Item 1. Financial Statements
CYTOSORBENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(As Adjusted)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,400,348
|
|
|
$
|
5,245,178
|
|
Grants and accounts receivable, net of allowance for doubtful accounts of $76,601 at September 30, 2017 and $65,414 at December 31, 2016
|
|
|
2,350,190
|
|
|
|
1,433,468
|
|
Inventories
|
|
|
1,089,343
|
|
|
|
833,976
|
|
Prepaid expenses and other current assets
|
|
|
546,124
|
|
|
|
315,802
|
|
Total current assets
|
|
|
19,386,005
|
|
|
|
7,828,424
|
|
Property and equipment, net
|
|
|
1,032,789
|
|
|
|
569,409
|
|
Other assets
|
|
|
1,799,515
|
|
|
|
1,296,011
|
|
Total long-term assets
|
|
|
2,832,304
|
|
|
|
1,865,420
|
|
Total Assets
|
|
$
|
22,218,309
|
|
|
$
|
9,693,844
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,288,230
|
|
|
$
|
1,330,072
|
|
Current maturities of long-term debt
|
|
|
3,000,000
|
|
|
|
833,333
|
|
Accrued expenses and other current liabilities
|
|
|
1,489,931
|
|
|
|
2,114,666
|
|
Total current liabilities
|
|
|
5,778,161
|
|
|
|
4,278,071
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities and debt acquisition costs
|
|
|
6,966,355
|
|
|
|
4,078,314
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
12,744,516
|
|
|
|
8,356,385
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $0.001, 5,000,000 shares authorized; -0- shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
—
|
|
|
|
—
|
|
Common Stock, par value $0.001, 50,000,000 shares authorized; 28,481,082 and 25,483,966 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
28,481
|
|
|
|
25,484
|
|
Additional paid-in capital
|
|
|
158,734,206
|
|
|
|
143,929,397
|
|
Accumulated other comprehensive income (loss)
|
|
|
(123,277
|
)
|
|
|
898,684
|
|
Accumulated deficit
|
|
|
(149,165,617
|
)
|
|
|
(143,516,106
|
)
|
Total stockholders' equity
|
|
|
9,473,793
|
|
|
|
1,337,459
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
22,218,309
|
|
|
$
|
9,693,844
|
|
See accompanying notes to consolidated financial
statements
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited
As Adjusted)
|
|
|
(Unaudited)
|
|
|
(Unaudited,
As Adjusted)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,448,661
|
|
|
$
|
2,143,116
|
|
|
$
|
9,085,806
|
|
|
$
|
5,593,235
|
|
Grant income
|
|
|
375,638
|
|
|
|
268,592
|
|
|
|
1,418,237
|
|
|
|
850,993
|
|
Total revenue
|
|
|
3,824,299
|
|
|
|
2,411,708
|
|
|
|
10,504,043
|
|
|
|
6,444,228
|
|
Cost of revenue
|
|
|
1,516,864
|
|
|
|
963,881
|
|
|
|
4,253,357
|
|
|
|
2,656,646
|
|
Gross profit
|
|
|
2,307,435
|
|
|
|
1,447,827
|
|
|
|
6,250,686
|
|
|
|
3,787,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
537,949
|
|
|
|
1,172,155
|
|
|
|
1,628,261
|
|
|
|
3,120,347
|
|
Legal, financial and other consulting
|
|
|
238.303
|
|
|
|
279,321
|
|
|
|
961,444
|
|
|
|
853,056
|
|
Selling, general and administrative
|
|
|
3,680,228
|
|
|
|
2,140,563
|
|
|
|
9,698,412
|
|
|
|
6,735,856
|
|
Total expenses
|
|
|
4,456,480
|
|
|
|
3,592,039
|
|
|
|
12,288,117
|
|
|
|
10,709,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,149,045
|
)
|
|
|
(2,144,212
|
)
|
|
|
(6,037,431
|
)
|
|
|
(6,921,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(253,780
|
)
|
|
|
(117,352
|
)
|
|
|
(497,683
|
)
|
|
|
(111,864
|
)
|
Gain on foreign currency transactions
|
|
|
348,546
|
|
|
|
73,445
|
|
|
|
1,221,334
|
|
|
|
176,096
|
|
Total other income (expense), net
|
|
|
94,766
|
|
|
|
(43,907
|
)
|
|
|
723,651
|
|
|
|
64,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(2,054,279
|
)
|
|
|
(2,188,119
|
))
|
|
|
(5,313,780
|
)
|
|
|
(6,857,445
|
)
|
Benefit from income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,054,279
|
)
|
|
|
(2,188,119
|
))
|
|
|
(5,313,780
|
)
|
|
|
(6,857,445
|
)
|
Dividend, warrant exercise price adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
335,731
|
|
|
|
—
|
|
Net loss available to common stockholders
|
|
|
(2,054,279
|
)
|
|
|
(2,188,119
|
)
|
|
|
(5,649,511
|
)
|
|
|
(6,857,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share of Common Stock
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.27
|
)
|
Weighted average number of shares of Common Stock outstanding
|
|
|
28,206,437
|
|
|
|
25,444,565
|
|
|
|
27,231,145
|
|
|
|
25,420,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,054,279
|
)
|
|
$
|
(2,188,119
|
)
|
|
|
(5,313,780
|
)
|
|
$
|
(6,857,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
(280,078
|
)
|
|
|
(60,820
|
)
|
|
|
(1,021,961
|
)
|
|
|
(161,593
|
)
|
Comprehensive loss
|
|
$
|
(2,334,357
|
)
|
|
$
|
(2,248,939
|
)
|
|
$
|
(6,335,741
|
)
|
|
$
|
(7,019,038
|
)
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
Period from December 31, 2016 to September
30, 2017 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
(As Originally Reported)
|
|
|
25,483,966
|
|
|
$
|
25,484
|
|
|
$
|
143,066,477
|
|
|
$
|
898,684
|
|
|
$
|
(144,464,733
|
)
|
|
$
|
(474,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment (see note 3)
|
|
|
—
|
|
|
|
—
|
|
|
|
862,920
|
|
|
|
—
|
|
|
|
948,627
|
|
|
|
1,811,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
(As Adjusted)
|
|
|
25,483,966
|
|
|
|
25,484
|
|
|
|
143,929,397
|
|
|
|
898,684
|
|
|
|
(143,516,106
|
)
|
|
|
1,337,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation - employees, consultants and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
1,851,020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,851,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock-offering, net of fees incurred
|
|
|
2,837,949
|
|
|
|
2,838
|
|
|
|
11,968,625
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,971,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss): foreign translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,021,961
|
)
|
|
|
—
|
|
|
|
(1,021,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units
|
|
|
41,390
|
|
|
|
41
|
|
|
|
207,567
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of stock options
|
|
|
2,074
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
59,001
|
|
|
|
59
|
|
|
|
260,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
56,702
|
|
|
|
57
|
|
|
|
181,423
|
|
|
|
—
|
|
|
|
—
|
|
|
|
181,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend, warrant exercise price adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
335,731
|
|
|
|
—
|
|
|
|
(335,731
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,313,780
|
)
|
|
|
(5,313,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
28,481,082
|
|
|
$
|
28,481
|
|
|
$
|
158,734,206
|
|
|
$
|
(123,277
|
)
|
|
$
|
(149,165,617
|
)
|
|
$
|
9,473,793
|
|
See accompanying notes to consolidated financial
statements
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited,
As Adjusted)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,313,780
|
)
|
|
$
|
(6,857,445
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
161,688
|
|
|
|
109,395
|
|
Amortization of debt costs
|
|
|
56,268
|
|
|
|
15,240
|
|
Bad debt expense
|
|
|
3,897
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
1,851,020
|
|
|
|
724,025
|
|
Foreign currency transaction gain
|
|
|
(1,221,334
|
)
|
|
|
(176,096
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Grants and accounts receivable
|
|
|
(803,348
|
)
|
|
|
(747,117
|
)
|
Inventories
|
|
|
(227,882
|
)
|
|
|
143,200
|
|
Prepaid expenses and other current assets
|
|
|
(8,528
|
)
|
|
|
295,516
|
|
Other assets
|
|
|
(15,000
|
)
|
|
|
(21,363
|
)
|
Accounts payable and accrued expenses
|
|
|
(534,222
|
)
|
|
|
862,754
|
|
Net cash used by operating activities
|
|
|
(6,051,221
|
)
|
|
|
(5,651,891
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(579,944
|
)
|
|
|
(155,696
|
)
|
Payments for patent costs
|
|
|
(516,203
|
)
|
|
|
(341,665
|
)
|
Proceeds from redemptions of short-term investments
|
|
|
—
|
|
|
|
2,192,000
|
|
Net cash provided (used) by investing activities
|
|
|
(1,096,147
|
)
|
|
|
1,694,639
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Equity contributions - net of fees incurred
|
|
|
11,775,046
|
|
|
|
-
|
|
Proceeds from long-term debt
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Payment of debt acquisition costs
|
|
|
(1,560
|
)
|
|
|
(118,833
|
)
|
Proceeds from exercise of stock options
|
|
|
181,480
|
|
|
|
79,990
|
|
Proceeds from exercise of warrants
|
|
|
260,504
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
17,215,470
|
|
|
|
5,011,157
|
|
Effect of exchange rates on cash
|
|
|
87,068
|
|
|
|
4,293
|
|
Net increase in cash and cash equivalents
|
|
|
10,155,170
|
|
|
|
1,058,198
|
|
Cash and cash equivalents - beginning of period
|
|
|
5,245,178
|
|
|
|
5,316,851
|
|
Cash and cash equivalents - end of period
|
|
$
|
15,400,348
|
|
|
$
|
6,375,049
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
407,347
|
|
|
$
|
71,233
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of accrued bonuses with restricted stock units
|
|
$
|
207,608
|
|
|
$
|
—
|
|
Dividend, warrant exercise price adjustment
|
|
$
|
335,731
|
|
|
$
|
—
|
|
Proceeds of stock sale not received
|
|
$
|
196,417
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial
statements.
CytoSorbents Corporation
Notes to Consolidated Financial Statements
(UNAUDITED)
September 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 nine
months ended September 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 September 30, 2017, the Company had an
accumulated deficit of $149,165,617, which included net losses of $5,313,780 for the nine months ended September 30, 2017 and $6,857,445
for the nine months ended September 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 is 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 September 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 (the “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 CytoSorbents Europe GmbH, for which
the U.S. dollar is the functional currency, are included in operations. Foreign currency transaction gain amounted to $348,546
and $73,445 for the three months ended September 30, 2017 and 2016, respectively. Foreign currency transaction gain included in
net loss amounted to $1,221,334 and $176,096 for the nine months ended September 30, 2017 and 2016, respectively. The Company translates
assets and liabilities of the European subsidiaries, 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 accumulated other comprehensive income (loss) as a component of stockholder’s
equity.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents.
Grants and Accounts Receivable
Grants receivable represent amounts due from
U.S. government agencies and are included in Grants and Accounts Receivable.
Accounts receivable are unsecured, non-interest
bearing customer obligations due under normal trade terms. The Company sells its devices to various hospitals and distributors.
The Company performs ongoing credit evaluations of 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
$77,000 and $65,000 at September 30, 2017 and December 31, 2016, respectively.
Inventories
Inventories are valued at the lower of cost
or market. At September 30, 2017 and December 31, 2016, the Company’s inventory was comprised of finished goods, which amounted
to $351,642 and $307,483, respectively; work in process which amounted to $648,131 and $467,663, respectively; and raw materials,
which amounted to $89,570 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.
Warrants (See Note 3)
The Company recognizes the fair value of the
warrants with a down round feature as a component of stockholders’ equity as of the date of the warrant grant. When the down
round feature is triggered, the Company remeasures the fair value of the warrants, and records the change in fair value as a dividend
and as a reduction in net income available to common stockholders.
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 and costs of clinical trials and studies are expensed when incurred.
Advertising Expenses
Advertising expenses are charged to activities
when incurred. Advertising expenses amounted to approximately $45,000 and $28,000 for the three months ended September 30, 2017
and 2016, respectively, and approximately $132,000 and $153,000 for the nine months ended September 30, 2017 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 September 30, 2017 or December 31, 2016. The Company
files tax returns in the U.S. federal and various 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 nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
1,964,434
|
|
|
$
|
1,327,193
|
|
|
$
|
5,359,560
|
|
|
$
|
3,653,995
|
|
All other countries
|
|
|
1,484,227
|
|
|
|
815,923
|
|
|
|
3,726,246
|
|
|
|
1,939,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
375,638
|
|
|
|
268,592
|
|
|
|
1,418,237
|
|
|
|
850,993
|
|
Total revenue
|
|
$
|
3,824,299
|
|
|
$
|
2,411,708
|
|
|
$
|
10,504,043
|
|
|
$
|
6,444,228
|
|
As of September 30, 2017, two distributors
accounted for approximately 33% 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 September 30, 2017,
no agency, distributor, or direct customer represented more than 10% of the Company’s revenue. For the three months ended
September 30, 2016, one direct customer represented 11% of the Company’s total revenue. For the nine months ended September
30, 2017, no agency, distributor, or direct customer represented more than 10% of the Company’s revenue. For the nine months
ended September 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
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. In 2016,
the FASB issued ASU’s 2016-08, 2016-10 and 2016-12, all of which relate to this same topic and have the same effective date.
The Company has evaluated the impact of these ASU’s and has determined that the adoption of this updated guidance may result
in the deferral of revenue for certain distributors and strategic partners due to volume pricing discounts in the contracts. Also,
revenues may be deferred on certain grant contracts with government agencies. The Company may also be required to capitalize costs
incurred to obtain certain grant contracts and amortize these costs over the term of the related contract. Adoption of these ASU’s
may require enhanced disclosures regarding contracts with customers including disaggregation of revenue, information about contract
balances and performance obligations, significant judgments used in determining transaction price and assets recognized from costs
to obtain a contract.
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 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, 2018. 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 has elected to adopt the provisions of this ASU as of September 30, 2017 and has restated its current and comparative
financial statements within this quarterly filing accordingly. (See Note 3).
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 $50,000 and $28,000 for the three months ended September 30, 2017
and 2016, respectively, and approximately $178,000 and $99,000 for the nine months ended September 30 2017 and 2016, respectively.
|
3.
|
ADOPTION OF NEW ACCOUNTING STANDARD AND RESTATEMENT
|
Effective September 30, 2017, the Company adopted
the provisions of Accounting Standards Update (“ASU”) 2017-11, “Earning Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The provisions of this ASU change the classification
analysis of certain equity-linked financial instruments (or embedded features) with down round features. The fair value of a financial
instrument with a down round feature is now required to be classified as a component of stockholders equity, as opposed to a liability
as it was previously required to be reported. In addition, this recorded fair value of the financial instrument is no longer to
be subsequently remeasured. When the down round feature of the financial instrument is triggered due to a change in the underlying
strike price, the change in the fair value is now required to be treated as a dividend and as a reduction of income available to
common stockholders in accordance with the guidance of ASC-260. Accordingly, the Company has restated its current and historical
financial statements to properly reflect the provisions of this ASU as discussed below.
Prior accounting treatment
In
connection with its March 11, 2014 offering, the Company issued warrants to purchase 816,000 shares of Common Stock. These warrants
contain 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. Accordingly, the Company recognized a liability for these warrants based on their
fair value as of the date of grant. The initial warrant liability recognized on the related warrants totaled $862,920. At each
subsequent quarter end, the Company then remeasured the fair value of the warrants, and recorded the change in the warrant liability
as a component of net income. 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, and the warrant liability was adjusted based upon the change in the underlying
exercise price. There was no change in the number of warrants which were repriced. (see Note 4).
Current accounting treatment.
The warrant liability has been eliminated from the Company’s balance sheets for the quarterly periods and years 2014, 2015,
2016, and 2017. As of January 1, 2016, the fair value of the warrant liability amounted to $1,636,128. Accordingly, the Company
has restated its retained earnings and additional paid in capital as of January 1, 2016 by $773,208 and $862,920, respectively,
in accordance with the provisions of this ASU. In addition, the Company has restated its net income by $494,596 and $666,815 for
the three and nine months ended September 30, 2016, respectively, for the effect of the change in the fair value of the warrant
liability. In addition, as of September 30, 2017, the Company has restated its net income by $765,106, which eliminates the year
to date 2017 change to the warrant liability that was a component of net income, The cumulative effect of these restatements resulted
in an increase to retained earnings amounting to $948,627 and additional paid in capital of $862,920 as of December 31, 2016.
As a result of the repricing of the warrants
which occurred in connection with the April 2017 equity offering, the Company additionally recorded a dividend of $335,731 during
the nine months ended September 30, 2017.
Preferred Stock
In December 2014, the Company amended and restated
its articles of incorporation to reduce the total number of authorized shares of preferred stock. The amended and restated articles
of incorporation authorize the issuance of up to 5,000,000 shares of “blank check” preferred stock, with such designation
rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock
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. 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. From November 4, 2015 through December 31, 2015, the Company sold 28,880
shares, generating net proceeds of approximately $225,000 under the Sales Agreement. There were no sales during the year
ended December 31, 2016. During the three months ended September 30, 2017, the Company sold 282,394 shares, generating net
proceeds of approximately 1,659,000. As of September 30, 2017, approximately $196,000 of these proceeds was held in escrow
and not received and is included in prepaid expenses and other current assets in the accompanying balance sheet. From October
1, 2017 through November 7, 2017, the Company sold 157,398 shares, generating net proceeds of approximately 980,000. (See Note
8). In the aggregate, the Company has sold 468,672 shares at an average selling price of $6.30 per share, generating net
proceeds of approximately $2,863,000 under the terms of the Sales Agreement.
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.
As a result of the repricing of the warrants
which occurred in connection with the April 2017 equity offering, the Company recorded a dividend of $335,731 during the nine months
ended September 30, 2017.
Stock-Based Compensation
Stock Options:
Total share-based employee, director, and consultant
compensation for the three months and nine months ended September 30, 2017 and 2016 amounted to approximately $960,000 and $124,000
and $1,851,000 and $599,000, respectively. These amounts are included in the statement of operations under the captions research
and development ($28,000 and $29,000 for the three months ended September 30, 2017 and 2016, and $73,000 and $121,000 for the nine
months ended September 30, 2017 and 2016) and selling, general and administrative ($932,000 and $95,000 for the three months ended
September 30, 2017 and 2016, and $1,778,000 and $478,000 for the nine months ended September 30, 2017 and 2016).
The summary of the stock option activity for
the nine months ended September 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
|
|
|
1,180,950
|
|
|
|
5.45
|
|
|
|
9.7
|
|
Forfeited
|
|
|
(17,640
|
)
|
|
|
4.65
|
|
|
|
—
|
|
Expired
|
|
|
(32,120
|
)
|
|
|
36.33
|
|
|
|
—
|
|
Exercised
|
|
|
(74,180
|
)
|
|
|
3.56
|
|
|
|
—
|
|
Outstanding, September 30, 2017
|
|
|
3,819,187
|
|
|
$
|
4.68
|
|
|
|
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 80.8%), expected dividends (-0-%) on the stock and the risk free interest rate (1.24% to 1.85%) for the
term of the stock option.
The aggregate intrinsic value is calculated
at the difference between the market value as of September 30, 2017 of $6.20 and the exercise price of the shares.
Options Outstanding
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
Outstanding at
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise
|
|
September 30,
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Price
|
|
2017
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
$0.88 - $11.48
|
|
|
3,819,187
|
|
|
$
|
4.68
|
|
|
|
6.8
|
|
|
$
|
6,045,932
|
|
Options Exercisable
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Exercisable at
|
|
|
Average
|
|
|
Aggregate
|
|
September 30,
|
|
|
Exercise
|
|
|
Intrinsic
|
|
2017
|
|
|
Price
|
|
|
Value
|
|
|
2,592,062
|
|
|
$
|
4.31
|
|
|
$
|
5,125,994
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the status of the Company’s
non-vested options for the nine months ended September 30, 2017 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested, January 1, 2017
|
|
|
912,547
|
|
|
$
|
2.55
|
|
Granted
|
|
|
1,180,950
|
|
|
|
0.58
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
|
2.41
|
|
Vested
|
|
|
(865,372
|
)
|
|
|
2.36
|
|
Non-vested, September 30, 2017
|
|
|
1,227,125
|
|
|
$
|
0.62
|
|
As of September 30, 2017, the Company had approximately
$470,000 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 September 30, 2017, the Company has determined that it has met or
will probably meet 45 percent of these milestones, which equates to a vesting of 45 percent of these options. Accordingly, the
Company has recorded expense of approximately $821,000 for the three months and $1,478,000 for the nine months ended September
30, 2017 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 nine months ended September 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 three and nine months ended September 30, 2017, the Company recorded a charge of approximately
$31,000 and $77,000 related to the vested portion of 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 three and nine months ended September 30, 2017, the Company
recorded a charge of approximately $58,000 and $175,000 related to these restricted stock unit awards.
The following table outlines the restricted
stock unit activity for the nine months ended September 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, September 30, 2017
|
|
|
110,003
|
|
|
$
|
5.38
|
|
Warrants:
As of September 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
|
|
717,000
|
|
|
$
|
4.500
|
|
|
March 11, 2019
|
|
30,000
|
|
|
$
|
9.900
|
|
|
January 14, 2020
|
|
1,019,560
|
|
|
|
|
|
|
|
In connection with its March 11, 2014 offering,
the Company issued warrants to purchase 816,000 shares of Common Stock. As of September 30, 2017, 717,000 of these warrants remain
outstanding. These 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, which is currently $4.50, over the life of the warrants,
excluding certain exempt issuances. These warrants are exercisable on a cash-only basis.
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 of 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 8.98% at September 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 Term Loan B, 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 months ended September 30, 2017 and 2016, the Company recorded interest expense amounting to $7,558 and
$7,427, respectively, related to these costs. For the nine months ended September 30, 2017 and 2016, the Company recorded interest
expenses amounting to $22,413 and $7,427, 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 is required to make monthly payments of interest only during the term of
each Term Loan. Commencing on February 1, 2018, subject to certain conditions as outlined in the Loan and Security Agreement. The
Company is required to make equal monthly payments of principal of $333,333, together with accrued and unpaid interest. In either
event, 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 months
ended September 30, 2017 and 2016, the Company recorded interest expense of $18,229 and $7,813, respectively, related to the final
fee. For the nine months ended September 30, 2017 and 2016, the Company recorded interest expense of $33,854 and $7,813, respectively,
related to the final fee. The Term Loans shall be evidenced by one or more 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, and 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 September 30, 2017:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
10,000,000
|
|
|
$
|
5,000,000
|
|
Less unamortized debt acquisition costs
|
|
|
(83,124
|
)
|
|
|
(103,978
|
)
|
Plus accrued final fee
|
|
|
49,479
|
|
|
|
15,625
|
|
Subtotal
|
|
|
9,966,355
|
|
|
|
4,911,647
|
|
Less Current maturities
|
|
|
3,000,000
|
|
|
|
833,333
|
|
Long-term debt net of current maturities
|
|
$
|
6,966,355
|
|
|
$
|
4,078,314
|
|
Annual principal payments of long-term debt are as follows at September
30,:
2018
|
|
$
|
3,000,000
|
|
2019
|
|
|
4,000,000
|
|
2020
|
|
|
3,000,000
|
|
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 Dr. Eric R. Mortensen 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 three months ended September 30, 2017 and 2016, the Company has recorded
royalty costs of approximately $101,000 and $63,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company
has recorded royalty costs of approximately $267,000 and $165,000, respectfully.
License Agreements
In August 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, which expires on August 7, 2024. 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 for a term not greater than 18 years. For the
three months ended September 30, 2016 and 2015, the Company has recorded royalty costs of approximately $169,000 and $84,000, respectively.
For the nine months ended September 30, 2017 and 2016, the Company has recorded royalty costs of approximately $446,000 and $220,000,
respectfully.
Basic loss per share and diluted loss per share
for the three and nine months ended September 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 4,948,750 and 4,058,557 incremental shares at September 30, 2017 and 2016 have been excluded
from the computation of diluted loss per share for the three and nine months ended September 30, 2017 and 2016 as they are anti-dilutive.
From October
1, 2017 through November 7, 2017, the
Company sold 157,398 shares of its Common Stock under the terms of its Controlled Equity Offering
SM
Sales
Agreement with Cantor Fitzgerald and Co. The sale of these shares generated net proceeds of approximately $980,000, bringing
the total net proceeds generated under the agreement to approximately $2,863,000. (See Note 4).
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 stockholders issued by us
from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events,
or otherwise, other than as required under the Federal securities laws.
Overview
This discussion of our financial condition
and the results of operations should be read together with the financial statements, including the notes contained elsewhere in
this Quarterly Report on Form 10-Q, and the financial statements, including the notes thereto, contained in our Annual Report on
Form 10-K for the year ended December 31, 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 31,000 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 September 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, and demonstrated the clearance of key cytokines.
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 three-year renewal for the CytoSorb CE Mark. In June 2017,
we successfully completed an ISO 13485:2003 annual surveillance audit maintaining our good standing with our Notified Body.
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 four-person sales team in place. During this period, we expanded our direct sales efforts
to include both Austria and Switzerland.
Fiscal year 2013 represented the first
full year of CytoSorb commercialization. We focused our direct sales efforts in Germany, Austria and Switzerland with four sales
representatives. The focus of the team was to encourage acceptance and usage by key opinion leaders (“KOLs”) throughout
these countries. We believe our relationships with KOLs have been 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,
many of these KOL’s have been responsible for organizing more than 60 investigator initiated studies in Europe and abroad
using CytoSorb, 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 augment 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 November 1, 2017, our sales force includes 14 direct sales
representatives, one contract sales person, 14 sales support staff, and multiple consultants.
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 (DRGR) 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 allows Fresenius to offer an innovative and easy way to use blood
purification therapy for removing cytokines in patients that are treated in the ICU. To promote the success of CytoSorb, Fresenius
agreed to also engage in the ongoing clinical development of the product. This includes the support and publication of a number
of small case series and patient case reports as well as the potential for future larger, clinical collaborations. Fresenius launched
the product in these six countries in May 2016. 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 began in 2017 and is ongoing, with implementation of the co-marketing program
underway in certain initial countries.
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 60 investigator-initiated
studies planned, with approximately half in an advanced stage, enrolling or 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, are expected to be integral in helping to drive additional usage
and adoption of CytoSorb.
In January 2017 we launched the VetResQ
product for specific use with the veterinary market, following registration with the FDA. VetResQ serves a niche veterinary market
and will take some time to develop. Initial market entry will be with large academic institutions. The product line is composed
of three different product sizes for treatment of small animals such as cats to larger animals, such as dogs weighing over 50 kilograms.
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 (pfHb)
and cytokines in patients undergoing complex cardiac surgery. The study was not powered to measure effect on clinical outcomes.
The length, complexity and invasiveness of these procedures cause hemolysis and inflammation, leading to high levels of plasma
free hemoglobin, cytokines, activated complement, and other substances. These inflammatory mediators are correlated with
the incidence of serious post-operative complications such as kidney injury, renal failure and other organ dysfunction. The
goal of CytoSorb is to actively remove these inflammatory and toxic substances as they are being generated during the surgery and
reduce complications. Enrollment was completed with 46 patients, on which safety was assessed. A total of 38 patients were evaluable
for pfhB and completed all aspects of the study.
The primary safety and efficacy endpoints of
the study were the assessment of serious device related adverse events and the change in plasma free hemoglobin levels, respectively.
On October 5, 2016, we announced positive top-line safety data. In addition, following a detailed review of all reported
adverse events in a total of 46 enrolled patients, the independent Data Safety Monitoring Board (“DSMB”) found no 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 the reduction of 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.
The Company has recently met with the FDA regarding REFRESH 2, intended to be a pivotal, registration
trial for US approval, to discuss trial design and address any clinical and technical questions. In parallel, the Company initiated
discussions with previous trial sites that participated in the REFRESH I study that are familiar with the CytoSorb device and intraoperative
use during CPB. The Company believes using sites that previously participated in REFRESH I will accelerate the process of site
startup and a planned fourth quarter 2017 launch of REFRESH 2.
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, complications of cancer immunotherapy, 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. Commercially available in the United States.
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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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K
+
ontrol – a development-stage blood purification
technology designed to treat severe hyperkalemia by reducing potassium from whole blood and other bodily fluids.
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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 Joint Program Executive Office for Chemical Biologic Defense.
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 was for advanced technology development
of our hemocompatible porous polymer technologies to remove cytokines and a number of pathogen and biowarfare toxins from blood.
We have completed our work under the contract with DARPA and SSC Pacific under Contract No. N66001-12-C-4199, that provided for
maximum funding of approximately $3,825,000. As of September 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 September 30, 2017, we received approximately
$1,246,000 in funding under this contract and no funding remains.
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. In September 2017, the contract was amended to extend the term to September 2018. As of September 30, 2017, we have
received approximately $1,059,000 and have approximately $463,000 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 September 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 September 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 September 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 September 30, 2017, we have received approximately $262,000 and have approximately
$738,000 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 September
30, 2017, we have received approximately $160,000 and have approximately $839,000 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 September 30, 2017, we have
received approximately $32,000 and have approximately $687,000 remaining under this contract.
In September 2017, the Company was awarded
a Phase II SBIR contract for its development program entitled “Investigation of a sorbent-based potassium adsorber for the
treatment of hyperkalemia induced by traumatic injury and acute kidney injury”. The purpose of this contract is to continue
development of two novel and distinct treatment options for life-threatening hyperkalemia. This work is being funded by the USAMRAA
under contract W81XWH-17-C-0142 and provides for maximum funding of $999,871. As of September 30, 2017, no funding has yet been
received under this contract.
Results of Operations
Comparison for the three months ended
September 30, 2017 and 2016:
Revenues:
Revenue from product sales was approximately
$3,449,000 in the three months ended September 30, 2017, as compared to approximately $2,143,000 in the three months ended September
30, 2016, an increase of approximately $1,306,000, or 61%. 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 $375,000 for
the three months ended September 30, 2017 as compared to approximately $269,000 for the three months ended September 30, 2016,
an increase of approximately $106,000. 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 September 30, 2017, we generated total revenue of approximately $3,824,000,
as compared to total revenues of approximately $2,412,000, for the three months ended September 30, 2016, an increase of approximately
$1,412,000 or 59%.
Cost of Revenues:
For the three months ended September 30, 2017
and 2016, cost of revenue was approximately $1,517,000 and $964,000, respectively, an increase of approximately $553,000. Product
cost of revenues increased approximately $385,000 during the three months ended September 30, 2017 as compared to the three months
ended September 30, 2016 due to increased sales. Product gross margins were approximately 69% for the three months ended September
30, 2017, as compared to approximately 68% for the three months ended September 30, 2016. This increase in gross margin was
primarily due to the mix of direct and distributor sales.
Research and Development Expenses
:
For the three months ended September 30, 2017,
research and development expenses were approximately $538,000 as compared to research and development expenses of approximately
$1,172,000 for the three months ended September 30, 2016. The decrease of approximately $634,000 was due to a decrease in costs
related to our various clinical studies and trials of approximately $519,000 and an increase in direct labor and other costs being
deployed toward grant-funded activities of approximately $168,000, 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 $53,000.
Legal, Financial and Other Consulting
Expense:
Legal, financial and other consulting expenses
were approximately $238,000 for the three months ended September 30, 2017, as compared to approximately $279,000 for the three
months ended September 30, 2016. The decrease of approximately $41,000 was due to a decrease in legal fees of approximately $29,000
related to certain corporate initiatives in the three months ended September 30, 2016 that did not recur in the three months ended
September 30, 2017 and a decrease in consulting fees of approximately $23,000. These decreases were offset by an increase in auditing
and accounting fees of approximately $11,000.
Selling, General and Administrative Expense:
Selling, general and administrative expenses
were approximately $3,680,000 for the three months ended September 30, 2017, as compared to approximately $2,141,000 for the three
months ending September 30, 2016. The increase of $1,539,000 was due to an increase in non-cash stock-based compensation expense
of approximately $927,000 primarily based upon progress toward meeting the 2017 operating milestones, increases in salaries, commissions
and related costs of approximately $94,000 due to headcount additions and personnel related costs, an increase in royalty expenses
of approximately $124,000 due to the increase in product sales, additional sales and marketing costs, which include advertising
and conferences of approximately $220,000, an increase in rent expense of approximately $29,000 related to facility expansion,
an increase in public relations costs of approximately $42,000, an increase in stock transfer fees of approximately $6,000, an
increase in office supplies and related expenses of approximately $47,000 and other general and administrative cost increases of
approximately $50,000.
Interest Income (Expense):
For the three months ended September 30, 2017,
interest expense was approximately $254,000, as compared to interest expense of approximately $117,000 for the three months ended
September 30, 2016. This increase in interest expense of approximately $137,000 is directly related to interest expense incurred
related to the Company’s draw down of Term Loan B with Bridge Bank on which $5,000,000 was drawn on June 30, 2017 and was
outstanding for the three months ended September 30, 2017.
Gain (Loss) on Foreign Currency Transactions:
For the three months ended September 30, 2017,
the gain on foreign currency transactions was approximately $349,000, as compared to approximately $73,000 for the three months
ended September 30, 2016. The 2017 gain is directly related to the increase in the exchange rate of the Euro at September 30, 2017
as compared to June 30, 2017. The exchange rate of the Euro to the U.S. dollar was $1.17 per Euro at September 30, 2017 as compared
to $1.14 per Euro at June 30, 2017. The 2016 gain is directly related to the increase in the exchange rate of the Euro at September
30, 2016 as compared to June 30, 2016. The exchange rate of the Euro to the U.S. dollar was $1.12 per Euro at September 30, 2016
as compared to $1.11 per Euro at June 30, 2016.
Comparison for the nine months ended
September 30, 2017 and 2016:
Revenues:
Revenue from product sales was approximately
$9,086,000 in the nine months ended September 30, 2017, as compared to approximately $5,593,000 in the nine months ended September
30, 2016, an increase of approximately $3,493,000, or 62%. 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 $1,418,000 for
the nine months ended September 30, 2017, as compared to approximately $851,000 for the nine months ended September 30, 2016, an
increase of approximately $567,000, or 67%. 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 nine months ended September 30, 2017, we generated total revenue of approximately $10,504,000,
as compared to total revenue of approximately $6,444,000, for the nine months ended September 30, 2016, an increase of approximately
$4,060,000, or 63%.
Cost of Revenues:
For the nine months ended September 30, 2017
and 2016, cost of revenue was approximately $4,253,000 and $2,657,000, respectively, an increase of approximately $1,596,000. Product
cost of revenues increased approximately $1,073,000 during the nine months ended September 30, 2017 as compared to the nine months
ended September 30, 2016 due to increased sales. Product gross margins were approximately 67% for the nine months ended September
30, 2017, as compared to approximately 66% for the nine months ended September 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 $523,000 during the nine months ended September 30, 2017 as compared to the nine months
ended September 30, 2016.
Research and Development Expenses
:
For the nine months ended September 30, 2017,
research and development expenses were approximately $1,628,000, as compared to research and development expenses of approximately
$3,120,000 for the nine months ended September 30, 2016, a decrease of approximately $1,492,000. This decrease was due to a reduction
in costs related to the various clinical studies of approximately $1,057,000 and an increase in direct labor and other costs being
deployed toward grant-funded activities of approximately $524,000, 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
$89,000.
Legal, Financial and Other Consulting
Expense:
Legal, financial and other consulting expenses were approximately $961,000 for the nine months ended September
30, 2017, as compared to approximately $853,000 for the nine months ended September 30, 2016. The increase of approximately $108,000
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 $56,000 related to various corporate initiatives. These increases were offset by decreases
in accounting and audit fees of approximately $14,000 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 $46,000.
Selling, General and Administrative Expense:
Selling, general and administrative expenses
were approximately $9,698,000 for the nine months ended September 30, 2017, as compared to approximately $6,736,000 for the nine
months ending September 30, 2016, an increase of $2,962,000. The increase in selling, general, and administrative expenses was
due to an increase in non-cash stock compensation expense of approximately $1,427,000 primarily based upon progress toward meeting
the 2017 operating milestones, increases in salaries, commissions and related costs of approximately $489,000 due to headcount
additions and increases in product sales, an increase in royalty expenses of approximately $329,000 due to the increase in product
sales, additional sales and marketing costs, which include advertising and conferences of approximately $360,000 and an increase
in travel and entertainment costs and other expenses of approximately $64,000, an increase in occupancy cost of approximately $84,000
related to facility expansion, an increase in public relations expense of approximately $64,000, an increase in office supplies
and related expenses of approximately $100,000 and other general and administrative cost increases of approximately $45,000.
Interest Income (Expense):
For the nine months ended September 30, 2017,
interest expense was approximately $498,000, as compared to interest income of approximately $112,000 for the nine months ended
September 30, 2016. This increase in interest expense of approximately $386,000 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 outstanding for the nine months ended September 30, 2017 and $5,000,000 was drawn on June 30, 2017
and was outstanding during the three months ended September 30, 2017.
Gain (Loss) on Foreign Currency Transactions:
For the nine months ended September 30, 2017,
the gain on foreign currency transactions was approximately $1,221,000, as compared to approximately $176,000 for the nine months
ended September 30, 2016. The 2017 gain is directly related to the increase in the exchange rate of the Euro at September 30, 2017,
as compared to December 31, 2016. The exchange rate of the Euro to the U.S. dollar was $1.17 per Euro at September 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 September 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 September 30, 2016 as compared to $1.08 per Euro at December 31, 2015.
History of Operating Losses
:
We have experienced substantial operating losses
since inception. As of September 30, 2017, we had an accumulated deficit of approximately $149,166,000, which included losses of
approximately $5,314,000 and $6,857,000 for the nine month periods ended September 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 September 30, 2017, we had current assets of approximately $19,386,000
including cash on hand of approximately $15,400,000 and current liabilities of approximately $5,778,000.
During the three
months ended September 30, 2017, the Company sold 282,394 shares of its Common Stock, generating net proceeds of
approximately $1.7 million under the terms of its existing Controlled Equity Offering
SM
Sales Agreement with
Cantor Fitzgerald and Co. From October
1, 2017 through November 7, 2017, the Company sold an additional 157,398 shares of its Common
Stock, generating net proceeds of approximately $1.0 million under the terms of the Sales Agreement. Total net proceeds
generated from these sales during 2017 amounted to approximately $2.6 million.
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.
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 under the Loan and Security Agreement in June 2017, and in conjunction with the closing of the equity financing in April
2017 and recent sales of the Company’s common stock under the Controlled Equity Offering
SM
Sales Agreement, we
believe we have sufficient liquidity to fund our operations into 2019; however, we may need to raise additional capital to fund
clinical 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 September 2017, the Company entered into
a Sixteenth Amendment to Lease Agreement with Princeton Corporate Plaza, LLC, which expands our space to approximately 15,745 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 $28,210 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 $6,986 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 September 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
|
|
$
|
422,354
|
|
|
$
|
393,349
|
|
|
$
|
76,848
|
|
|
|
–
|
|
Long-term debt
|
|
|
3,000,000
|
|
|
|
4,000,000
|
|
|
|
3,000,000
|
|
|
|
–
|
|
|
|
$
|
3,408,831
|
|
|
$
|
4,384,333
|
|
|
$
|
3,076,848
|
|
|
|
–
|
|
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 September 30, 2017, we had an accumulated
deficit of approximately $149,166,000, which included net losses of approximately $5,314,000 for the nine months ended September
30, 2017, and $6,857,000 for the nine months ended September 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.