted with respect to applications that are currently pending or that we apply for in the future with respect to one or more
of our products and product candidates, or that issued or granted patents will not later be found to be invalid and/or unenforceable.
The patent prosecution process is expensive
and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable
cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development
output before it is too late to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements
with parties who have access to patentable aspects of our research and development output, such as our employees, distribution
partners, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output
before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
The patent position of medical device companies
generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation.
As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our
pending and future patent applications may not result in patents being issued, and even if issued, the patents may not meaningfully
protect our products or product candidates, effectively prevent competitors and third parties from commercializing competitive
products or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent
our patents by developing similar or alternative products in a non-infringing manner.
Changes in the patent laws, implementing
regulations or interpretation of the patent laws in the United States and other countries may also diminish the value of our patents
or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent
as the laws of the United States, and many companies have encountered significant difficulties in protecting and defending such
rights in foreign jurisdictions.
We cannot be certain that our patents and
patent rights will be effective in protecting our products, product candidates and technologies. In addition, certain of our
existing patents expire over the next 1 to 10 years. Failure to protect such assets may have a material adverse effect on our business,
operations, financial condition and prospects.
We may face litigation from third
parties claiming that our products infringe on their intellectual property rights, or seek to challenge the validity of our patents.
Our future success is also dependent in
part on the strength of our intellectual property, trade secrets and know-how, which have been developed from years of research
and development. In addition to the “Purolite” litigation discussed below, we may be exposed to additional future litigation
by third parties seeking to challenge the validity of our rights based on claims that our technologies, products or activities
infringe the intellectual property rights of others or are invalid, or that we have misappropriated the trade secrets of others.
Since our inception, we have sought to
contract with large, established manufacturers to supply commercial quantities of our adsorbent polymers. As a result, we have
disclosed, under confidentiality agreements, various aspects of our technology with potential manufacturers. We believe that these
disclosures, while necessary for our business, have resulted in the attempt by potential suppliers to improperly assert ownership
claims to our technology in an attempt to gain an advantage in negotiating manufacturing rights.
We have previously engaged in discussions
with the Brotech Corporation and its affiliate, Purolite International, Inc. (collectively referred to as Purolite), which had
demonstrated a strong interest in being our polymer manufacturer. For a period of time beginning in December 1998, Purolite engaged
in efforts to develop and optimize the manufacturing process needed to produce our polymer products on a commercial scale. However,
the parties eventually decided not to proceed. In 2003, Purolite filed a lawsuit against us asserting, among other things, co-ownership
and co-inventorship of certain of our patents. On September 1, 2006, the United States District Court for the Eastern District
of Pennsylvania approved a Stipulated Order and Settlement Agreement under which we and Purolite agreed to the settlement of the
action. The Settlement Agreement provides us with the exclusive right to use our patented technology and proprietary know how relating
to adsorbent polymers for a period of 18 years. Under the terms of the Settlement Agreement, we have agreed to pay Purolite royalties
of 2.5% to 5% on the sale of certain of our products if and when those products are sold commercially.
Several years ago we engaged in discussions
with the Dow Chemical Company, which had indicated a strong interest in being our polymer manufacturer. After a Dow representative
on our Advisory Board resigned, Dow filed and received several patents naming our former Advisory Board member as an inventor.
In management’s view the Dow patents improperly incorporate our technology and should not have been granted to Dow. The existence
of these Dow patents could result in a potential dispute with Dow in the future. In the event such a dispute arises, we may be
forced to spend significant time and resources to defending our position. There can be no assurances that such efforts will be
successful and not have a material adverse effect on our business, operating results, financial condition and prospects.
The expiration or loss of patent protection may adversely
affect our future revenues and operating earnings.
We rely on patent, trademark, trade secret
and other intellectual property protection in the discovery, development, manufacturing, and sale of our products and product candidates.
In particular, patent protection is important in the development and eventual commercialization of our products and product candidates.
Patents covering our products and product candidates normally provide market exclusivity, which is important in order for our products
and product candidates to become profitable.
Certain of our patents will expire in the
next one to ten years. While we are seeking additional patent coverage which may protect the technology underlying these patents,
there can be no assurances that such additional patent protection will be granted, or if granted, that these patents will not be
infringed upon or otherwise held enforceable. Even if we are successful in obtaining a patent, patents have a limited lifespan.
In the United States, the natural expiration of a utility patent typically is generally 20 years after it is filed. Various extensions
may be available; however, the life of a patent, and the protection it affords, is limited. Without patent protection for our products
and product candidates, we may be open to competition from generic versions of such methods and devices.
We have commenced the process of
seeking regulatory approvals of our products and product candidates, but the approval process involves lengthy and costly clinical
studies and is, in large part, not in ourcontrol. The failure to obtain government approvals, internationally or domestically,
for our products and product candidates, or to comply with ongoing governmental regulations could prevent, delay or limit introduction
or sale of our products and result in the failure to achieve revenues or maintain our operations.
CytoSorb has already achieved EU regulatory
approval under the CE Mark and the Medical Devices Directive. It is manufactured at our manufacturing facility in New Jersey under
ISO 13485 Full Quality Systems certification. The manufacturing and marketing of our products will be subject to extensive and
rigorous government regulation in the European market, the U.S., in various states and in other foreign countries. In the U.S.
and other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive, and uncertain.
There can be no assurance that we will ever obtain the necessary additional approvals to sell our products in the United States
or other non EU countries. Even if we do ultimately receive FDA approval for any of our products, we will be subject to extensive
ongoing regulation. While we have received approval from our Notified Body to apply the CE Mark to our CytoSorb device, we will
be subject to extensive ongoing regulation and auditing requirements to maintain the CE Mark.
Our products will be subject to international
regulation as medical devices under the Medical Devices Directive. In Europe, which we expect to provide the initial market for
our products, the Notified Body and Competent Authority govern, where applicable, development, clinical studies, labeling, manufacturing,
registration, notification, clearance or approval, marketing, distribution, record keeping, and reporting requirements for medical
devices. Different regulatory requirements may apply to our products depending on how they are categorized by the Notified Body
under these laws. Current international regulations classify our CytoSorb device as a Class IIb device. Even though we have received
CE Mark certification of the CytoSorb device, there can be no assurance that we will be able to continue to comply with the required
annual auditing requirements or other international regulatory requirements that may be applicable. In addition, there can be no
assurance that government regulations applicable to our products or the interpretation of those regulations will not change. The
extent of potentially adverse government regulation that might arise from future legislation or administrative action cannot be
predicted. There can be no assurances that reimbursement will be granted or that additional clinical data will be required to establish
reimbursement.
We have conducted limited clinical
studies of our CytoSorb device. Clinical and pre-clinical data is susceptible to varying interpretations, which could delay, limit
or prevent additional regulatory clearances.
To date, we have conducted limited clinical
studies on our CytoSorb product. There can be no assurance that we will successfully complete additional clinical studies necessary
to receive additional regulatory approvals in markets not covered by the CE Mark. While studies conducted by us and others have
produced results we believe to be encouraging and indicative of the potential efficacy of our products and technology, data already
obtained, or in the future obtained, from pre-clinical studies and clinical studies do not necessarily predict the results that
will be obtained from later pre-clinical studies and clinical studies. Moreover, pre-clinical and clinical data are susceptible
to varying interpretations, which could delay, limit or prevent additional regulatory approvals. A number of companies in the medical
device and pharmaceutical industries have suffered significant setbacks in advanced clinical studies, even after promising results
in earlier studies. The failure to adequately demonstrate the safety and effectiveness of an intended product under development
could delay or prevent regulatory clearance of the device, resulting in delays to commercialization, and could materially harm
our business. Even though we have received approval to apply the CE Mark to our CytoSorb device as a cytokine filter, there can
be no assurance that we will be able to receive approval for other potential applications of CytoSorb, or that we will receive
regulatory clearance from other targeted regions or countries.
We rely extensively on research and
testing facilities at various universities and institutions, which could adversely affect us should we lose access to those facilities.
Although we have our own research laboratories
and clinical facilities, we collaborate with numerous institutions, universities and commercial entities to conduct research and
studies of our products. We currently maintain a good working relationship with these parties. However, should the situation change,
the cost and time to establish or locate alternative research and development facilities could be substantial and delay gaining
CE Mark for other potential applications of our products, our other product candidates or technologies, and/or FDA approval and
commercializing our products.
We are and will be exposed to product
liability risks, and clinical and preclinical liability risks, which could place a substantial financial burden upon us should
we be sued.
Our business exposes us to potential product
liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices. We cannot
be sure that claims will not be asserted against us. A successful liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition and results of operations.
We cannot give assurances that we will
be able to continue to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance
will provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability insurance coverage
that we may obtain could have a material adverse effect on our business, financial condition and results of operations.
Certain university and other relationships
are important to our business and may potentially result in conflicts of interests.
Dr. John Kellum and others are critical
care advisors and consultants of ours and are associated with institutions such as the University of Pittsburgh Medical Center.
Their association with these institutions may currently or in the future involve conflicting interests in the event they or these
institutions enter into consulting or other arrangements with competitors of ours.
We have limited manufacturing experience,
and once our products are approved, we may not be able to manufacture sufficient quantities at an acceptable cost, or without shut-downs
or delays.
In March 2011, we received approval from
our Notified Body to apply the CE Mark to our CytoSorb device for commercial sale as a cytokine filter. 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 sale in the EU and for additional clinical
studies. Manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring
that quality control and manufacturing procedures conform to current Good Manufacturing Practices (cGMP). As such, we are
subject to continual review and periodic inspections to assess compliance with cGMP as required by our International notified body
and those FDA regulations governing companies that export medical products for sale outside the United States. Accordingly,
we must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and
quality control. We have limited experience in establishing, supervising and conducting commercial manufacturing. If we or the
third-party manufacturers of our products fail to adequately establish, supervise and conduct all aspects of the manufacturing
processes, we may not be able to commercialize our products.
While we currently believe we have established
sufficient production capacity to supply potential near term demand for the CytoSorb device, we will need to scale up and increase
our manufacturing capabilities in the future. No assurance can be given that we will be able to successfully scale up our manufacturing
capabilities or that we will have sufficient financial or technical resources to do so on a timely basis or at all.
Due to our limited marketing, sales
and distribution experience, we may be unsuccessful in our efforts to sell our products.
We expect to enter into agreements with
third parties for the commercial marketing, and distribution of our products. There can be no assurance that parties we may engage
to market and distribute our products will:
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satisfy their financial or contractual obligations to us;
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adequately market our products; or
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not offer, design, manufacture or promote competing products.
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If for any reason any party we engage is
unable or chooses not to perform its obligations under our marketing and distribution agreement, we would experience delays in
product sales and incur increased costs, which would harm our business and financial results.
Our results of operations can be
significantly affected by foreign currency fluctuations and regulations.
A significant portion of our revenues is
currently derived in the local currencies of the foreign jurisdictions in which our products are sold. Accordingly, we are subject
to risks relating to fluctuations in currency exchange rates. In the future, and especially as we further expand our sales efforts
in international markets, our customers will increasingly make payments in non-U.S. currencies. Fluctuations in foreign currency
exchange rates could affect our revenues, operating costs and operating margins. In addition, currency devaluation can result in
a loss to us if we hold deposits of that currency. We cannot predict the effect of future exchange rate fluctuations
on our operating results.
If we are unable to convince physicians
and other health care providers as to the benefits of our products, we may incur delays or additional expense in our attempt to
establish market acceptance.
Broad use of our products may require physicians
and other health care providers to be informed about our products and their intended benefits. The time and cost of such an educational
process may be substantial. Inability to successfully carry out this education process may adversely affect market acceptance of
our products. We may be unable to educate physicians regarding our products in sufficient numbers or in a timely manner to achieve
our marketing plans or to achieve product acceptance. Any delay in physician education may materially delay or reduce demand for
our products. In addition, we may expend significant funds towards physician education before any acceptance or demand for our
products is created, if at all.
The market for our products is rapidly
changing and competitive, and new devices and drugs, which may be developed by others, could impair our ability to maintain and
grow our business and remain competitive.
The medical device and pharmaceutical industries
are subject to rapid and substantial technological change. Developments by others may render our technologies and products noncompetitive
or obsolete. We also may be unable to keep pace with technological developments and other market factors. Technological competition
from medical device, pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into
the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities
and budgets than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities
represent significant competition for us.
If users of our products are unable
to obtain adequate reimbursement from third-party payers, or if new restrictive legislation is adopted, market acceptance of our
products may be limited and we may not achieve anticipated revenues.
The continuing efforts of government and
insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of health
care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers
and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of
medical devices is subject to government control. In the United States, given recent federal and state government initiatives directed
at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care
reform, the cost of medical devices and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any
such legislative or regulatory proposals will be adopted, the announcement or adoption of these proposals could materially harm
our business, financial condition and results of operations.
Our ability to commercialize our products
will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment
are obtained by governmental authorities, private health insurers and other organizations, such as health maintenance organizations
(HMOs). Third-party payers are increasingly challenging the prices charged for medical care. Also, the trend toward managed health
care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and medical devices, as well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for our products. The cost containment measures that health care payers and
providers are instituting and the effect of any health care reform could materially harm our ability to operate profitably.
CytoSorb is currently reimbursable in Germany
and Austria. We plan to seek reimbursement for our product in other EU and non-EU countries to help further adoption. There can
be no assurance when, or if, this additional reimbursement might be approved.
Our business may
be negatively affected if the United States and/or the countries in which we sell our products participate in wars, military
actions or are otherwise the target of international terrorism.
Involvement in a war or
other military action or international acts of terrorism may cause significant disruption to commerce throughout the world. To
the extent that such disruptions result in (i) delays or cancellations of customer orders, (ii) a general decrease in consumer
spending on healthcare technology, (iii) our inability to effectively market and distribute our products globally or (iv) our inability
to access capital markets, our business and results of operations could be materially and adversely affected. We are unable to
predict whether acts of international terrorism or the involvement in a war or other military actions by the United States and/or
the countries in which we sell our products will result in any long-term commercial disruptions or if such involvement or responses
will have any long-term material adverse effect on our business, results of operations, or financial condition.
We could
be adversely affected by violations of the Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
We are subject to the Foreign Corrupt Practices
Act (FCPA), which generally prohibits companies and their intermediaries from making payments to non-U.S. government officials
for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to anti-bribery
laws in the jurisdictions in which we operate. Although we have policies and procedures designed to ensure that we, our employees
and our agents comply with the FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect
us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries with respect to
our business or any businesses that we acquire. We do business in a number of countries in which FCPA violations have recently
been enforced. Failure to comply with the FCPA, other anti-bribery laws or other laws governing the conduct of business with foreign
government entities, including local laws, could disrupt our business and lead to severe criminal and civil penalties, including
imprisonment, criminal and civil fines, loss of our export licenses, suspension of our ability to do business with the federal
government, denial of government reimbursement for our products and/or exclusion from participation in government healthcare programs.
Other remedial measures could include further changes or enhancements to our procedures, policies, and controls and potential personnel
changes and/or disciplinary actions, any of which could have a material adverse effect on our business, financial condition, results
of operations and liquidity. We could also be adversely affected by any allegation that we violated such laws.
Risks Connected to Our Securities
The price of our Common
Stock has been highly volatile due to factors that will continue to affect the price of our stock.
On December 3, 2014, we effected a twenty-five-for-one
(25:1) reverse split of our common stock. Immediately after the reverse stock split, on December 3, 2014 we changed our state of
incorporation from the State of Nevada to the State of Delaware pursuant to an Agreement and Plan of Merger, dated December 3,
2014, whereby we merged with and into our recently formed, wholly-owned Delaware subsidiary. On December 17, 2014, we received
approval for up-listing to The NASDAQ Capital Market and our common stock began trading on The NASDAQ Capital Market on December
23, 2014. Our Common Stock closed as high as $5.68 and as low as $3.21 per share between January 1, 2016 and March 31, 2016 on
The NASDAQ Capital Market. On May 1, 2016 the closing price of our common stock, as reported on The NASDAQ Capital Market, was
$4.42. Historically, medical device company securities such as our Common Stock have experienced extreme price fluctuations. Some
of the factors leading to this volatility include, but are not limited to:
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fluctuations in our operating results;
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announcements of product releases by us or our competitors;
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announcements of acquisitions and/or partnerships by us or our competitors; and
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general market conditions.
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Although shares of our common
stock currently trade on the NASDAQ Capital Market under the symbol “CTSO”, there is no assurance that our stock will
not continue to be volatile while listed on NASDAQ in the future.
Directors, executive officers and
principal stockholders own a significant percentage of the shares of Common Stock, which will limit your ability to influence corporate
matters.
Our directors, executive officers and principal
stockholders together beneficially own a significant percentage of the voting control of the Common Stock on a fully diluted basis.
Accordingly, these stockholders could have a significant influence over the outcome of any corporate transaction or other matter
submitted to stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets
and also could prevent or cause a change in control. The interests of these stockholders may differ from the interests of our other
stockholders. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of
ownership.
Our Board of Directors may, without
stockholder approval, issue and fix the terms of shares of preferred stock and issue additional shares of common stock adversely
affecting the rights of holders of our common stock.
On December 3, 2014, we effected a twenty-five-for-one
(25:1) reverse split of our common stock. Immediately after the reverse stock split, on December 3, 2014 we changed our state of
incorporation from the State of Nevada to the State of Delaware pursuant to an Agreement and Plan of Merger, dated December 3,
2014, whereby we merged with and into our recently formed, wholly-owned Delaware subsidiary. Pursuant to the Agreement and Plan
of Merger effecting the merger, we adopted the certificate of incorporation, as amended and restated, and bylaws of our Delaware
subsidiary as our certificate of incorporation and bylaws at effective time of the merger. As a result, our certificate of incorporation,
as amended and restated, 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. Currently, our certificate
of incorporation, as amended and restated, which was effective December 3, 2014, authorizes the issuance of up to 50,000,000 shares
of common stock, of which approximately 24,594,000 shares remain available for issuance and may be issued by us without stockholder
approval.
Anti-takeover provisions in our charter
documents and under Delaware law could prevent or delay transactions that our stockholders may favor and may prevent stockholders
from changing the direction of our business or our management.
After giving effect to our merger into
our wholly-owned Delaware subsidiary, provisions of our certificate of incorporation, as amended and restated, and bylaws may discourage,
delay or prevent a merger or acquisition that our stockholders may consider favorable, including transactions in which you might
otherwise receive a premium for your shares, and may also frustrate or prevent any attempt by stockholders to change the direction
or management of us. For example, these provisions:
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authorize the issuance of “blank check” preferred stock without any need for action by stockholders;
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eliminate the ability of stockholders to call special meetings of stockholders;
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prohibit stockholder action by written consent; and
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establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
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Compliance with changing corporate governance and public
disclosure regulations may result in additional expense.
Keeping abreast of, and in compliance with,
changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act
of 2002, new SEC regulations will require an increased amount of management attention and external resources. In addition, prior
to the merger, our current management team was not subject to these laws and regulations, as we were a private corporation. We
intend to continue to invest all reasonably necessary resources to comply with evolving standards, which may result in increased
general and administrative expense and a diversion of management time and attention from revenue-generating activities to compliance
activities.
Our Common Stock is thinly traded
on The NASDAQ Capital Market exchange and no assurances can be made about stock performance, liquidity, or maintenance of our NASDAQ
listing.
Prior to December 23, 2014, our common
stock was quoted on the OTCQB, which provided significantly less liquidity than a securities exchange (such as the New York Stock
Exchange or the Nasdaq Stock Market). On December 17, 2014, our common stock was approved for trading on The NASDAQ Capital Market
(NASDAQ). Beginning on December 23, 2014, our common stock began trading on NASDAQ under the symbol “CTSO.” Although
currently listed on NASDAQ, there can be no assurance that we will continue to meet NASDAQ’s minimum listing requirements
or that of any other national exchange. In addition, there can be no assurances that a liquid market will be created for our common
stock. If we are unable to maintain listing on The NASDAQ or if a liquid market for our common stock does not develop, our common
stock may remain thinly traded.
Future sales of our common stock
could cause our share price to fall.
In November 2015, we entered into a sales
agreement with Cantor Fitzgerald & Co. to offer shares of our common stock from time to time through “at-the-market”
offerings, pursuant to which we offer and sell shares of our common stock for an aggregate offering price of up to $25 million.
We are not obligated to make or continue to make any sale of shares of our common stock under the “at-the-market” offerings.
Any sale of securities pursuant to the “at-the-market” offerings will result in dilution of our stockholders and could
cause our share price to fall.