Item 1. Financial Statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
|
|
|
|
2017
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,402,330
|
|
|
$
|
5,245,178
|
|
Grants and accounts receivable, net of allowance for doubtful accounts of $74,743 at June 30, 2017 and $65,414 at December 31, 2016
|
|
|
2,058,815
|
|
|
|
1,433,468
|
|
Inventories
|
|
|
889,739
|
|
|
|
833,976
|
|
Prepaid expenses and other current assets
|
|
|
390,328
|
|
|
|
315,802
|
|
Total current assets
|
|
|
19,741,212
|
|
|
|
7,828,424
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
725,138
|
|
|
|
569,409
|
|
Other assets
|
|
|
1,620,109
|
|
|
|
1,296,011
|
|
Total long-term assets
|
|
|
2,345,247
|
|
|
|
1,865,420
|
|
Total Assets
|
|
$
|
22,086,459
|
|
|
$
|
9,693,844
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,581,401
|
|
|
$
|
1,330,072
|
|
Current maturities of long-term debt
|
|
|
2,000,000
|
|
|
|
833,333
|
|
Accrued expenses and other current liabilities
|
|
|
1,602,130
|
|
|
|
2,114,666
|
|
Warrant liability at fair value
|
|
|
1,046,441
|
|
|
|
1,811,547
|
|
Total current liabilities
|
|
|
6,229,972
|
|
|
|
6,089,618
|
|
Long term debt, net of current maturities and debt acquisition costs
|
|
|
7,940,568
|
|
|
|
4,078,314
|
|
Total Liabilities
|
|
|
14,170,540
|
|
|
|
10,167,932
|
|
Commitment and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity/(Deficit):
|
|
|
|
|
|
|
|
|
Preferred Stock, Par Value $0.001, 5,000,000 shares authorized; -0- shares issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
—
|
|
|
|
—
|
|
Common Stock, Par Value $0.001, 50,000,000 shares authorized; 28,133,986 and 25,483,966 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
28,134
|
|
|
|
25,484
|
|
Additional paid-in capital
|
|
|
154,690,112
|
|
|
|
143,066,477
|
|
Accumulated other comprehensive income
|
|
|
156,801
|
|
|
|
898,684
|
|
Accumulated deficit
|
|
|
(146,959,128
|
)
|
|
|
(144,464,733
|
)
|
Total stockholders' equity/(deficit)
|
|
|
7,915,919
|
|
|
|
(474,088
|
)
|
Total Liabilities and Stockholders' Equity/(Deficit)
|
|
$
|
22,086,459
|
|
|
$
|
9,693,844
|
|
See accompanying notes to consolidated financial
statements
.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,041,012
|
|
|
$
|
1,852,670
|
|
|
$
|
5,637,145
|
|
|
$
|
3,450,119
|
|
Grant income
|
|
|
525,214
|
|
|
|
369,668
|
|
|
|
1,042,599
|
|
|
|
582,401
|
|
Total revenue
|
|
|
3,566,226
|
|
|
|
2,222,338
|
|
|
|
6,679,744
|
|
|
|
4,032,520
|
|
Cost of revenue
|
|
|
1,482,010
|
|
|
|
873,266
|
|
|
|
2,736,493
|
|
|
|
1,692,765
|
|
Gross profit
|
|
|
2,084,216
|
|
|
|
1,349,072
|
|
|
|
3,943,251
|
|
|
|
2,339,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
487,613
|
|
|
|
1,092,070
|
|
|
|
957,160
|
|
|
|
1,948,192
|
|
Legal, financial and other consulting
|
|
|
443,196
|
|
|
|
319,184
|
|
|
|
723,141
|
|
|
|
573,735
|
|
Selling, general and administrative
|
|
|
3,484,315
|
|
|
|
2,625,189
|
|
|
|
6,151,336
|
|
|
|
4,595,293
|
|
Total expenses
|
|
|
4,415,124
|
|
|
|
4,036,443
|
|
|
|
7,831,637
|
|
|
|
7,117,220
|
|
Loss from operations
|
|
|
(2,330,908
|
)
|
|
|
(2,687,371
|
)
|
|
|
(3,888,386
|
)
|
|
|
(4,777,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income(expense), net
|
|
|
(123,454
|
)
|
|
|
1,582
|
|
|
|
(243,903
|
)
|
|
|
5,488
|
|
Gain (loss) on foreign currency transactions
|
|
|
719,734
|
|
|
|
(128,941
|
)
|
|
|
872,788
|
|
|
|
102,651
|
|
Change in warrant liability
|
|
|
618,248
|
|
|
|
(190,513
|
)
|
|
|
765,106
|
|
|
|
(172,219
|
)
|
Total other income (expense), net
|
|
|
1,214,528
|
|
|
|
(317,872
|
)
|
|
|
1,393,991
|
|
|
|
(64,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(1,116,380
|
)
|
|
|
(3,005,243
|
)
|
|
|
(2,494,395
|
)
|
|
|
(4,841,545
|
)
|
Benefit from income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,116,380
|
)
|
|
|
(3,005,243
|
)
|
|
|
(2,494,395
|
)
|
|
|
(4,841,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.19
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
27,953,542
|
|
|
|
25,416,077
|
|
|
|
26,735,416
|
|
|
|
25,408,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,116,380
|
)
|
|
$
|
(3,005,243
|
)
|
|
$
|
(2,494,395
|
)
|
|
$
|
(4,841,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
(610,333
|
)
|
|
|
144,723
|
|
|
|
(741,883
|
)
|
|
|
(100,773
|
)
|
Comprehensive loss
|
|
$
|
(1,726,713
|
)
|
|
$
|
(2,860,520
|
)
|
|
$
|
(3,236,278
|
)
|
|
$
|
(4,942,318
|
)
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
Period from December
31, 2016 to June 30, 2017 (Unaudited):
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Equity/(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
25,483,966
|
|
|
$
|
25,484
|
|
|
$
|
143,066,477
|
|
|
$
|
898,684
|
|
|
$
|
(144,464,733
|
)
|
|
$
|
(474,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation - employees, consultants
and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
890,994
|
|
|
|
—
|
|
|
|
—
|
|
|
|
890,994
|
|
Issuance of common stock – net of fees incurred
|
|
|
2,555,555
|
|
|
|
2,556
|
|
|
|
10,318,216
|
|
|
|
|
__
|
|
|
—
|
|
|
|
10,320,772
|
|
Other comprehensive income/(loss): foreign translation
adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(741,883
|
)
|
|
|
—
|
|
|
|
(741,883
|
)
|
Proceeds from exercise of stock options
|
|
|
11,000
|
|
|
|
11
|
|
|
|
31,897
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of stock options
|
|
|
2,074
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units
|
|
|
41,390
|
|
|
|
41
|
|
|
|
207,566
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,607
|
|
Proceeds from exercise of warrants
|
|
|
40,001
|
|
|
|
40
|
|
|
|
174,964
|
|
|
|
—
|
|
|
|
|
|
|
|
175,004
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,494,395
|
)
|
|
|
(2,494,395
|
)
|
Balance at June 30, 2017
|
|
|
28,133,986
|
|
|
$
|
28,134
|
|
|
$
|
154,690,112
|
|
|
$
|
156,801
|
|
|
$
|
(146,959,128
|
)
|
|
$
|
7,915,919
|
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six months
|
|
|
Six months
|
|
|
|
Ended
|
|
|
ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,494,395
|
)
|
|
$
|
(4,841,545
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
103,561
|
|
|
|
69,423
|
|
Amortization of debt costs
|
|
|
30,481
|
|
|
|
—
|
|
Bad debt
|
|
|
3,791
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
890,994
|
|
|
|
599,768
|
|
Change in warrant liability
|
|
|
(765,106
|
)
|
|
|
172,219
|
|
Foreign currency transaction gain
|
|
|
(872,788
|
)
|
|
|
(102,651
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Grants and accounts receivable
|
|
|
(534,647
|
)
|
|
|
(292,517
|
)
|
Inventories
|
|
|
(38,565
|
)
|
|
|
149,347
|
|
Prepaid expenses and other current assets
|
|
|
(56,235
|
)
|
|
|
352,594
|
|
Other assets
|
|
|
(15,000
|
)
|
|
|
(1,019
|
)
|
Accounts payable and accrued expenses
|
|
|
(119,960
|
)
|
|
|
710,819
|
|
Net cash used by operating activities
|
|
|
(3,867,869
|
)
|
|
|
(3,183,562
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(229,619
|
)
|
|
|
(98,330
|
)
|
Payments for patent costs
|
|
|
(327,366
|
)
|
|
|
(212,409
|
)
|
Proceeds from redemptions of short-term investments
|
|
|
|
|
|
|
1,943,000
|
|
Net cash used by investing activities
|
|
|
(556,985
|
)
|
|
|
1,632,261
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Payment of debt acquisition costs
|
|
|
(1,560
|
)
|
|
|
(118,833
|
)
|
Equity contributions – net of fees incurred
|
|
|
10,320,772
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
31,908
|
|
|
|
3,750
|
|
Proceeds from exercise of warrants
|
|
|
175,004
|
|
|
|
25,000
|
|
Net cash provided by financing activities
|
|
|
15,526,124
|
|
|
|
4,909,917
|
|
Effect of exchange rates on cash
|
|
|
55,882
|
|
|
|
(5,077
|
)
|
Net change in cash and cash equivalents
|
|
|
11,157,152
|
|
|
|
3,353,539
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
5,245,178
|
|
|
|
5,316,851
|
|
Cash and cash equivalents - end of period
|
|
$
|
16,402,330
|
|
|
$
|
8,670,390
|
|
|
|
Six months
|
|
|
Six months
|
|
|
|
Ended
|
|
|
ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
216,236
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Settlement of accrued bonuses with restricted stock units
|
|
$
|
207,566
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial
statements.
CytoSorbents Corporation
Notes to Consolidated Financial Statements
(UNAUDITED)
June 30, 2017
The interim 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 necessary for a fair statement of the Company’s financial position and results of operations
for the interim periods presented. Certain information and disclosures normally included in the annual financial statements prepared
in accordance with U.S. GAAP have been condensed or omitted. These interim financial statements should be read in conjunction with
the audited financial statements and accompanying notes for the year ended December 31, 2016 included in the Company’s
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 3, 2017. The results for the three and
six months ended June 30, 2017 and 2016 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 June 30, 2017, the Company had an
accumulated deficit of $146,959,128, which included net losses of $2,494,395 for the six months ended June 30, 2017 and $4,841,545
for the six months ended June 30, 2016. The Company’s losses have resulted principally from costs incurred in the research
and development of the Company’s polymer technology and selling, general and administrative expenses. 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 operating 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 the Company’s technology and commercial products,
obtaining additional requisite regulatory approvals in markets not covered by the CE Mark previously received and for potential
label extensions of the Company’s current CE Mark, establishing manufacturing and sales and marketing arrangements with third
parties, and raising sufficient funds to finance the Company’s activities, including clinical trials. No assurance can be
given that the Company’s product development efforts will be successful, that the Company’s current CE Mark will enable
the Company 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, investigating and commercializing its CytoSorb blood purification therapy 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.
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 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. CytoSorb
,
the Company’s flagship product, is approved in the EU and marketed
in and distributed in forty-four countries around the world, as a safe and effective extracorporeal cytokine adsorber, 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. 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 March 2011, CytoSorb was “CE Marked” in the European Union (“EU”)
allowing for commercial marketing.
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 absorption. The Company has numerous products under development based upon this unique blood purification technology,
which include HemoDefend, ContrastSorb, DrugSorb, and others. As of June 30, 2017, the Company owns 32 issued United States patents
and has multiple issued patents and pending patent applications worldwide. Our patent portfolio includes 16 issued United States
patents as well as multiple issued patents and pending patent applications directed to various compositions and methods of use
related to our blood purifications technologies, which are expected to expire between 2018 and 2031, absent any patent term extensions.
Management believes that any 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 (“Common Stock”) 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 the parent, CytoSorbents Corporation, and its wholly-owned subsidiaries, CytoSorbents Medical, Inc. and CytoSorbents
Europe GmbH. In addition, the financial statements include CytoSorbents Switzerland GmbH, a wholly owned subsidiary of CytoSorbents
Europe GmbH. All significant intercompany transactions and balances have been eliminated in consolidation.
Translation gains and losses resulting
from the process of remeasuring into the U.S. dollar, the foreign currency financial statements of the European subsidiary, for
which the U.S. dollar is the functional currency, are included in other comprehensive income. Foreign currency transaction gain/(loss)
included in net loss amounted to $719,734 and $(128,941) for the three months ended June 30, 2017 and 2016, respectively. Foreign
currency transaction gains included in net loss amounted to $872,788 and $102,651 for the six months ended June 30, 2017 and 2016,
respectively. The Company translates assets and liabilities of CytoSorbents Europe GmbH, whose functional currency is their local
currency, at the exchange rate in effect at the balance sheet date. The Company translates revenue and expenses at the daily average
exchange rates. The Company includes accumulated net translation adjustments in stockholders’ equity as a component of accumulated
other comprehensive income.
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 customers’ financial condition. Management reviews accounts receivable
periodically to determine collectability. Balances that are determined to be uncollectible are written off to the allowance for
doubtful accounts. The allowance for doubtful accounts contains a general accrual for estimated bad debts and amounted to approximately
$75,000 and $65,000 at June 30, 2017 and December 31, 2016, respectively.
Inventories
Inventories are valued at the lower of
cost or market under the first in, first out (FIFO) method. At June 30, 2017 and December 31, 2016, the Company’s inventory
was comprised of finished goods, which amounted to $319,769 and $307,483, respectively; work in process which amounted to $508,733
and $467,663, respectively; and raw materials, which amounted to $61,237 and $58,830, respectively. Devices used in clinical trials
or for research and development purposes are removed from inventory and charged to research and development expenses at the time
of their use.
Property and Equipment
Property and equipment are recorded at
cost less accumulated depreciation. Depreciation of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of their economic useful lives
or the term of the related leases. Gains and losses on depreciable assets retired or sold are recognized in the statements of operations
in the year of disposal. Repairs and maintenance expenditures are expensed as incurred.
Patents
Legal costs incurred to establish and successfully
defend patents are capitalized. When patents are issued, capitalized costs are amortized on the straight-line method over the related
patent term. In the event a patent is abandoned, the net book value of the patent is written off.
Impairment or Disposal of Long-Lived
Assets
The Company assesses the impairment of
patents and other long-lived assets under accounting standards for the impairment or disposal of long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. For long-lived assets to be held and used,
the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and
measures the impairment loss based on the difference between the carrying amount and fair value.
Warrant Liability
The Company recognizes the fair value of
the warrants as of the date of the warrant grant using the Monte Carlos simulation model. At each subsequent reporting date, the
Company again measures the fair value of the warrants, and records a change to the warrant liability as appropriate, and the change
is reported in the statement of operations.
Revenue Recognition
Product Sales
: Revenues from sales
of products are recognized at the time when title and risk of loss passes to the customer. Recognition of revenue also requires
reasonable assurance of collection of sales proceeds and completion of all performance obligations.
Grant Revenue
:
Revenue from
grant income is based on contractual agreements. Certain agreements provide for reimbursement of costs, while other agreements
provide for reimbursement of costs and an overhead margin. Revenues are recognized when milestones have been achieved and revenues
have been earned. Costs are recorded as incurred. Costs subject to reimbursement by these grants have been reflected as costs of
revenue
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 $37,000 and $45,000 for the three months ended June 30, 2017 and
2016, respectively, and approximately $87,000 and $125,000 for the six months ended June 30, 3017 and 2016 respectively, and are
included in selling, general, and administrative expenses on the consolidated statement of operations.
Income Taxes
Income taxes are accounted for under the
asset and liability method prescribed by accounting standards for accounting for income taxes. Deferred income taxes are recorded
for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax
assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
Under Section 382 of the Internal Revenue Code, the net operating losses generated prior to the 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 June 30, 2017 or December 31, 2016. 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 and CytoSorbents
Switzerland GmbH files an annual corporate tax return, VAT return and a trade tax return in Germany and Switzerland, respectively.
Use of Estimates
The preparation of 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. Significant
estimates in these financials are the valuation of options granted, and valuation methods used to determine the fair value of the
warrant liability.
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. The
following table provides a geographic summary of revenues for the three and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
1,852,022
|
|
|
$
|
1,321,216
|
|
|
$
|
3,395,126
|
|
|
$
|
2,327,242
|
|
All other countries
|
|
|
1,188,990
|
|
|
|
531,454
|
|
|
|
2,242,019
|
|
|
|
1,122,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
525,214
|
|
|
|
369,668
|
|
|
|
1,042,599
|
|
|
|
582,401
|
|
Total revenue
|
|
$
|
3,566,226
|
|
|
$
|
2,222,338
|
|
|
$
|
6,679,744
|
|
|
$
|
4,032,520
|
|
As of June 30, 2017, one distributor accounted
for approximately 13% of outstanding grant and accounts receivable. At December 31, 2016, one distributor and one government agency
accounted for approximately 22% of outstanding grant and accounts receivable. For the three months ended June 30, 2017, no agency,
distributor, or direct customer represented more than 10% of the company’s revenue. For the three months ended June 30, 2016,
one direct customer represented 13% of the company’s total revenue. For the six months ended June 30, 2017, no agency, distributor,
or direct customer represented more than 10% of the Company’s revenue. For the six months ended June 30, 2016, one direct
customer accounted for approximately 11% of the company’s revenue.
Financial Instruments
The carrying values of cash and cash equivalents,
short-term investments, accounts payable, notes payable, and other debt obligations approximate their fair values due to their
short-term nature.
Net Loss Per Common Share
Basic earnings per share is computed by
dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share is 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 7).
Stock-Based Compensation
The Company accounts for its stock-based
compensation under the recognition requirements of accounting standards for accounting for stock-based compensation, for employees
and directors whereby each option granted is valued at fair market value on the date of grant. Under these accounting standards,
the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.
The Company also follows the guidance of
accounting standards for accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction
with selling, goods or services for equity instruments issued to consultants.
Effects of Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
“Revenue with Contracts from Customers.” ASU 2014-09 supersedes the current revenue recognition guidance, including
industry-specific guidance. The ASU introduces a five-step model to achieve its core principal of the entity recognizing revenue
to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods and services. In August 2014, the FASB issued ASU 2015-14 which deferred the effective
date by one year. Accordingly, the updated guidance is effective for public entities for interim and annual periods beginning after
December 15, 2017 and early adoption is permitted as of the beginning of an interim or annual reporting period beginning after
December 31, 2016. The Company has evaluated the impact of the updated guidance and has determined that the adoption of ASU 2014-09
is not expected to have a significant impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
“Inventory: Simplifying the Measurement of Inventory.” ASU 2015-11 clarifies current guidance regarding the valuation
of inventory. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. This ASU does not apply
to inventory that is measured using the last-in, first-out (“LIFO”) or the retail inventory method. The updated guidance
is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning
after December 15, 2017. The Company has evaluated the impact of the updated guidance and has determined that the adoption of ASU
2015-11 is not expected to have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”. ASU 2016-02 outlines reporting requirements for Lessees to recognize a right-of-use asset and
corresponding liability on the balance sheet for all leases covering a period of greater than 12 months. The liability is to be
measured as the present value of the future minimum lease payments, plus any initial direct costs. The minimum payments are discounted
using the rate implicit in the lease, or, if not known, the lessee’s incremental borrowing rate. The updated guidance is
effective for public entities for fiscal years beginning after December 31, 2018. The Company is evaluating the impact of the updated
guidance and has determined that the adoption of ASU 2016-02 may impact certain financial statement disclosures, particularly with
regard to leases of premises.
In March 2016, the FASB issued ASU 2016-08
“Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).”
The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers
(Topic 606), which is discussed above and is not yet effective. The effective date and transition requirements for the amendments
in this Update are the same as the effective date and transition requirements of Update 2015-14, also discussed above. The Company
has evaluated the impact of the updated guidance and has determined that the adoption of ASU 2016-08 is not expected to have a
significant impact on its consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10
“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing.” The amendments in this
Update affect entities with transactions included within the scope of Topic 606. The scope of that Topic includes entities that
enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities)
in exchange for consideration. The effective date and transition requirements for the amendments in this Update are the same as
the effective date and transition requirements of Update 2015-14, which is discussed above. The Company has evaluated the impact
of the updated guidance and has determined that the adoption of ASU 2016-10 is not expected to have a significant impact on its
consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12,
“Revenue from Contracts with Customers (Topic 606), Narrow Scope Improvements and Practical Expedients.” The amendments
in ASU 2016-12 affect only the narrow aspects of Topic 606 that are outlined in ASU 2016-12. The effective date and transition
requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2015-14,
which is discussed above. The Company has evaluated the impact of the updated guidance and has determined that the adoption of
ASU 2016-12 is not expected to have a significant impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task
Force).” The amendments in this Update relate to eight specific types of cash receipts and cash payments which current GAAP
either is unclear or does not include specific guidance on the cash flow classification issues. The amendments in this Update are
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. The Company will adopt the provisions of this ASU
for its fiscal year beginning January 1, 2017. The adoption of ASU 2016-15 is not expected to have a significant impact on its
consolidated financial statements.
In May 2017,
the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718). The amendments in this Update provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718
.
The
amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities
for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods
for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively
to an award modified on or after the adoption date. The Company is evaluating the impact of the revised guidance and believes that
this will not have a significant impact on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11,
“Earning Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815).
Part I of this Update addresses the complexity of accounting for certain financial instruments with down round features. The amendments
in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. For
public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The Company is evaluating the impact of the revised guidance and believes that this may have a significant impact on its consolidated
financial statements.
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 Research
and Development. Total freight costs amounted to approximately $45,000 and $37,000 for the three months ended June 30, 2017 and
2016, respectively and approximately $128,000 and $71,000 for the six months ended June 30, 2017 and 2016, respectively.
Preferred Stock
In December 2014, the Company amended its
articles of incorporation to reduce the total number of authorized shares of preferred stock. The amended articles of incorporation
authorize the issuance of up to 5,000,000 shares of “blank check” preferred stock, par value $0.001 per share (“Preferred
Stock”), with such designation rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock
Shelf Registration
On July 29, 2015, the Company’s registration
statement on Form S-3, as filed with the SEC on July 23, 2015, was declared effective using a “shelf” registration
process. Under this shelf registration statement, the Company may issue, in one or more offerings, any combination of Common Stock,
Preferred Stock, senior or subordinated debt securities, warrants, or units, up to a total dollar amount of $100 million.
April 5, 2017 Equity Offering
On April 5, 2017,
the Company closed on the sale of an aggregate of 2,222,222 shares of Common Stock pursuant to the Company's existing shelf registration
statement (Registration No. 333-205806) on Form S-3. The Company received gross proceeds of approximately $10,000,000, based on
a public offering price of $4.50 per share.
On April 11, 2017, the Company closed the sale
of an additional 333,333 shares of the Company’s Common Stock, pursuant to the underwriters’ full exercise of an over-allotment
option. The Company received gross proceeds of approximately $1,500,000 as a result of the exercise of the option. As a result,
the company received total gross proceeds of $11,500,000, and,
after deducting the underwriting discounts and commissions
and expenses related to the offering, the Company received total net proceeds of approximately
$10,300,000. As a result of this offering, the exercise price of the warrants issued i
n connection with the Company’s
March 11, 2014 public offering was reduced to $4.50 in accordance with the pricing provisions of those warrants (see Note 4). There
was no change in the number of warrants which were repriced. These warrants remain exercisable on a cash-only basis.
November 4,
2015 Controlled Equity Offering
On November 4,
2015, the Company entered into a Controlled Equity Offering
SM
Sales Agreement (the “Sales Agreement”) with
Cantor Fitzgerald and Co., as agent (“Cantor”), pursuant to which the Company may offer to sell, from time to time
through Cantor, shares of the Company’s Common Stock, having an aggregate offering price of up to $25,000,000 (the “Shares”)
Any Shares offered and sold will be issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration
No. 333-205806), and the related prospectus previously declared effective by the Securities and Exchange Commission (the SEC) on
July 29, 2015 (the “Registration Statement”), as supplemented by a prospectus supplement, dated November 4, 2015, which
the Company filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act.
Under the Sales
Agreement, Cantor may sell Shares by any method permitted by law and deemed to be an “at the market offering” as defined
in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on NASDAQ, on any existing
trading market for the Common Stock or to or through a market maker. In addition, under the Sales Agreement, Cantor may sell the
Shares by any other method permitted by law, including in privately negotiated transactions. The Company may instruct Cantor not
to sell Shares if the sales cannot be effected at or above the price designated by the Company from time to time.
The Company is
not obligated to make any sales of Shares under the Sales Agreement, and if it elects to make any sales, the Company can set a
minimum sales price for the Shares. The offering of Shares pursuant to the Sales Agreement will terminate upon the earlier of (a)
the sale of all the shares subject to the Sales Agreement and (b) the termination of the Sales Agreement by Cantor or the Company,
as permitted therein. Since it was established on November 4, 2015 through December 31, 2015, the Company sold 28,880 shares at
an average selling price of $8.02 per share, generating net proceeds of approximately $225,000 under the Sales Agreement. There
were no sales during the year ended December 31, 2016 or for the six months ended June 30, 2017.
The Company pays
a commission rate of 3.0% of the aggregate gross proceeds from each sale of Shares and has agreed to provide Cantor with customary
indemnification and contribution rights. In 2015, the Company reimbursed Cantor $50,000 for certain specified expenses in connection
with the execution of the Sales Agreement.
The Company intends
to use the net proceeds raised through “at the market” sales for research and development activities, which include
the funding of additional clinical studies and costs of obtaining regulatory approvals in countries not covered by the CE Mark,
capital expenditures and other costs necessary to expand production capacity, support of various sales and marketing efforts,
product development and general working capital purposes.
Stock-Based
Compensation
Total share-based employee, director,
and consultant compensation for the three and six months ended June 30, 2017 and 2016 amounted to approximately $799,000 and $368,000,
and $891,000 and $475,000 respectively. These amounts are included in the statement of operations under the captions research
and development ($30,000 and $62,000 for the three months ended June 30, 2017 and 2016, and $45,000 and $92,000 for the six months
ended June 30, 2017 and 2016) and selling, general and administrative ($769,000 and $306,000 for the three months ended June 30,
2017 and 2016 and $846,000 and $383,000 for the six months ended June 30, 2017 and 2016).
The summary of the stock option activity
for the six months ended June 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (Years)
|
|
Outstanding, December 31, 2016
|
|
|
2,762,177
|
|
|
$
|
4.69
|
|
|
|
6.0
|
|
Granted
|
|
|
1,179,950
|
|
|
$
|
5.45
|
|
|
|
9.7
|
|
Forfeited
|
|
|
(17,640
|
)
|
|
$
|
4.65
|
|
|
|
—
|
|
Expired
|
|
|
(32,120
|
)
|
|
$
|
36.33
|
|
|
|
—
|
|
Exercised
|
|
|
(23,960
|
)
|
|
$
|
3.87
|
|
|
|
—
|
|
Outstanding, June 30, 2017
|
|
|
3,868,407
|
|
|
$
|
4.66
|
|
|
|
6.8
|
|
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
$3.45 to $6.20 per share) and expected life of the stock option (10 years), the current price of the underlying stock and its expected
volatility (ranging from 66.8 to 71.1 percent), expected dividends (-0- percent) on the stock and the risk free interest rate (ranging
from 1.85 to 2.21 percent) for the term of the stock option.
The intrinsic value is calculated as the
difference between the market value as of June 30, 2017 of $4.30 and the exercise price of the shares.
Options Outstanding
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
Outstanding at
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise
|
|
June 30,
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Price
|
|
2017
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
$0.88 - $11.48
|
|
|
3,868,407
|
|
|
|
4.66
|
|
|
|
6.8
|
|
|
$
|
1,464,408
|
|
Options Exercisable
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Exercisable at
|
|
|
Average
|
|
|
Aggregate
|
|
June 30,
|
|
|
Exercise
|
|
|
Intrinsic
|
|
2017
|
|
|
Price
|
|
|
Value
|
|
|
2,608,593
|
|
|
$
|
4.28
|
|
|
$
|
1,438,394
|
|
The summary of the status of the Company’s
non-vested options for the six months ended June 30, 2017 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested, December 31, 2016
|
|
|
912,547
|
|
|
$
|
2.55
|
|
Granted
|
|
|
1,179,950
|
|
|
$
|
0.58
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
$
|
2.41
|
|
Vested
|
|
|
(831,683
|
)
|
|
$
|
2.33
|
|
Non-vested, June 30, 2017
|
|
|
1,259,814
|
|
|
$
|
0.68
|
|
As of June 30, 2017, the Company had approximately
$609,000 of total unrecognized compensation cost related to stock options which will, on average, be amortized over one year.
On February 24, 2017, the Board of Directors
granted options to purchase 953,200 shares of Common Stock to the Company’s employees which will vest upon the achievement
of certain specific, predetermined milestones related to the Company’s 2017 operations. The grant date fair value of these
unvested options amounted to approximately $3,284,000. As of June 30, 2017, the Company has determined that it has met certain
milestones that equate to a twenty percent vesting of these options. Accordingly, the Company has recorded an expense of approximately
$658,000 in the consolidated statement of operations.
In April 2015, the Board of Directors also
granted 960,000 restricted stock units, valued at $7,747,200, to Company employees and 240,000 restricted stock units, valued at
$1,936,000, to the members of the Board of Directors, which will only vest upon a Change in Control of the Company, as defined
in the Company’s 2014 Long-Term Incentive Plan (a “Change in Control”). Of these restricted stock units granted
to Company employees in April 2015, 75,000 have been forfeited. In June 2016, the Board of Directors granted an additional 414,000
restricted stock units to Company employees, valued at $1,941,660 at the time of issuance, which will only vest upon a Change in
Control, bringing the total amount of change of control restricted stock units outstanding to 1,539,000. In February 2017, the
Board of Directors granted an additional 129,500 restricted stock options to Company employees, Directors, and consultants valued
at approximately $725,200 at the time of issuance, which will only vest upon a Change in Control, bringing the total amount of
Change of Control restricted stock units outstanding to 1,668,500. 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 and six months ended June 30, 2017.
Performance Based Stock Awards:
Pursuant to a review of the compensation
of the senior management of the Company, on June 7, 2016, the Board of Directors granted 80,000 restricted stock units to certain
senior managers of the Company. These awards were valued at $375,200 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. These awards are charged to expense
over the period which they vest. For the six and three months ended June 30, 2017, the Company recorded a charge of approximately
$45,000 and $14,000 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 2016, on February 24, 2017, the Board of Directors
granted 125,000 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued as of December
31, 2016. These awards were valued at approximately $700,000 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 grant,
and one third on the second anniversary of the date of the grant. For the six and three months ended June 30, 2017, the Company
recorded a charge of approximately $117,000 and $58,000 related to these restricted stock unit awards.
The following table outlines the restricted
stock unit activity for the year ended June 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, January 1, 2017
|
|
|
53,335
|
|
|
$
|
4.69
|
|
Granted
|
|
|
125,000
|
|
|
|
5.60
|
|
Vested
|
|
|
(68,332
|
)
|
|
|
5.24
|
|
Non-vested, June 30, 2017
|
|
|
110,003
|
|
|
$
|
5.38
|
|
Warrants:
As of June 30, 2017, the Company has
the following warrants to purchase Common Stock outstanding:
Number of Shares
|
|
|
Warrant Exercise
|
|
|
Warrant
|
To be Purchased
|
|
|
Price per Share
|
|
|
Expiration Date
|
|
113,600
|
|
|
$
|
3.750
|
|
|
June 21, 2018
|
|
110,000
|
|
|
$
|
3.125
|
|
|
September 30, 2018
|
|
48,960
|
|
|
$
|
7.500
|
|
|
March 11, 2019
|
|
736,000
|
|
|
$
|
4.500
|
|
|
March 11, 2019
|
|
30,000
|
|
|
$
|
9.900
|
|
|
January 14, 2020
|
|
1,038,560
|
|
|
|
|
|
|
|
In connection with its March 11,
2014 offering, the Company issued warrants to purchase 816,000 shares of Common Stock. The Company recognizes these warrants
as liabilities at their fair value on the date of grant, then measures the fair value of the warrants on each reporting
date, and records a change to the warrant liability as appropriate. The warrants have certain pricing provisions which apply
if the Company sells or issues Common Stock or Common Stock equivalents at a price that is less than the exercise price of
the warrants, over the life of the warrants, excluding certain exempt issuances. In addition, these warrants may only
be exercised with cash. In April 2017, the Company closed on an underwritten public offering. The price of this offering
was $4.50 per share of Common Stock which is less than the exercise price of the warrants. Accordingly, the exercise price of
the warrants has been reduced to $4.50 per warrant. There was no change in the number of warrants which were repriced. (see
Note 3).
The Company recognized an initial warrant
liability of $862,920 for the warrants issued in connection with the offering completed in March 2014, which was based on the March
11, 2014 five-day weighted average closing price per share of the Company’s common stock of $6.00. On June 30, 2017 and 2016,
the closing price per share of common stock was $4.30 and $4.55, respectively. During the three months ended June 30, 2017, the
warrant liability decreased $618,248 from $1,664,689 as of March 31, 2017 to $1,046.441 at June 30, 2017. As of June 30, 2017,
the warrant liability was $1,046,441, a decrease of $765,106 from the warrant liability as of December 31, 2016 of $1,811,547.
This reduction in the warrant liability for the three and six months ended June 30, 2017 was primarily due to a decrease in the
market value of the Company’s common stock from December 31, 2016 to June 30, 2017 and a reduction in management’s
estimate of the probable need for additional equity financing through the expiration date of the warrants. During the three months
ended June 30, 2016, the warrant liability increased $190,513 from 1,617,834 as of March 31, 2016 to $1,808,347 at June 30, 2016.
This increase for the three months ended June 30, 2017 was primarily due to an increase in the market value of the Company’s
common stock from March 31, 2016 to June 30, 2016. As of June 30, 2016, the warrant liability was $1,808,347, an increase of $172,219
from the warrant liability as of December 31, 2015 of $1,636,128. This increase for the six months ended June 30, 2016 was primarily
due to an increase in the market value of the Company’s common stock from December 31, 2015 to June 30, 2016.
The assumptions used in connection with
the valuation of warrants issued utilizing the Monte Carlo simulation valuation model were as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Number of shares underlying the warrants
|
|
|
736,000
|
|
|
|
736,000
|
|
Exercise price
|
|
$
|
4.50
|
|
|
$
|
7.81
|
|
Volatility
|
|
|
62.40
|
%
|
|
|
72.80
|
%
|
Risk-free interest rate
|
|
|
1.33
|
%
|
|
|
0.67
|
%
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
Expected warrant life (years)
|
|
|
1.70
|
|
|
|
2.70
|
|
Stock Price
|
|
$
|
4.30
|
|
|
$
|
4.55
|
|
Loan and Security Agreement:
On June 30, 2016 (the “Closing Date”),
the Company and its wholly-owned subsidiary, CytoSorbents Medical, Inc. (together, the “Borrower”), entered into a
Loan and Security Agreement (the “Loan and Security Agreement”) with Bridge Bank, a division of Western Alliance Bank,
(the “Bank”), pursuant to which the Bank agreed to loan up to an aggregate of $10 million to the Company, to be disbursed
in two equal tranches of $5 million (the first tranche, the “Term A Loan”, the second tranche, the “Term B Loan”,
and the Term A Loan and Term B Loan together, the “Term Loans”). The Company received the proceeds of the Term A Loan
on June 30, 2016 and the proceeds from Term Loan B on June 30, 2017. The proceeds from the Term Loans will be used for working
capital purposes and to fund general business requirements in accordance with the terms of the Loan and Security Agreement. The
Term Loans are secured by substantially all the assets of the Company, with the exception of any intellectual Property. Outstanding
balances on the Term Loans bear interest at the thirty (30) day US dollar LIBOR rate reported in the Wall Street Journal plus 7.75%,
adjusted monthly. This rate was 8.97% at June 30, 2017.
On the Closing Date, the Company was required
to pay a non-refundable closing fee of $50,000 and expenses incurred by the Bank related to the Loan and Security Agreement of
$24,000. On June 30, 2017, in connection with the closing of the Term B Loan, the Company was required to pay expenses incurred
by the Bank of $1,560. In addition, the Company incurred legal expenses related to the Loan and Security Agreement of $44,833.
These costs, which total $120,393, 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 and six months ended June 30, 2017, the Company recorded interest expense amounting to $7,428 and
$14,855, respectively, related to these costs. After accounting for the various costs outlined above, the effective interest rate
on the Term A Loan was 10.0% as of June 30, 2016. Commencing on the first calendar day of the calendar month after a Term Loan
is made, the Company shall make monthly payments of interest only during the term of the Term Loans. Commencing on February 1,
2018, subject to certain conditions as outlined in the Loan and Security Agreement, the Company shall make equal monthly payments
of principal of $333,333, together with accrued and unpaid interest. All unpaid principal and accrued and unpaid interest shall
be due and payable in full on July 1, 2020. In addition, the 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) July 1, 2020 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 and six months ended June 30, 2017, the Company recorded interest expense of $7,813
and $15,625, respectively, related to the final fee. The Term Loans are evidenced by secured promissory notes issued to the Bank
by the Company. If the Company elects to prepay the Term Loan(s) pursuant to the terms of the 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 June 30, 2020, 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 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 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 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.
Effective with the issuance of Term Loan
B on June 30, 2017, the Company is required to meet a financial covenant which requires the Company to achieve consolidated trailing
six month revenue from product sales equal to at least 75% of the projected revenue for such period in accordance with financial
projections supplied to the Bank by the Company.
The Borrower’s obligations under
the Loan and Security Agreement are joint and severable, are secured by a first priority security interest in favor of the Bank
with respect to the Shares (as defined in the Loan and Security Agreement) and the Collateral (as defined in the Loan and Security
Agreement), which definition excludes the Borrower’s intellectual property and other customary exceptions.
Success Fee Letter:
In connection with the Loan and Security
Agreement, the Borrower simultaneously entered into a Success Fee Letter (the “Letter”) with the Bank. Pursuant to
the 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 Loans
(the “Success Fee”) upon the first occurrence of any of the following events (each a “Liquidity Event”):
(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 NASDAQ being $8.00
(after giving effect to any stock splits or consolidations effected after the date hereof) or more for five successive business
days.
If the Success Fee is due pursuant to a Liquidity Event described
in clause (d) of the definition thereof, the Company may elect, in lieu of paying the Success Fee in cash, to issue and sell to
the Bank, in exchange for the Success Fee, such number of shares of the Company’s Common Stock as would be equal to the quotient
(calculated by rounding up the nearest whole number) obtained by dividing (a) the Success Fee by (b) the volume weighted average
price per share of the Company’s Common Stock for the same five successive business days on which the closing price per share
of the Company’s Common Stock caused the Success Fee to become payable. The Bank’s right to receive the Success Fee
and the Borrower’s obligation to pay such Success Fee terminate on June 30, 2021, and shall survive the termination of the
Loan and Security Agreement and any prepayment of the Term Loans.
Long-term debt consists of the following at June 30, 2017:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
10,000,000
|
|
|
$
|
5,000,000
|
|
Less unamortized debt acquisition costs
|
|
|
(90,682
|
)
|
|
|
(103,978
|
)
|
Plus accrued final fee
|
|
|
31,250
|
|
|
|
15,625
|
|
Subtotal
|
|
|
9,940,568
|
|
|
|
4,911,647
|
|
Less Current maturities
|
|
|
2,000,000
|
|
|
|
833,333
|
|
Long-term debt net of current maturities
|
|
$
|
7,940,568
|
|
|
$
|
4,078,314
|
|
Principal payments of long-term debt are due as follows at June
30, 2017:
2018
|
|
$
|
2,000,000
|
|
2019
|
|
|
4,000,000
|
|
2020
|
|
|
4,000,000
|
|
Total
|
|
$
|
10,000,000
|
|
|
6.
|
COMMITMENTS AND CONTINGENCIES
|
Employment Agreements
On July 14, 2015, CytoSorbents Corporation
entered into executive employment agreements with its principal executives, Dr. Phillip P. Chan, President and Chief Executive
Officer, Vincent Capponi, Chief Operating Officer, and Kathleen P. Bloch, Chief Financial Officer. Each of these agreements has
an initial term of three years, and is retroactively effective as of January 1, 2015. On May 30, 2017, CytoSorbents Corporation
announced the appointment of Eric R. Mortensen M.D., Ph.D as the Company’s Chief Medical Officer, pursuant to the terms of
an employment agreement dated May 23, 2017. Dr. Mortensen’s employment agreement provides for an initial term commencing
on June 1, 2017 and ending on December 31, 2019. These 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 in 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 existing investor agreed to make a $4 million equity investment in the Company. These amounts were received by the Company
in 2003. In connection with this agreement, the Company granted the investor a future royalty of 3% on all gross revenues received
by the Company from the sale of its CytoSorb device. For the six months ended June 30, 2017 and 2016, the Company has recorded
royalty costs of approximately $166,000 and $102,000, respectfully. For the three months ended June 30, 2017 and 2016, the Company
has recorded royalty costs of approximately $89,000 and $55,000, 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 six months ended June 30, 2017 and 2016, per the terms of the license agreement,
the Company has recorded royalty costs of approximately $277,000 and $136,000, respectfully. For the three months ended June 30,
2017 and 2016, the Company has recorded royalty costs of approximately $149,000 and $73,000, respectively.
Basic loss per share and diluted loss per
share for the three months ended June 30, 2017 and 2016 have been computed by dividing the net loss for each respective period
by the weighted average number of shares outstanding during that period.
All outstanding warrants, options and restricted
stock awards representing approximately 5,017,000 and 4,101,000 incremental shares at June 30, 2017 and 2016 have been excluded
from the computation of diluted loss per share as they are anti-dilutive.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Cautionary Notes Regarding Forward Looking
Statements
This report 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 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, and in the press releases and other communications to shareholders 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, 2016, as filed with the SEC on March 3, 2017.
We are a leader in critical care
immunotherapy, investigating and commercializing our CytoSorb blood purification therapy 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 addition, CytoSorb can be used in other inflammatory conditions such as
cardiac surgery, autoimmune disease flares, and potentially for cancer, cytokine release syndrome in cancer immunotherapy,
and cancer cachexia, a common syndrome that affects cancer patients, where cytokines play a major role in the cause of
inflammation. CytoSorb has been used globally in more than 27,000 human treatments to date. 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. We have numerous products under development based upon this unique blood
purification technology. As of June 30, 2017, we own 32 issued United States patents and have multiple issued and multiple
pending patent applications in major markets worldwide. Our patent portfolio includes 16 issued United States patents as well
as multiple issued and pending patent applications in major markets worldwide directed to various compositions and methods of
use related to our blood purifications technologies, which are expected to expire between 2018 and 2031, absent any patent
term extensions.
In March 2011, CytoSorb, as an
extracorporeal cytokine filter indicated for use in clinical situations where cytokines are elevated, was “CE
marked” in the EU, 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, cytokine release syndrome in
cancer immunotherapy, 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 to support the CE Mark, the device showed clearance for a broad range of cytokines. 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. In September 2016, we were granted a two-year renewal for the CytoSorb CE Mark. In June 2016,
we successfully completed an ISO 13485:2003 annual surveillance audit maintaining our good standing with our Notified Body. We
also established a reimbursement path for CytoSorb in Germany and Austria.
From September 2011 through June 2012,
we began a controlled market release of CytoSorb in select geographic territories in Germany. The purpose of this program was to
prepare for commercialization of CytoSorb in Germany in terms of manufacturing, reimbursement, logistics, infrastructure, marketing,
contacts, and other key issues.
In late June 2012, following the establishment
of 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. By the end of 2015, we had hundreds of KOLs in critical care, cardiac
surgery, and blood purification who are either using CytoSorb or planning to use CytoSorb in the near future. We believe our
relationships with KOLs will be essential to drive adoption and recurrent usage of CytoSorb, facilitate purchases by hospital
administration, arrange reimbursement, and generate data for papers and presentations. In addition, we now currently have
more than 58 investigator initiated studies in Europe, with approximately half in the planning stages, and half started,
enrolling, or completed in multiple applications including sepsis, cardiac surgery, lung injury, trauma, pancreatitis, liver
failure, kidney failure, and others. These studies are being
supported by our European Medical Director.
In March 2016, we established CytoSorbents
Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH, our wholly-owned subsidiary, to conduct marketing and
direct sales in Switzerland. This indirect subsidiary began operations during the second quarter of 2016. In the third quarter
of 2016, we expanded our direct sales force efforts to include Belgium and Luxembourg.
As of August 1, 2017, our sales force includes 13 direct sales people, one contract sales person and 14 sales
support staff.
We have complemented our direct sales efforts
with sales to distributors and/or corporate partners. In 2013, we reached agreements with distributors in the United Kingdom, Ireland,
the Netherlands, Russia and Turkey. In April 2014, we announced the distribution of CytoSorb in the Middle East, including Saudi
Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, and Oman (the Gulf Cooperative Council (“GCC”)) and Yemen,
Iraq, and Jordan through an exclusive agreement with TechnoOrbits. In December 2014, we entered into an exclusive agreement with
Smart Medical Solutions S.R.L., to distribute CytoSorb for critical care applications in Romania and the neighboring Republic of
Moldova. In 2015, we announced exclusive distribution agreements with Aferetica SRL to distribute CytoSorb in Italy, AlphaMedix
Ltd. to distribute CytoSorb in Israel, TekMed Pty Ltd. to distribute CytoSorb in Australia and New Zealand, and Hoang Long Pharma
to distribute CytoSorb in Vietnam. In June 2016, we announced an exclusive distribution agreement with Palex Medical SA to distribute
CytoSorb in Spain and Portugal. In September 2016, we announced an exclusive agreement with Armaghan Salamat Kish Group (Arsak)
to distribute CytoSorb in Iran. In October 2016, we announced an exclusive agreement with Foxx Medical Chile SpA to distribute
CytoSorb in Chile. In July 2017, we announced an exclusive agreement with Drogueria Ramon Gonzalez Revilla S.A. to distribute CytoSorb
in Panama.
We have been expanding our strategic partnerships
by number and scope. In September 2013, we entered into a strategic partnership with Biocon Ltd., India’s largest biopharmaceuticals
company, with an initial distribution agreement for India and select emerging markets, under which Biocon has the exclusive commercialization
rights for CytoSorb initially focused on sepsis. 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.
In December 2014, we entered into a multi-country
strategic partnership with Fresenius Medical Care AG & Co KGaA (“Fresenius”) to commercialize the CytoSorb therapy.
Under the terms of this agreement, Fresenius has exclusive rights to distribute CytoSorb for critical care applications in France,
Poland, Sweden, Denmark, Norway, and Finland. The partnership will allow 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
will 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 January 2017, the
Fresenius partnership was expanded. The terms of the revised three-year agreement extend 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. In addition, we have entered into a new comprehensive co-marketing agreement
with Fresenius. Under the terms of the agreement, CytoSorbents and Fresenius will jointly market CytoSorb and Fresenius’
CytoSorb compatible blood tubing sets to Fresenius’ critical care customer base in all countries where CytoSorb is being
actively commercialized. CytoSorb will continue to be sold by our direct sales force or through our international network of distributors
and partners, while Fresenius will sell all ancillary products to their customers. Fresenius will also provide a written endorsement
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 is ongoing and it is expected co-marketing
activity will commence during the second half of 2017.
In September 2016, we entered into a multi-country
strategic partnership with Terumo Cardiovascular Group 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.
In March 2017, we entered into a partnership
with Dr. Reddy’s Laboratories Ltd. for the South African market. Under the terms of the agreement, Dr. Reddy’s has
the exclusive right to distribute CytoSorb for intensive care, cardiac surgery, and other hospital applications in South Africa.
This is a multi-year agreement and is subject to annual minimum purchases of CytoSorb to maintain exclusivity.
We are currently evaluating other potential
distributor and strategic partner networks in other major 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 expend the scope of clinical experience for marketing purposes, to increase the number of treated patients,
and to support potential future publications. We have 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 are being stratified for age, cytokine levels, and co-morbid
illnesses in this matched pairs analysis.
In addition, we now have more than
58 investigator-initiated studies planned, with approximately half in an advanced stage, ready to enroll, or completed
around the world. These trials, which are funded and supported by well-known university hospitals and KOLs, are the
equivalent of Phase II clinical studies. They will provide invaluable information regarding the success of the device in the
treatment of sepsis, cardiac pulmonary bypass surgery, trauma, and many other indications, and if successful, will be
integral in helping to drive additional usage and adoption of CytoSorb.
In February 2015, the U.S. Food and Drug Administration
(“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 trial to be a 40-patient randomized controlled study (20
treatment, 20 control) in eight clinical centers. REFRESH I represents 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 in a heart-lung machine to reduce plasma
free hemoglobin 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 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 safety
concerns related to the CytoSorb device, achieving the primary safety endpoint of the trial. 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. This study represents
the first randomized controlled trial demonstrating the safety of intra-operative CytoSorb use in patients undergoing high risk
cardiac operations.
Investigators of the REFRESH I trial submitted
an abstract with data, including free hemoglobin data, from the REFRESH I trial 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 on plasma free hemoglobin and activated complement from the study and disclosed that investigators of the study
have submitted a manuscript of the REFRESH I trial for publication. In parallel, the Company plans to meet with the FDA to discuss
the results of REFRESH I in anticipation of filing an IDE application to initiate a pivotal REFRESH 2 trial in 2017.
The 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, 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 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.
In addition to the sepsis indication, 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. Some examples include the prevention of post-operative complications of cardiac surgery (cardiopulmonary
bypass surgery) and damage to organs donated for transplant prior to organ harvest. 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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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.
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HemoDefend – a development-stage blood purification technology designed to remove contaminants in blood transfusion products. The goal of HemoDefend is to reduce transfusion reactions and improve the safety of older blood.
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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
b
2-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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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, for example, the Defense Advanced Research Projects Agency, or DARPA, the U.S. Army, U.S.
Special Operations Command, and the U.S. Air Force.
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 seeks
to develop a therapeutic blood purification device that is 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 is 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 that provided for maximum funding of approximately $3,825,000. As of June 30, 2017, we
have received approximately $3,825,000 in funding under this contract and no funding remains.
In September 2012, we were awarded a Phase
II Small Business Innovation Research (“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. As of June 30, 2017, we received approximately
$1,213,000 in funding under this contract and have approximately $33,000 remaining under this contract.
In September 2013, the National Heart, Lung
and Blood Institute (“NHLBI”), a division of the National Institutes of Health, awarded us a Phase I SBIR contract,
(contract number HHSN-268201-300044C), valued at $203,351, to further advance our HemoDefend blood purification technology for
packed red blood cell (“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 is 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, with support from U.S. SOCOM, 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), provides for maximum funding of approximately $1,522,000 over a two
year period. As of June 30, 2017, we have received approximately $928,000 and have approximately $594,000 remaining under this
contract.
In March 2016, we were awarded a Phase I SBIR
contract for its development program entitled “Mycotoxin Absorption with Hemocompatible Porous Polymer Beads.” The
purpose of this contract is to develop effective blood purification countermeasures for weaponized mycotoxins that can be easily
disseminated in water, food and air. This work is being 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 provides for maximum funding of $150,000. As of June 30, 2017,
we received approximately $150,000 and no funding is remaining under this contract.
In June 2016, we were awarded a Phase I
Small Business Technology Transfer (“STTR”) contract for a 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
is to develop our HemoDefend blood purification technology to potentially enable universal plasma. This work is being funded
by the U.S. Army Medical Research Acquisition Activity (“USAMRAA”) under contract W81XWH-16-C-0025 and provides
for maximum funding of $150,000. As of June 30, 2017, we received approximately $150,000 and no funding is remaining under
this contract.
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 is to develop
two novel and distinct treatment options for life-threatening hyperkalemia. This work is being funded by the USAMRAA under contract
W81XWH-16-C-0080 and provides for maximum funding of approximately $150,000. As of June 30, 2017, we received approximately $150,000
and no funding is remaining under this contract.
In January 2017, the Company was awarded
a Phase II SBIR contract to continue development of CytoSorb for fungal mycotoxin blood purification. This program will focus
on demonstrating the ability of CytoSorb to absorb mycotoxins in vivo and improve survival in animals. This contract provides
for maximum funding of $999,996 over two years. This program is funded by the Chemical and Biological Defense
(“CBD”) SBIR program under Contract number W911QY-17-C-0007. As of June 30, 2017, we have received approximately
$196,000 and have approximately $804,000 remaining under this contract.
In May 2017, the Company was awarded a
Phase II STTR contract Titled “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. CytoSorbents will 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. As of June 30, 2017, we have received approximately $40,000 and have approximately
$959,070 remaining under this contract.
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 June 30, 2017, we have received approximately $6,000 and have approximately $713,000 remaining under this
contract.
Results of Operations
Comparison for the three months ended
June 30, 2017 and 2016:
Revenues:
Revenue from product sales was approximately
$3,041,000 in the three months ended June 30, 2017, as compared to approximately $1,853,000 in the three months ended June 30,
2016, an increase of approximately $1,188,000, or 64%. This increase was largely driven by an increase in direct sales from both
new customers and repeat orders from existing customers, along with an increase in distributor sales.
Grant income was approximately $525,000 for
the three months ended June 30, 2017 as compared to approximately $370,000 for the three months ended June 30, 2016, an increase
of approximately $155,000. This increase was a result of revenue recognized from new grants.
As a result of the increases in both product
sales and grant income, for the three months ended June 30, 2017, we generated total revenue of approximately $3,566,000, as compared
to total revenues of approximately $2,222,000, for the three months ended June 30, 2016, an increase of approximately $1,344,000
or 60%.
Cost of Revenues:
For the three months ended June 30, 2017
and 2016, cost of revenue was approximately $1,482,000 and $873,000, respectively, an increase of approximately $609,000.
Product cost of revenues increased approximately $458,000 during the three months ended June 30, 2017 as compared to the
three months ended June 30, 2016 due to increased sales. Product gross margins were approximately 65% for the three months
ended June 30, 2017, as compared to approximately 68% for the three months ended June 30, 2016. This decrease in gross
margin was primarily due to the mix of direct and distributor sales.
Research and Development Expenses
:
For the three months ended June 30, 2017, research
and development expenses were approximately $488,000 as compared to research and development expenses of approximately $1,092,000
for the three months ended June 30, 2016. The decrease of approximately $604,000 was due to a decrease in costs related to our
various clinical studies and trials of approximately $469,000 and an increase in direct labor and other costs being deployed toward
grant-funded activities of approximately $151,000, which had the effect of decreasing the amount of our non-reimbursable research
and development costs. These decreases were offset by an increase in our non-clinical research and development activities of approximately
$16,000.
Legal, Financial and Other Consulting
Expense:
Legal, financial and other consulting expenses
were approximately $443,000 for the three months ended June 30, 2017, as compared to approximately $319,000 for the three months
ended June 30, 2016. The increase of approximately $124,000 was due to an increase in employment agency fees of approximately $80,000
related to the recruitment of senior level personnel and an increase in legal fees of approximately $63,000 related to certain
corporate initiatives and an increase in consulting fees of approximately $5,000, These increases were offset by decreases in auditing
and other consulting fees of approximately $24,000 due to fees incurred related to the audit of our internal controls as required
by The Sarbanes-Oxley Act of 2002 in 2016 that did not recur in 2017.
Selling, General and Administrative Expense:
Selling, general and
administrative expenses were approximately $3,484,000 for the three months ended June 30, 2017, as compared to approximately
$2,625,000 for the three months ending June 30, 2016. The increase of $859,000 was due to an increase in non-cash stock-based compensation expense of approximately $411,000 primarily based
upon progress toward meeting the 2017 operating milestones, increases in salaries, commissions
and related costs of approximately $82,000 due to headcount additions and personnel related costs, an increase in royalty
expenses of approximately $110,000 due to the increase in product sales, additional sales and marketing costs, which include
advertising and conferences of approximately $48,000, an increase in travel and entertainment and other costs of
approximately $70,000, an increase in rent expense of approximately $29,000 related to
the new expanded office facility in Germany, an increase in public relations costs of approximately $27,000, an increase in
stock transfer fees of approximately $9,000 and other general and administrative cost increases of approximately $73,000.
Interest Income (Expense):
For the three months ended June 30, 2017,
interest expense was approximately $123,000, as compared to interest income of approximately $2,000 for the three months
ended June 30, 2016. This increase in interest expense of approximately $125,000 is directly related to interest expense
incurred and amortization of loan acquisition costs related to the Company’s financing facility with Bridge Bank on
which $5,000,000 was drawn on June 30, 2016 and was outstanding for the three months ended June 30, 2017.
Gain (Loss) on Foreign Currency Transactions:
For the three months ended June 30, 2017, the
gain on foreign currency transactions was approximately $720,000 as compared to a loss of approximately $129,000 for the three
months ended June 30, 2016. The 2017 gain is directly related to the increase in the exchange rate of the Euro at June 30, 2017
as compared to March 31, 2017. The exchange rate of the Euro to the U.S. dollar was $1.14 per Euro at June 30, 2017 as compared
to $1.07 per Euro at March 31, 2017. The 2016 loss is directly related to the decrease in the exchange rate of the Euro at June
30, 2016 as compared to March 31, 2016. The exchange rate of the Euro to the U.S. dollar was $1.11 per Euro at June 30, 2016 as
compared to $1.14 per Euro at March 31, 2016.
Change in Warrant Liability:
We recognize warrants as liabilities at
their fair value on the date of the grant because of price adjustment provisions in the warrants, then measure the fair value
of the warrants on each reporting date, and record a change to the warrant liability as appropriate. The change in warrant
liability resulted in non-cash other income of approximately $618,000 for the three months ended June 30, 2017 as compared to
non-cash other expense approximately $190,000 for the three months ended June 30, 2016. The change in warrant liability was a
result of the change in the fair value of the warrant liability from March 31, 2017 to June 30, 2017 and from March 31, 2016
to June 30, 2016. See Note 4 to the consolidated financial statements for details related to the calculation of the
fair value of the warrant liability.
Comparison for the six months ended June
30, 2017 and 2016:
Revenues:
Revenue from product sales was approximately
$5,637,000 in the six months ended June 30, 2017, as compared to approximately $3,450,000 in the six months ended June 30, 2016,
an increase of approximately $2,187,000, or 63%. This increase was largely driven by an increase in direct sales from both new
customers and repeat orders from existing customers, along with an increase in distributor sales.
Grant income was approximately $1,043,000 for
the six months ended June 30, 2017, as compared to approximately $582,000 for the six months ended June 30, 2016, an increase of
approximately $461,000, or 79%. This increase was a result of revenue recognized from new grants.
As a result of the increases in both product
sales and grant income, for the six months ended June 30, 2017, we generated total revenue of approximately $6,680,000, as compared
to total revenue of approximately $4,032,000, for the six months ended June 30, 2016, an increase of approximately $2,648,000,
or 66%.
Cost of Revenues:
For the six months ended June 30, 2017
and 2016, cost of revenue was approximately $2,736,000 and $1,693,000, respectively, an increase of approximately $1,043,000.
Product cost of revenues increased approximately $687,000 during the six months ended June 30, 2017 as compared to the six
months ended June 30, 2016 due to increased sales. Product gross margins were approximately 66% for the six months ended June
30, 2017, as compared to approximately 65% for the six months ended June 30, 2016 primarily due to the mix of direct and
distributor sales. Grant income related expenses increased due to direct labor and other costs being deployed toward
grant-funded activities, an increase of approximately $356,000 during the six months ended June 30, 2017 as compared to the
six months ended June 30, 2016.
Research and Development Expenses
:
For the six months ended June 30, 2017, research
and development expenses were approximately $957,000, as compared to research and development expenses of approximately $1,948,000
for the six months ended June 30, 2016, a decrease of approximately $991,000. This decrease was due to a reduction in costs related
to the various clinical studies of approximately $672,000 and, an increase in direct labor and other costs being deployed toward
grant-funded activities of approximately $356,000, which had the effect of decreasing the amount of our non-reimbursable research
and development costs. These decreases were offset by increases in other research and development costs of approximately $37,000.
Legal, Financial and Other Consulting
Expense:
Legal, financial and other consulting expenses
were approximately $723,000 for the six months ended June 30, 2017, as compared to approximately $574,000 for the six months ended
June 30, 2016. The increase of approximately $149,000 was due to an increase in employment agency fees of approximately $110,000
related to the hiring of senior level personnel and increases in legal fees of approximately $85,000 related to various corporate
initiatives. These increases were offset by decreases in accounting and audit fees of approximately $25,000 due to fees incurred
related to the audit of our internal controls as required by The Sarbanes-Oxley Act of 2002 in 2016 that did not recur in 2017
and a decrease in consulting fees of approximately $21,000.
Selling, General and Administrative Expense:
Selling, general and
administrative expenses were approximately $6,151,000 for the six months ended June 30, 2017, as compared to approximately
$4,595,000 for the six months ending June 30, 2016, an increase of $1,556,000. The increase in selling, general, and
administrative expenses was due to an increase in non-cash stock compensation expense of approximately
$500,000 primarily based upon progress toward meeting the 2017 operating milestones, increases in salaries, commissions and related costs of approximately $395,000 due to
headcount additions and increases in product sales, an increase in royalty expenses
of approximately $204,000 due to the increase in sales, additional sales and marketing costs, which include advertising and
conferences of approximately $141,000 and an increase in travel and entertainment costs and other expenses of approximately
$126,000, an increase in occupancy cost of approximately $55,000 related to the new expanded office facility in Germany, an
increase in public relations expense of approximately $22,000, an increase in office supplies and related expenses of
approximately $57,000 and other general and administrative cost increases of approximately $56,000.
Interest Income (Expense):
For the six months ended June 30, 2017, interest
expense was approximately $244,000, as compared to interest income of approximately $5,000 for the six months ended June 30, 2016.
This increase in interest expense of approximately $249,000 is directly related to interest expense incurred and amortization of
loan acquisition costs related to the Company’s financing facility with Bridge Bank on which $5,000,000 was drawn on June
30, 2016 and was outstanding for the six months ended June 30, 2017.
Gain (Loss) on Foreign Currency Transactions:
For the six months ended June 30, 2017, the
gain on foreign currency transactions was approximately $873,000, as compared to approximately $103,000 for the six months ended
June 30, 2016. The 2017 gain is directly related to the increase in the exchange rate of the Euro at June 30, 2017, as compared
to December 31, 2016. The exchange rate of the Euro to the U.S. dollar was $1.14 per Euro at June 30, 2017 as compared to $1.05
per Euro at December 31, 2016. The 2016 gain is directly related to the increase in the exchange rate of the Euro at June 30, 2016,
as compared to December 31, 2015. The exchange rate of the Euro to the U.S. dollar was $1.12 per Euro at June 30, 2016 as compared
to $1.08 per Euro at December 31, 2015.
Change in Warrant Liability:
We recognize warrants as liabilities
at their fair value on the date of the grant because of price adjustment provisions in the warrants, then measure the fair
value of the warrants on each reporting date, and record a change to the warrant liability as appropriate. The change in
warrant liability resulted in non-cash other income of approximately $765,000 for the six months ended June 30, 2017, and
non-cash other expense of approximately $172,000 for the six months ended June 30, 2016. The change in warrant liability was
a result of the change in the fair value of the warrant liability from December 31, 2016 to June 30, 2017 and from December
31, 2015 to June 30, 2016. See Note 4 to the consolidated financial statements for details related to the calculation of the
fair value of the warrant liability.
History of Operating Losses
:
We have experienced substantial operating losses
since inception. As of June 30, 2017, we had an accumulated deficit of approximately $146,959,000, which included losses of approximately
$2,494,000 and $4,842,000 for the six month periods ended June 30, 2017 and 2016, 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 June 30, 2017, we had current assets of approximately $19,741,000
including cash on hand of approximately $16,402,000 and current liabilities of approximately $6,230,000.
On June 30, 2016, the Company and its wholly-owned
subsidiary, CytoSorbents Medical, Inc., entered into a Loan and Security Agreement (the “Loan and Security Agreement”)
with Bridge Bank, a division of Western Alliance Bank, (the “Bank”), pursuant to which the Bank agreed to loan up to
an aggregate of $10 million to the Company, to be disbursed in two equal tranches of $5 million. We received the proceeds from
the first tranche on June 30, 2016 and from the second tranche on June 30, 2017.
In addition, on April 5, 2017, the Company
closed on the sale of an aggregate of 2,222,222 shares of Common Stock pursuant to the Company's existing shelf registration statement
(Registration No. 333-205806) on Form S-3. The Company received gross proceeds of approximately $10 million, based on a public
offering price of $4.50 per share.
On April 11, 2017, the Company closed the sale of an additional
333,333 shares of the Company’s Common Stock, pursuant to the underwriters’ full exercise of an over-allotment option.
The Company received gross proceeds of approximately $1.5 million as a result of the exercise of the option. As a result, the Company
received total gross proceeds of $11.5 million, and,
after deducting the underwriting discounts and commissions and estimated
expenses related to the offering, the Company received total net proceeds of approximately
$10.3 million.
As a result of the receipt of additional proceeds
both under the Loan and Security Agreement in June 2017 and in conjunction with the closing of the equity financing in April 2017,
we believe we have sufficient liquidity to fund our operations through 2018; however, we may need to raise additional capital to
fully fund pivotal trials in the United States and/or Germany. We will be better able to assess this need once the specific protocols
are finalized with appropriate regulatory bodies.
Contractual Obligations
In April 2017, the Company entered into a Fifteenth
Amendment to Lease Agreement with Princeton Corporate Plaza, LLC, which expands our space to approximately 15,100 square feet and
extended the term of the lease for its corporate headquarters and manufacturing facility through May 31, 2019 and, effective June
1, 2017, increased the Company’s base rent obligation to $27,083 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, 2020 upon certain conditions.
In September 2016, the Company entered into
a five year lease agreement with Klimik GmbH for 600 square meters of office and warehouse space for its wholly-owned subsidiary
CytoSorbents Europe GmbH. The lease, which commenced on September 1, 2016, has a rent obligation of $6,789 per month. The lease
expires on August 31, 2021. The lease also provides the Company with an option to extend the term of the lease for an additional
five year period through August 31, 2026.
The following table summarizes our obligations with regard to our
contractual obligations as of June 30, 2017, and the expected timing of maturities of those contractual obligations.
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Over 5 Years
|
|
Operating Lease Obligations
|
|
$
|
325,221
|
|
|
$
|
460,861
|
|
|
$
|
95,053
|
|
|
|
–
|
|
Long-term debt
|
|
|
2,000,000
|
|
|
|
4,000,000
|
|
|
|
2,000,000
|
|
|
|
–
|
|
|
|
$
|
2,325,221
|
|
|
$
|
4,460,861
|
|
|
$
|
2,095,053
|
|
|
|
–
|
|
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 have 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 June 30, 2017, we had an accumulated
deficit of approximately $146,959,000, which included net losses of approximately $2,494,000 for the six months ended June 30,
2017, and $4,842,000 for the six months ended June 30, 2016. In part due to these losses, our audited consolidated financial statements
were prepared assuming we will continue as a going concern, and the auditors’ report on those 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 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 consolidated financial statements do not include any adjustments related to the outcome of this uncertainty.