Item 1. Financial Statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(As adjusted)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,647,374
|
|
|
$
|
22,368,837
|
|
Grants and accounts receivable, net of allowance for doubtful accounts of $85,460 at March 31, 2019 and $83,726 at December 31, 2018
|
|
|
3,267,035
|
|
|
|
3,943,119
|
|
Inventories
|
|
|
1,213,606
|
|
|
|
833,133
|
|
Prepaid expenses and other current assets
|
|
|
700,177
|
|
|
|
1,118,998
|
|
Total current assets
|
|
|
24,828,192
|
|
|
|
28,264,087
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,896,655
|
|
|
|
1,729,860
|
|
Right of use asset
|
|
|
1,359,097
|
|
|
|
1,449,437
|
|
Other assets
|
|
|
2,910,768
|
|
|
|
2,753,379
|
|
Total Assets
|
|
$
|
30,994,712
|
|
|
$
|
34,196,763
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,840,724
|
|
|
$
|
1,485,812
|
|
Current maturities of long-term debt
|
|
|
1,666,667
|
|
|
|
666,667
|
|
Lease liability – current portion
|
|
|
388,915
|
|
|
|
378,675
|
|
Accrued expenses and other current liabilities
|
|
|
2,815,025
|
|
|
|
4,385,720
|
|
Total current liabilities
|
|
|
6,711,331
|
|
|
|
6,916,874
|
|
Long term debt, net of current maturities and debt issuance costs
|
|
|
8,298,281
|
|
|
|
9,274,527
|
|
Lease liability, net of current portion
|
|
|
970,182
|
|
|
|
1,070,762
|
|
Total Liabilities
|
|
|
15,979,794
|
|
|
|
17,262,163
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, Par Value $0.001, 5,000,000 shares authorized; -0- shares issued and outstanding at March 31, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common Stock, Par Value $0.001, 50,000,000 shares authorized; 32,243,044 and 31,774,139 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
|
|
32,243
|
|
|
|
31,774
|
|
Additional paid-in capital
|
|
|
188,795,855
|
|
|
|
186,138,466
|
|
Accumulated other comprehensive income
|
|
|
594,462
|
|
|
|
288,175
|
|
Accumulated deficit
|
|
|
(174,407,642
|
)
|
|
|
(169,523,815
|
)
|
Total stockholders' equity
|
|
|
15,014,918
|
|
|
|
16,934,600
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
30,994,712
|
|
|
$
|
34,196,763
|
|
See accompanying notes to consolidated financial
statements
.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
CytoSorb sales
|
|
$
|
4,509,779
|
|
|
$
|
4,403,896
|
|
Other sales
|
|
|
66,800
|
|
|
|
29,400
|
|
Total product sales
|
|
|
4,576,579
|
|
|
|
4,433,296
|
|
Grant income
|
|
|
615,050
|
|
|
|
491,355
|
|
Total revenue
|
|
|
5,191,629
|
|
|
|
4,924,651
|
|
Cost of revenue
|
|
|
1,738,589
|
|
|
|
1,567,645
|
|
Gross margin
|
|
|
3,453,040
|
|
|
|
3,357,006
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,418,633
|
|
|
|
1,725,278
|
|
Legal, financial and other consulting
|
|
|
561,516
|
|
|
|
416,218
|
|
Selling, general and administrative
|
|
|
4,758,084
|
|
|
|
4,316,677
|
|
Total expenses
|
|
|
7,738,233
|
|
|
|
6,458,173
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,285,193
|
)
|
|
|
(3,101,167
|
)
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(205,179
|
)
|
|
|
(239,098
|
)
|
Gain (loss) on foreign currency transactions
|
|
|
(393,455
|
)
|
|
|
358,230
|
|
Total other income, net
|
|
|
(598,634
|
)
|
|
|
119,132
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
|
(4,883,827
|
)
|
|
|
(2,982,035
|
)
|
Benefit from income taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss available to common shareholders
|
|
$
|
(4,883,827
|
)
|
|
$
|
(2,982,035
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.10
|
)
|
Weighted average number of shares of common stock outstanding
|
|
|
31,931,215
|
|
|
|
29,351,174
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,883,827
|
)
|
|
$
|
(2,982,035
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
306,287
|
|
|
|
(329,912
|
)
|
Comprehensive loss
|
|
$
|
(4,577,540
|
)
|
|
$
|
(3,311,947
|
)
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For the three months ended March 31,
2019 (Unaudited):
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
31,774,139
|
|
|
$
|
31,774
|
|
|
$
|
186,138,466
|
|
|
$
|
288,175
|
|
|
$
|
(169,523,815
|
)
|
|
$
|
16,934,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation - employees, consultants and directors
|
|
|
-
|
|
|
|
-
|
|
|
|
227,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: foreign translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306,287
|
|
|
|
-
|
|
|
|
306,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
46,734
|
|
|
|
47
|
|
|
|
236,023
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of stock options
|
|
|
967
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of warrants
|
|
|
9,029
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units
|
|
|
51,817
|
|
|
|
52
|
|
|
|
425,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
425,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
360,358
|
|
|
|
361
|
|
|
|
1,768,130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,768,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,883,827
|
)
|
|
|
(4,883,827
|
)
|
Balance at March 31, 2019
|
|
|
32,243,044
|
|
|
$
|
32,243
|
|
|
$
|
188,795,855
|
|
|
$
|
594,462
|
|
|
$
|
(174,407,642
|
)
|
|
$
|
15,014,918
|
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For the three months ended March 31,
2018 (Unaudited):
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
28,973,679
|
|
|
$
|
28,974
|
|
|
$
|
162,907,482
|
|
|
$
|
(360,985
|
)
|
|
$
|
(152,312,636
|
)
|
|
$
|
10,262,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation - employees, consultants and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
524,449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
524,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of fees
|
|
|
782,328
|
|
|
|
782
|
|
|
|
6,045,979
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,046,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss): foreign translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(329,912
|
)
|
|
|
—
|
|
|
|
(329,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
132,771
|
|
|
|
132
|
|
|
|
529,045
|
|
|
|
—
|
|
|
|
—
|
|
|
|
529,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of stock options
|
|
|
25,288
|
|
|
|
26
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of warrants
|
|
|
7,921
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock units
|
|
|
48,381
|
|
|
|
48
|
|
|
|
380,851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
380,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
4,000
|
|
|
|
4
|
|
|
|
14,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,982,035
|
)
|
|
|
(2,982,035
|
)
|
Balance at March 31, 2018
|
|
|
29,974,368
|
|
|
$
|
29,974
|
|
|
$
|
170,402,768
|
|
|
$
|
(690,897
|
)
|
|
$
|
(155,294,671
|
)
|
|
$
|
14,447,174
|
|
See accompanying notes to consolidated financial
statements.
CYTOSORBENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three months
|
|
|
Three months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,883,827
|
)
|
|
$
|
(2,982,035
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Non-cash compensation
|
|
|
261,747
|
|
|
|
217,220
|
|
Depreciation and amortization
|
|
|
138,175
|
|
|
|
56,574
|
|
Amortization of debt costs
|
|
|
23,754
|
|
|
|
25,787
|
|
Bad debt
|
|
|
14,193
|
|
|
|
4,057
|
|
Stock-based compensation
|
|
|
227,658
|
|
|
|
524,449
|
|
Foreign currency transaction loss (gain)
|
|
|
393,455
|
|
|
|
(358,230
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Grants and accounts receivable
|
|
|
611,668
|
|
|
|
(117,527
|
)
|
Inventories
|
|
|
(395,683
|
)
|
|
|
114,700
|
|
Prepaid expenses and other current assets
|
|
|
435,423
|
|
|
|
38,623
|
|
Accounts payable and accrued expenses
|
|
|
(1,064,124
|
)
|
|
|
272,604
|
|
Net cash used by operating activities
|
|
|
(4,237,561
|
)
|
|
|
(2,203,778
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(292,458
|
)
|
|
|
(242,989
|
)
|
Payments for patent costs
|
|
|
(181,769
|
)
|
|
|
(229,287
|
)
|
Net cash used by investing activities
|
|
|
(474,227
|
)
|
|
|
(472,276
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
-
|
|
|
|
666,667
|
|
Repayment of long-term debt
|
|
|
-
|
|
|
|
(666,667
|
)
|
Payment of debt acquisition costs
|
|
|
-
|
|
|
|
(147,988
|
)
|
Equity contributions - net of fees incurred
|
|
|
-
|
|
|
|
6,046,761
|
|
Proceeds from exercise of stock options
|
|
|
236,070
|
|
|
|
529,177
|
|
Proceeds from exercise of warrants
|
|
|
1,768,491
|
|
|
|
15,000
|
|
Net cash provided by financing activities
|
|
|
2,004,561
|
|
|
|
6,442,950
|
|
Effect of exchange rates on cash
|
|
|
(14,236
|
)
|
|
|
990
|
|
Net change in cash and cash equivalents
|
|
|
(2,721,463
|
)
|
|
|
3,767,886
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
22,368,837
|
|
|
|
17,321,862
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
19,647,374
|
|
|
$
|
21,089,748
|
|
|
|
Three months
|
|
|
Three months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
227,681
|
|
|
$
|
261,611
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of accrued bonuses with restricted stock units
|
|
$
|
425,639
|
|
|
$
|
380,899
|
|
See accompanying notes to consolidated financial
statements.
CytoSorbents Corporation
Notes to Consolidated Financial Statements
(UNAUDITED)
March 31, 2019
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, 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, 2018 included in the Company’s
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019. The
results for the three months ended March 31, 2019 and 2018 are not necessarily indicative of the results to be expected for a full
year, any other interim periods or any future year or period.
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business.
As of March 31, 2019, the Company had an
accumulated deficit of $174,407,642, which included net losses of $4,883,827 for the three months ended March 31, 2019 and $2,982,035
for the three months ended March 31, 2018. 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 net losses for the foreseeable future. The amount of future losses
and when, if ever, the Company will achieve profitability are uncertain. The Company’s ability to achieve profitability will
depend, among other things, on successfully completing the development of its technology and commercial products, obtaining additional
requisite regulatory approvals in markets not covered by the CE mark previously received for the Company’s CytoSorb product
and for potential label extensions of the current CE mark, establishing manufacturing and sales and marketing arrangements with
third parties, and raising sufficient funds to finance the Company’s activities. No assurance can be given that the Company’s
product development efforts will be successful, that the Company’s current CE mark will enable it to achieve profitability,
that additional regulatory approvals in other countries will be obtained, that any of the Company’s products will be manufactured
at a competitive cost and will be of acceptable quality, or that the Company will be able to achieve profitability or that profitability,
if achieved, can be sustained. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements do not include any adjustments related to the outcome of this uncertainty.
|
2.
|
PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Business
The Company is a leader in critical care
immunotherapy using blood purification technology to treat deadly inflammation in critically-ill and cardiac surgery patients around
the world. The Company, through its subsidiary CytoSorbents Medical, Inc. (formerly known as CytoSorbents, Inc.), is engaged in
the research, development and commercialization of medical devices with its blood purification technology platform which incorporates
a proprietary adsorbent, porous polymer technology. The Company, through its wholly owned European subsidiary, CytoSorbents Europe
GmbH, conducts sales and marketing related operations for the Company’s flagship product, CytoSorb. In March 2016, the Company
formed CytoSorbents Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH. This subsidiary, which began operations
during the second quarter of 2016, provides marketing and direct sales services in Switzerland. In November 2018, the Company formed
CytoSorbents Poland Sp. z.o.o., a wholly-owned subsidiary of CytoSorbents Europe GmbH. This subsidiary, which began operations
during the first quarter of 2019, provides marketing and direct sales services in Poland.
CytoSorb was approved in the European Union
(“EU”) in March 2011, and is currently being marketed in and distributed in fifty-five countries around the world,
as a safe and effective extracorporeal cytokine absorber, designed to reduce the “cytokine storm” that could otherwise
cause massive inflammation, organ failure and death in common critical illnesses such as sepsis, burn injury, trauma, lung injury,
and pancreatitis. In May 2018, the Company received a label extension for CytoSorb covering use of the device for the removal of
bilirubin and myoglobin which allows for the use of the device in the treatment of liver failure and trauma, respectively. CytoSorb
is also being used during and after cardiac surgery to remove inflammatory mediators, such as cytokines and free hemoglobin, which
can lead to post-operative complications, including multiple organ failure.
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 is protected by 19 issued U.S. patents and multiple international patents, with applications pending both in the U.S. and
internationally, including HemoDefend, ContrastSorb, DrugSorb, and others. These patents and patent applications are directed to
various compositions and methods of use related to our blood purification technologies and are expected to expire between 2020
and 2035, absent any patent term extensions. Management believes that any near term expiring patents will not have a significant
impact on our ongoing business.
Stock Market Listing
On December 17, 2014 the Company’s
common stock, par value $0.001 per share, was approved for listing on the Nasdaq Capital Market (“Nasdaq”), and it
began trading on Nasdaq on December 23, 2014 under the symbol “CTSO.” Previously, the Company’s common stock
traded in the over-the-counter-market on the OTC Bulletin Board.
Basis of Consolidation and Foreign Currency
Translation
The consolidated financial statements include
the accounts of CytoSorbents Corporation and its wholly-owned subsidiaries, CytoSorbents Medical, Inc. and CytoSorbents Europe
GmbH. In addition, the financial statements include CytoSorbents Switzerland GmbH and CytoSorbents Poland Sp. z.o.o., wholly owned
subsidiaries 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 United States Dollar, the foreign currency financial statements of CytoSorbents Europe
GmbH, for which the Euro is the functional currency, are included in operations. Foreign currency transaction gain (loss) included
in net loss amounted to approximately $(393,000) and $358,000 for the three months ended March 31, 2019 and 2018, respectively.
The Company translates assets and liabilities of CytoSorbents Europe GmbH 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 stockholders’ equity.
Cash and Cash Equivalents
The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be cash equivalents.
Grants and Accounts Receivable
Grants receivable represent amounts due
from U.S. government agencies and are included in Grants and Accounts Receivable.
Accounts receivable are unsecured, non-interest
bearing customer obligations due under normal trade terms. The Company sells its devices to various hospitals and distributors.
The Company performs ongoing credit evaluations of its customers’ financial conditions. Management reviews accounts receivable
periodically to determine collectability. Balances that are determined to be uncollectible are written off to the allowance for
doubtful accounts. The allowance for doubtful accounts contains a general accrual for estimated bad debts and amounted to approximately
$85,000 and $84,000 at March 31, 2019 and December 31, 2018, respectively.
Inventories
Inventories are valued at the lower of
cost or net realizable value under the first in, first out (FIFO) method. At March 31, 2019 and December 31, 2018, the Company’s
inventory was comprised of finished goods, which amounted to $382,651 and $213,839, respectively; work in process which amounted
to $572,937 and $415,265, respectively; and raw materials, which amounted to $258,018 and $204,029, 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.
Revenue Recognition
Product Sales
: Revenues from sales
of products to both direct and distributor/strategic partner customers are recognized at the time when control passes to the customer,
in accordance with the terms of their respective contracts. Recognition of revenue occurs as each performance obligation is completed.
Grant Income
: Revenue from grant
income is based on contractual agreements. Certain agreements provide for reimbursement of costs, while other agreements provide
for reimbursement of costs and an overhead margin. Revenues are recognized when the associated performance obligation is fulfilled.
Costs are recorded as incurred. Costs subject to reimbursement by these grants have been reflected as costs of revenue.
Research and Development
All research and development costs, payments
to laboratories and research consultants are expensed when incurred.
Advertising Expenses
Advertising expenses are charged to activities
when incurred. Advertising expenses amounted to approximately $51,800 and $36,762 for the three months ended March 31, 2019 and
2018, 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.
The Company has provided a valuation allowance against all deferred tax assets. Under Section 382 of the Internal Revenue Code,
the net operating losses generated prior to the previously completed reverse merger may be limited due to the change in ownership.
Additionally, net operating losses generated subsequent to the reverse merger may be limited in the event of changes in ownership.
The Company follows accounting standards
associated with uncertain tax positions. The Company had no unrecognized tax benefits at March 31, 2019 or December 31, 2018. The
Company files tax returns in the U.S. federal and state jurisdictions.
The Company utilizes the Technology Business
Tax Certificate Transfer Program to sell a portion of its New Jersey Net Operating Loss carry forwards to an industrial company.
Each of CytoSorbents Europe GmbH, CytoSorbents
Switzerland GmbH and CytoSorbents Poland Sp. Z.o.o. file an annual corporate tax return, VAT return and a trade tax return in Germany,
Switzerland and Poland, 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 change in fair
value of the down round feature related to certain of the Company’s outstanding warrants.
Concentration of Credit Risk
The Company maintains cash balances, at
times, with financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Management monitors
the soundness of these institutions in an effort to minimize its collection risk of these balances.
A significant portion of our revenues are from product sales
in Germany. Substantially all of our grant and other income are from grant agencies in the United States. (See Note 4 for further
information relating to the Company’s revenue.)
As of March 31, 2019, one distributor accounted
for approximately 20% of outstanding grants and accounts receivable. As of March 31, 2018, one distributor accounted for approximately
11% of outstanding grants and accounts receivable. As of December 31, 2018, two distributors/strategic partners accounted for approximately
29% of the outstanding grants and accounts receivable. For the three months ended March 31, 2019 and 2018, no agency, distributor,
or direct customer represented more than 10% of the Company’s total revenue.
Financial Instruments
The carrying values of cash and cash equivalents,
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 8).
Stock-Based Compensation
The Company accounts for its stock-based
compensation under the recognition requirements of accounting standards for accounting for stock-based compensation, for employees
and directors whereby each option granted is valued at fair market value on the date of grant. Under these accounting standards,
the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.
The Company also follows the guidance of
accounting standards for accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction
with selling, goods or services for equity instruments issued to consultants.
Effects of Recent Accounting Pronouncements
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 has adopted the updated guidance
effective January 1, 2019. See Note 7 for details regarding the Company’s leases.
Shipping and Handling Costs
The cost of shipping product to customers
and distributors is typically borne by the customer or distributor. The Company records other shipping and handling costs in cost
of revenue. Total freight costs amounted to approximately $146,500 and $135,800, respectively, for the three months ended March
31, 2019 and 2018.
Reclassifications
Certain reclassifications have been made
to the March 31, 2018 financial statements in order to conform to the 2019 financial statement presentation. There was no change
in the reported amount of the accumulated deficit as a result of these reclassifications.
Preferred Stock
In December 2014, the Company amended and
restated its certificate of incorporation to reduce the total number of authorized shares of preferred stock. The amended and restated
certificate of incorporation authorizes the issuance of up to 5,000,000 shares of “blank check” preferred stock, with
such designation rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock
Shelf
Registration
On July 29, 2015,
the Company’s registration statement on Form S-3, as filed with the SEC on July 23, 2015 (the “2015 Shelf”),
was declared effective using a “shelf” registration process. On July 26, 2018, in anticipation of the expiration of
the 2015 Shelf, the Company filed a new registration statement on Form S-3 with the SEC (as amended, the “2018 Shelf”).
The 2018 Shelf, which was declared effective on August 7, 2018, enables the Company to offer and sell, in one or more offerings,
any combination of common stock, preferred stock, senior or subordinated debt securities, warrants and units, up to a total dollar
amount of $150 million.
Controlled
Equity Offering
SM
Sales Agreement with Cantor Fitzgerald & Co.
On
November 4, 2015, the Company entered into a Controlled Equity Offering
SM
Sales Agreement (the “Sales Agreement”)
with Cantor Fitzgerald & 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 (the “Shares”). Any Shares hereafter offered and sold
will be issued pursuant to the Company’s 2018 Shelf, and the related prospectus which the Company filed with the SEC pursuant
to Rule 424(b)(5) under the Securities Act.
On
July 26, 2018, the Company entered into that certain Amendment No. 1 to the Sales Agreement (the “Sales Agreement Amendment”)
to extend the term of the Sales Agreement until the expiration of the 2018 Shelf. The other provisions of the Sales Agreement remain
unchanged. References herein to “Sales Agreement” shall refer to the Sales Agreement, as amended by the Sales Agreement
Amendment.
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, 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 expiration of the 2018 Shelf or (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 year ended December 31, 2017,
the Company sold 550,000 shares at an average price of $6.31 per share, generating net proceeds of approximately $3,367,000. During
the year ended December 31, 2018, the Company sold 1,515,260 shares at an average cost of $9.61 per share, generating net proceeds
of approximately $14,127,000. There were no sales during the three months ended March 31, 2019. In the aggregate, the Company has
sold 2,094,140 shares at an average selling price of $8.72 per share, generating net proceeds of approximately $17,718,000 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 to fund clinical studies in the United
States and abroad, expand production capacity, support its sales and marketing efforts, further develop its products, and for general
working capital purposes.
Stock-Based
Compensation
Total share-based employee, director, and
consultant compensation for the three months ended March 31, 2019 and 2018 amounted to approximately $228,000 and $524,000, respectively.
These amounts are included in the statement of operations under general and administrative expenses.
The summary of the stock option activity
for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (Years)
|
|
Outstanding, December 31, 2018
|
|
|
3,658,462
|
|
|
$
|
5.82
|
|
|
|
7.0
|
|
Granted
|
|
|
60,800
|
|
|
$
|
6.99
|
|
|
|
9.3
|
|
Forfeited
|
|
|
(34,817
|
)
|
|
$
|
7.56
|
|
|
|
—
|
|
Expired
|
|
|
(4,000
|
)
|
|
$
|
4.20
|
|
|
|
—
|
|
Exercised
|
|
|
(55,642
|
)
|
|
$
|
4.58
|
|
|
|
—
|
|
Outstanding, March 31, 2019
|
|
|
3,624,803
|
|
|
$
|
5.86
|
|
|
|
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
$6.98 to $8.10 per share) and expected life of the stock option (10 years), the current price of the underlying stock and its expected
volatility (61.9 percent), expected dividends (-0- percent) on the stock and the risk free interest rate (ranging from 2.24 to
2.61 percent) for the term of the stock option.
The intrinsic value is calculated at the
difference between the market value as of March 31, 2019 of $7.57 and the exercise price of the shares.
Options Outstanding
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
Outstanding at
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise
|
|
March 31,
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Price
|
|
2019
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
$2.23 - $14.80
|
|
|
3,624,803
|
|
|
$
|
5.86
|
|
|
|
6.8
|
|
|
$
|
6,899,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Exercisable at
|
|
|
Average
|
|
|
Aggregate
|
|
March 31,
|
|
|
Exercise
|
|
|
Intrinsic
|
|
2019
|
|
|
Price
|
|
|
Value
|
|
|
2,845,173
|
|
|
$
|
5.36
|
|
|
$
|
6,486,837
|
|
|
|
|
|
|
|
|
|
|
|
|
The summary of the status of the
Company’s non-vested options for the three months ended March 31, 2019 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested, December 31, 2018
|
|
|
1,251,617
|
|
|
$
|
4.56
|
|
Granted
|
|
|
60,800
|
|
|
$
|
4.00
|
|
Forfeited
|
|
|
(34,817
|
)
|
|
$
|
4.57
|
|
Vested
|
|
|
(497,970
|
)
|
|
$
|
6.90
|
|
Non-vested, March 31, 2019
|
|
|
779,630
|
|
|
$
|
4.65
|
|
As of March 31, 2019, the Company had approximately
$800,000 of total unrecognized compensation cost related to stock options which will be amortized over six months.
Change in Control-Based Awards of Restricted
Stock Units:
The Board of Directors has granted restricted
stock units to members of the Board of Directors, to the Company’s executive officers, and to employees of the Company. These
restricted stock units will only vest upon a Change in Control of the Company, as defined in the Company’s 2014 Long-Term
Incentive Plan.
The following table is a summary of these
restricted stock units:
|
|
Restricted Stock Units
|
|
|
|
|
|
|
Board of
|
|
|
Executive
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
Management
|
|
|
Employees
|
|
|
Total
|
|
|
Intrinsic Value
|
|
December 31, 2018
|
|
|
277,200
|
|
|
|
724,500
|
|
|
|
1,002,300
|
|
|
|
2,004,000
|
|
|
$
|
16,192,320
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
277,200
|
|
|
|
724,500
|
|
|
|
996,300
|
|
|
|
1,998,000
|
|
|
$
|
15,124,860
|
|
Due to the uncertainty over whether these
restricted stock units will vest, which only happens upon a Change in Control, no charge for these restricted stock units has been
recorded in the consolidated statement of operations for the three months ended March 31, 2019 and 2018.
Performance-Based Awards of Restricted
Stock Units:
Pursuant to a review of the compensation
of the senior management of the Company and managements’ performance in 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 date
of the grant, and one third on the second anniversary of the date of the grant. For the three months ended March 31, 2019 and 2018,
the Company recorded a charge of approximately $150,000 and $154,000, respectively, related to these restricted stock unit awards.
Pursuant to a review of the compensation
of the senior management of the Company and managements’ performance in 2017, on February 28, 2018, the Board of Directors
granted 146,200 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued as of December
31, 2017. These awards were valued at approximately $1,148,000 at the date of issuance, based upon the market price of the Company’s
common stock at the date of the grant, and vest one third on the date of the grant one third on the first anniversary of the date
of the grant, and one third on the second anniversary of the date of the grant. For the three months ended March 31, 2019 and 2018,
the Company recorded a charge of approximately $107,000 and $32,000, respectively, related to these restricted stock unit awards.
Pursuant to a review of the compensation
of the senior management of the Company and managements’ performance in 2018, on March 4, 2019 the Board of Directors granted
22,220 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued as of December 31, 2018.
These awards were valued at approximately $179,000 at the date of issuance, based upon the market price of the Company’s
common stock at the date of the grant, and vest one third on the date of the grant one third on the first anniversary of the date
of the grant, and one third on the second anniversary of the date of the grant. For the three months ended March 31, 2019 and 2018,
the Company recorded a charge of approximately $5,000 and $0 respectively, related to these restricted stock unit awards.
The following table outlines the restricted
stock unit activity for the three months ended March 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, January 1, 2019
|
|
|
139,138
|
|
|
$
|
7.18
|
|
Granted
|
|
|
22,220
|
|
|
$
|
8.05
|
|
Vested
|
|
|
(97,806
|
)
|
|
$
|
6.63
|
|
Non-vested, March 31, 2019
|
|
|
63,552
|
|
|
$
|
7.90
|
|
Warrants:
As of March 31, 2019, the Company has 30,000 warrants
to purchase common stock outstanding. These warrants have an exercise price of $9.90 and expire on January 14, 2020.
The following table disaggregates the Company’s
revenue by customer type and geographic area for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Distributors/
|
|
|
Government
|
|
|
|
|
|
|
Direct
|
|
|
Strategic Partners
|
|
|
Agencies
|
|
|
Total
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
66,800
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
66,800
|
|
Germany
|
|
|
3,098,176
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,098,176
|
|
All other countries
|
|
|
816,229
|
|
|
|
595,374
|
|
|
|
–
|
|
|
|
1,411,603
|
|
Total product revenue
|
|
|
3,981,205
|
|
|
|
595,374
|
|
|
|
–
|
|
|
|
4,576,579
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
–
|
|
|
|
–
|
|
|
|
615,050
|
|
|
|
615,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,981,205
|
|
|
$
|
595,374
|
|
|
$
|
615,050
|
|
|
$
|
5,191,629
|
|
The following table disaggregates the Company’s
revenue by customer type and geographic area for the three months ended March 31, 2018:
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Distributors/
|
|
|
Government
|
|
|
|
|
|
|
Direct
|
|
|
Strategic Partners
|
|
|
Agencies
|
|
|
Total
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,800
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,800
|
|
Germany
|
|
|
2,667,408
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,667,408
|
|
All other countries
|
|
|
693,404
|
|
|
|
1,070,684
|
|
|
|
–
|
|
|
|
1,764,088
|
|
Total product revenue
|
|
|
3,362,612
|
|
|
|
1,070,684
|
|
|
|
–
|
|
|
|
4,433,296
|
|
Grant and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
–
|
|
|
|
–
|
|
|
|
491,355
|
|
|
|
491,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,362,612
|
|
|
$
|
1,070,684
|
|
|
$
|
491,355
|
|
|
$
|
4,924,651
|
|
The Company has two primary revenue streams:
(1) sales of the CytoSorb device and related device accessories and (2) grant income from contracts with various agencies of the
United States government. Both of these revenue streams are within the scope of this accounting pronouncement. The following is
a brief description of each revenue stream.
CytoSorb Sales
The Company sells its CytoSorb device using
both its own sales force (direct sales) and through the use of distributors and/or strategic partners. All sales of the device
are outside the United States, as CytoSorb is not yet approved in the United States. Direct sales are fulfilled from the Company’s
office in Berlin, Germany. Direct sales relate to sales to hospitals located in Germany, Switzerland, Austria, Belgium, Luxembourg,
Poland, the Netherlands, Sweden, Denmark and Norway. There are no formal sales contracts with any direct customers relating to
product price or minimum purchase requirements. However, there are agreements in place with certain direct customers that provide
for either free of charge product or rebate credits based upon achieving minimum purchase levels. The Company records the value
of these items as earned as a reduction of revenue. These customers submit purchase orders and the order is fulfilled and shipped
directly to the customer. Prices to all direct customers are based on a standard price list based on the packaged quantity (6 packs
vs 12 packs).
Distributor and strategic partner sales
make up the remaining product sales. These distributors are located in various countries throughout the world. The Company has
a formal written contract with each distributor/strategic partner. These contracts have terms ranging from 1-5 years in length,
with three years being the typical term. In addition, certain distributors are eligible for volume discount pricing if their unit
sales are in excess of the base amount in the contract.
Government Grants
The Company has been the recipient of various
grant contracts from various agencies of the United States government, primarily the Department of Defense, to perform various
research and development activities. These contacts fall into one of the following categories:
|
1.
|
Fixed price – the Company invoices the contract amount in equal installments over the term
of the contract without regard to the timing of the costs incurred related to this contract.
|
|
2.
|
Cost reimbursement – the Company submits monthly invoices during the term of the contract
for the amount of direct costs incurred during that month plus an agreed percentage that relates to allowable overhead and general
and administrative expenses. Cumulative amounts invoiced may not exceed the maximum amount of funding stipulated in the contract.
|
|
3.
|
Cost plus – this type of contract is similar to a cost reimbursement contract but this type
also allows for the Company to additionally invoice for a fee amount that is included in the contract.
|
In summary, the contracts the Company has
with customers are the distributor/strategic partner contracts related to CytoSorb product sales, agreements with direct customers
related to free-of-charge product and credit rebates based upon achieving minimum purchase levels, and contracts with various government
agencies related to the Company’s grants. The Company does not currently incur any outside/third party incremental costs
to obtain any of these contracts. The Company does incur internal costs, primarily salary related costs, to obtain the contracts
related to the grants. Company employees spend time reviewing the program requirements and developing the budget and related proposal
to submit to the grantor agency. There may additionally be travel expenditures involved with meeting with government agency officials
during the negotiation of the contract. These internal costs are expensed as incurred.
The following table provides information about receivables and
contract liabilities from contracts with customers:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Receivables, which are included in grants and accounts receivable
|
|
$
|
1,950,155
|
|
|
$
|
2,399,662
|
|
Contract liabilities
|
|
$
|
10,462
|
|
|
$
|
42,219
|
|
Contract liabilities represent the value
of free of charge goods and credit rebates earned in accordance with the terms of certain direct customer agreements during the
periods ended March 31, 2019 and December 31, 2018, and deferred revenue on distributor/strategic partner contracts. Deferred revenue
is the difference between the average selling price anticipated for the year ended 2019 and the actual price invoiced during the
three months ended March 31, 2019. There was no deferred revenue liability as of December 31, 2018.
On June 30, 2016, the Company and its wholly-owned
subsidiary, CytoSorbents Medical, Inc. (together, the “Borrower”), entered into a Loan and Security Agreement with
Bridge Bank, a division of Western Alliance Bank, (the “Bank”), pursuant to which the Company borrowed $10 million
in two equal tranches of $5 million (the “Original Term Loans”). On March 29, 2018 (the “Closing Date”),
the Original Term Loans were refinanced with the Bank pursuant to an Amended and Restated Loan and Security Agreement by and between
the Bank and the Borrower (the “Amended and Restated Loan and Security Agreement”), under which the Bank agreed to
loan the Borrower up to an aggregate of $15 million to be disbursed in two tranches (1) one tranche of $10 million (the “Term
A Loan”), which was funded on the Closing Date and used to refinance the Original Term Loans, and (2) a second tranche of
$5 million which may be disbursed at the Borrower’s sole request prior to March 31, 2019 provided certain conditions are
met (the “Term B Loan” and together with the Term A Loan, the “Term Loans”). In March 2019, the Borrower
declined to receive the Term B loan. The proceeds of Term A Loan were used for general business requirements in accordance with
the Amended and Restated Loan and Security Agreement. The outstanding balance on Term A Loan bears interest at the prime rate reported
in the Wall Street Journal plus 3.66%. This rate was 9.16% at March 31, 2019.
On the Closing Date, the Company was required
to pay a non-refundable closing fee of $25,000, expenses incurred by the Bank related to the Amended and Restated Loan and Security
Agreement of $11,000 and a portion of the final fee for the period the Original Term Loans were outstanding of $85,938. In addition,
the Company incurred legal expenses related to the Amended and Restated Loan and Security Agreement of $20,050. As of the Closing
Date, the total unamortized loan costs related to the Term Loans amounted to $130,060. These costs have been presented as a direct
deduction from the proceeds of the loan on the consolidated balance sheet in accordance with the provisions of ASC 850. These costs
are being amortized over the loan period as a charge to interest expense. For the three months ended March 31, 2019 and 2018, the
Company recorded interest expense amounting to $8,129 and $7,558, respectively, related to these costs. After accounting for the
various costs outlined above, the effective interest rate on the Term A Loan was 9.1% as of March 29, 2018. Commencing on the first
calendar day of the calendar month after Term A Loan was made, the Company was required to make monthly payments of interest only.
Commencing on November 1, 2019, the Company shall make equal monthly payments of principal of $333,333, together with accrued and
unpaid interest. All unpaid principal and accrued and unpaid interest shall be due and payable in full on April 1, 2022. In addition,
the Amended and Restated Loan and Security Agreement requires the Company to pay a non-refundable final fee equal to 2.5% of the
principal amount of each Term Loan funded upon the earlier of the (i) April 1, 2022 maturity date or (ii) termination of the Term
Loan via acceleration or prepayment. This final fee is being accrued and charged to interest expense over the term of the
loan. For the three months ended March 31, 2019 and 2018, the Company recorded interest expense of $15,625 and $18,229, respectively,
related to the final fee. The Term Loan is evidenced by a secured promissory note issued to the Bank by the Company. If the Company
elects to prepay the Term Loan pursuant to the terms of the Amended and Restated Loan and Security Agreement, it will owe a prepayment
fee to the Bank, as follows: (1) for a prepayment made on or after the funding date of a Term Loan through and including the first
anniversary of such funding date, an amount equal to 2.0% of the principal amount of such Term Loan prepaid; (2) for a prepayment
made after the first anniversary of the funding date of a Term Loan through and including the second anniversary of such funding
date, an amount equal to 1.5% of the principal amount of such Term Loan prepaid; and (3) for a prepayment made after the second
anniversary of the funding date of a Term Loan through April 1, 2022, an amount equal to 1.0% of the principal amount of such Term
Loan prepaid.
Events of default which may cause repayment
of the Term Loans to be accelerated include, among other customary events of default, (1) non-payment of any obligation when
due, (2) the failure to perform any obligation required under the Amended and Restated Loan and Security Agreement and to
cure such default within a reasonable time frame, (3) the occurrence of a Material Adverse Event (as defined in the Amended and
Restated Loan and Security Agreement), (4) the attachment or seizure of a material portion of the Borrower’s assets if such
attachment or seizure is not released, discharged or rescinded within 10 days, and (5) if the Borrower becomes insolvent or starts
an insolvency proceeding or if an insolvency proceeding is brought by a third party against the Borrower and such proceeding is
not dismissed or stayed within 30 days. The Amended and Restated Loan and Security Agreement includes customary loan conditions,
Borrower representations and warranties, Borrower affirmative covenants and Borrower negative covenants for secured transactions
of this type. The Company is in substantial compliance with these covenants.
The Company’s and CytoSorbents Medical,
Inc.’s obligations under the Amended and Restated Loan and Security Agreement are joint and severable and are secured by
a first priority security interest in favor of the Bank with respect to the Company’s Shares (as defined in the Amended and
Restated Loan and Security Agreement) and the Borrower’s Collateral (as defined in the Amended and Restated Loan and Security
Agreement, which definition excludes the Borrower’s intellectual property and other customary exceptions).
Success Fee Letter:
Pursuant to that certain Success Fee Letter
(the “2016 Letter”) entered into between the Borrower and the Bank in connection with the Original Term Loans, the
Borrower agreed to pay to the Bank a success fee in the amount equal to 6.37% of the funded amount of the Original Term Loans (the
“2016 Letter Success Fee”) upon the first occurrence of any of the following events: (a) a sale or other disposition
by the Borrower of all or substantially all of its assets; (b) a merger or consolidation of the Borrower into or with another person
or entity, where the holders of the Borrower’s outstanding voting equity securities as of immediately prior to such merger
or consolidation hold less than a majority of the issued and outstanding voting equity securities of the successor or surviving
person or entity as of immediately following the consummation of such merger or consolidation; (c) a transaction or a series of
related transactions in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) becomes the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of a sufficient number of shares of all classes of stock
then outstanding of the Borrower ordinarily entitled to vote in the election of directors, empowering such “person”
or “group” to elect a majority of the Board of Directors of the Borrower, who did not have such power before such transaction;
or (d) the closing price per share for the Company’s common stock on Nasdaq being $8.00 (after giving effect to any stock
splits or consolidations effected after the date thereof) or more for five successive business days. On May 18, 2018, the 2016
Letter Success Fee became due to the Bank as result of an occurrence of the event described in clause (d) above. The Company elected
to satisfy the 2016 Letter Success Fee by issuing shares of its common stock, which was permitted under the terms of the 2016 Letter.
On May 23, 2018, the Company issued 68,791 shares of its common stock in full satisfaction of the 2016 Letter Success Fee, and
the obligations of the Borrower under the 2016 Letter. The 2016 Letter Success Fee was valued at $637,000 and was charged to interest
expense.
Long-term debt consists of the following at March 31, 2019:
Principal amount
|
|
$
|
10,000,000
|
|
Less unamortized debt acquisition costs
|
|
|
(97,552
|
)
|
Plus accrued final fee
|
|
|
62,500
|
|
Subtotal
|
|
|
9,964,948
|
|
Less Current maturities
|
|
|
(1,666,667
|
)
|
Long-term debt net of current maturities
|
|
$
|
8,298,281
|
|
Required principal payments of long-term debt for the twelve
months ended March 31, are as follows:
2020
|
|
$
|
1,666,667
|
|
2021
|
|
|
4,000,000
|
|
2022
|
|
|
4,000,000
|
|
2023
|
|
|
333,333
|
|
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 the agreements has an
initial term of three years, and was retroactively effective as of January 1, 2015. After 2017, the employment agreements automatically
renewed for an additional term of one year. Accordingly, the employment agreements expired on December 31, 2018. The Company is
currently negotiating new employment agreements with Dr. Chan, Mr. Capponi, and Ms. Bloch. The parties continue to operate under
the terms of the expired agreements as they negotiate the new agreements. 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.
The foregoing employment agreements each
provide for base salary and other customary benefits which include participation in group insurance plans, paid time off and reimbursement
of certain business related expenses, including travel and continuing educational expenses, as well as bonus and/or equity awards
at the discretion of the Board of Directors. In addition, the agreements provide for certain termination benefits in the event
of termination without “Cause” or voluntary termination of employment for “Good Reason”, as defined in
each agreement. The agreements also provide for certain benefits in the event of a “Change of Control” of the Company,
as defined in each agreement.
Litigation
The Company is from time to time subject
to claims and litigation arising out of the ordinary course of business. The Company intends to defend vigorously against any future
claims and litigation. The Company is not currently a party to any legal proceedings.
Royalty Agreements
Pursuant to an agreement dated August 11,
2003, an 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 March 31, 2019 and 2018, the Company has recorded
royalty costs of approximately $134,000 and $131,000, respectively.
License Agreements
In March 2006, the Company entered into
a license agreement which provides the Company the exclusive right to use its patented technology and proprietary know how relating
to adsorbent polymers for a period of 18 years. Under the terms of the agreement, the Company has agreed to pay royalties of 2.5%
to 5% on the sale of certain of its products if and when those products are sold commercially for a term not greater than 18 years
commencing with the first sale of such product. For the three months ended March 31, 2019 and 2018, per the terms of the license
agreement, the Company has recorded royalty costs of approximately $224,000 and $219,000, respectively.
Effective January 1, 2019, the Company
adopted the provisions of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The provisions of this ASU
require the Company to record a right-of-use asset and related lease liability related to their leases. Accordingly, the Company
has adjusted its December 31, 2018 balance sheet to properly reflect the provisions of this ASU as discussed below.
Description of Leases:
The Company leases its operating facilities
in both the United States and Germany under operating lease agreements. In the United States, in January 2019, the Company entered
into an Eighteenth Amendment to Lease with the landlord which became effective February 1, 2019. This amendment expands the Company’s
space to 19,920 square feet and extends the term of the lease to May 31, 2020. The Company’s base rent is approximately $32,000
per month. In addition, the Company is obligated to pay monthly operating expenses of approximately $29,000 per month. The amendment
also includes a one year renewal option. The base rent for the renewal term will increase by the greater of five percent or the
increase in the Consumer Price Index. There were no lease incentives and no initial direct costs were incurred related to this
lease amendment.
In Germany, the Company leases its operating
facility under two operating lease agreements. These leases require combined base rent payments amounting to approximately $8,800
per month. The initial lease term of both leases ends August 31, 2021. In addition, the Company is obligated to monthly operating
expenses of approximately $2,900 per month. Both leases have a five year option to renew that would extend the lease term to August
31, 2026. There are no provisions in the leases to increase the base rent during the renewal period. There were no lease incentives
and no initial direct costs were incurred related to these leases.
Initial Measurement of Right-Of-Use Asset
and Lease Liability:
Under the provisions of this ASU, the Company
has adjusted its balance sheet at December 31, 2018 to reflect the value of the right-of-use asset and related lease liability.
This value was calculated based on the present value of the remaining base rent lease payments. The remaining lease payments include
the renewal periods for both facilities as the Company has determined that it is probable that the renewal options will be exercised
under each of the lease agreements. The discount rate used was the Company’s incremental borrowing rate, which is 9.16%,
as the Company could not determine the rate implicit in the lease. As a result, the value of the right-of-asset and related lease
liability is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Right-of-use asset
|
|
$
|
1,359,097
|
|
|
$
|
1,449,437
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
1,359,097
|
|
|
$
|
1,449,437
|
|
Less current portion
|
|
|
(388,915
|
)
|
|
|
(378,675
|
)
|
Lease liability, net of current portion
|
|
$
|
970,182
|
|
|
$
|
1,070,762
|
|
The maturities of the lease liabilities are as follows as of
March 31, 2019:
2020
|
|
$
|
388,915
|
|
2021
|
|
|
442,865
|
|
2022
|
|
|
136,098
|
|
2023
|
|
|
75,308
|
|
2024
|
|
|
82,503
|
|
Thereafter
|
|
|
233,408
|
|
Total
|
|
$
|
1,359,097
|
|
|
|
|
|
|
For the three months ended March 31, 2019 and 2018, operating
cash flows paid in connection with operating leases amounted to approximately $215,000 and $199,000, respectively.
As of March 31, 2019 and December 31, 2018, the weighted average
remaining lease term amount to 4.25 years and 4.50 years, respectively.
Basic loss per share and diluted loss per
share for the three months ended March 31, 2019 and 2018 have been computed by dividing the net loss for each respective period
by the weighted average number of shares outstanding during that period.
All outstanding warrants and options and
restricted stock awards representing approximately 5,716,000 and 6,848,000 incremental shares at March 31, 2019 and 2018 have been
excluded from the computation of diluted loss per share as they are anti-dilutive.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Notes Regarding Forward Looking
Statements
This Quarterly report on Form 10-Q includes
“forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations
and contentions and 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, 2018, as filed with the SEC on March 7, 2019.
We are a leader in critical care immunotherapy,
investigating and commercializing our CytoSorb blood purification technology to reduce deadly uncontrolled inflammation in hospitalized
patients around the world, with the goal of preventing or treating multiple organ failure in life-threatening illnesses and cardiac
surgery. Organ failure is the cause of nearly half of all deaths in the intensive care unit (“ICU”), with little to
improve clinical outcome. CytoSorb, our flagship product, is approved in the European Union (“EU”) as a safe and effective
extracorporeal cytokine filter and is designed to reduce the “cytokine storm” that could otherwise cause massive inflammation,
organ failure and death in common critical illnesses such as sepsis, burn injury, trauma, lung injury, and pancreatitis. These
are conditions where the mortality is extremely high, yet no effective treatments exist. In 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 61,000 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 product candidates under development based upon this unique blood purification
technology. As of March 31, 2019, the technology is protected by 19 issued U.S. patents, multiple issued foreign patents, and multiple
applications pending both in the U.S. and internationally. Our intellectual property consists of composition of matter, materials,
methods of production, systems incorporating the technology and multiple medical uses with expiration dates ranging from 1 to 16
years.
In March 2011, CytoSorb was “CE marked”
in the EU, allowing for commercial marketing as an extracorporeal cytokine filter indicated for use in clinical situations where
cytokines are elevated. In May 2018, the Company received a label extension for CytoSorb covering use of the device for the removal
of bilirubin and myoglobin which allows for the on-label use of the device in the treatment of liver failure and trauma, respectively.
The CE mark demonstrates that a conformity assessment has been carried out and the product complies with the Medical Devices Directive.
The goal of CytoSorb is to prevent or treat organ failure by reducing cytokine storm and the potentially deadly systemic inflammatory
response syndrome (“SIRS”) in diseases such as sepsis, trauma, burn injury, acute respiratory distress syndrome, pancreatitis,
liver failure, and many others. Organ failure is the leading cause of death in the ICU, and remains a major unmet medical need,
with little more than supportive care therapy (e.g., mechanical ventilation, dialysis, vasopressors, fluid support, etc.) as treatment
options. By potentially preventing or treating organ failure, CytoSorb may improve clinical outcome, including survival, while
reducing the need for costly ICU treatment, thereby potentially saving significant healthcare costs.
Our CE mark enables CytoSorb to be sold
throughout all 28 countries of the EU. In addition, many countries outside the EU accept CE mark approval for medical devices,
but may also require registration with or without additional clinical studies. The broad approved indication enables CytoSorb 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, elevated levels of bilirubin and myoglobin, and many other
conditions where cytokine-induced inflammation plays a detrimental role.
As part of the CE mark approval process,
we completed our randomized, controlled, European Sepsis Trial amongst 14 trial sites in Germany in 2011, with enrollment of 100
patients with sepsis and respiratory failure. The trial established that CytoSorb was sufficiently safe in this critically-ill
population, and that it was able to broadly reduce key cytokines in the blood of these patients. We plan to conduct larger, prospective
studies in septic patients in the future to confirm the European Sepsis Trial findings.
In addition to CE mark approval, we also
achieved ISO 13485:2003 Full Quality Systems certification, an internationally recognized quality standard designed to ensure that
medical device manufacturers have the necessary comprehensive management systems in place to safely design, develop, manufacture
and distribute medical devices in the EU. We manufacture CytoSorb at our manufacturing facilities in New Jersey for sale and for
additional clinical studies. We also established general reimbursement for CytoSorb in Germany.
From September 2011 through June 2012,
we began a controlled market release of CytoSorb in select geographic territories in Germany with the primary goal of preparing
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 our wholly owned European subsidiary, CytoSorbents Europe GmbH, 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. The fourth
quarter of 2012 represented the first full quarter of direct sales with the full sales team in place. During this period, we expanded
our direct sales efforts to include both Austria and Switzerland. In 2016, a dedicated reimbursement code was established for CytoSorb
in Germany. At the end of 2017, we had hundreds of key opinion leaders (“KOLs”) in our commercialized territories worldwide
in critical care, cardiac surgery, and blood purification, who were either using CytoSorb or supporting its use in clinical practice
or clinical trials.
In March 2016, we established CytoSorbents
Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH, to conduct marketing and direct sales in Switzerland.
This subsidiary began operations during the second quarter of 2016. In 2017, we further expanded our direct sales efforts into
Belgium and Luxembourg.
On March 5, 2019, the Company announced
the expansion of direct sales of CytoSorb for all applications to Poland and the Netherlands, and critical care applications to
Sweden, Denmark and Norway. As part of this effort, the Company established CytoSorbents Poland Sp. z.o.o., a wholly-owned subsidiary
of CytoSorbents Europe GmbH.
As of April 30, 2019, our European sales,
marketing and clinical support team included 27 direct sales people, one contract sales person and 25 sales support staff.
We have complemented our direct
sales efforts with sales to distributors and/or corporate partners. In 2013, we reached agreement with distributors in the
United Kingdom, Ireland, the Netherlands, Russia and Turkey. In April 2014, we announced distribution of CytoSorb in the
Middle East, including Saudi Arabia, the United Arab Emirates, Kuwait, 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 s.r.l. 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 April 2017, we entered into a distribution agreement with KRA Technical Services to
distribute CytoSorb in Qatar. In July 2017, we announced an exclusive agreement with Droguería, Ramón,
González, Revilla (DRGR) S.A. to distribute CytoSorb in Panama. In April 2018, we entered into exclusive agreements
with Pharmaworld and Chong Lap (H.K.) Co. Ltd. to distribute CytoSorb in Lebanon and Hong Kong, respectively. As of the third
quarter of 2018, we had expanded distribution to include Bosnia, Herzegovina, and Croatia with Medis, d.o.o.; Estonia,
Latvia, and Lithuania with SIA Scanmed; and Montenegro and Serbia with Mar Medica, d.o.o. and Cardiotec Vascular Ltda., in
Chile. In March 2019, we announced the registration of CytoSorb in Isreal and the change to Gad Medical as the distributor in
Israel. CytoSorb is also now distributed in the United Kingdom by Chalice Medical, Ltd., which focuses its efforts in England
and Ireland.
We have been working to expand the number
and scope of our strategic partnerships. In September 2013, we entered into a strategic partnership with Biocon Ltd. (“Biocon”),
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 2017, the Biocon partnership was further expanded to include
exclusive distribution of CytoSorb in Malaysia. Under the terms of the agreement, Biocon has committed to minimum annual purchases
in Malaysia to maintain exclusivity this territory. In addition, the term of the original agreement was extended to December 2022.
In December 2014, we entered into a multi-country
strategic partnership with Fresenius Medical Care AG & Co KGaA (together with its affiliates, as appropriate, “Fresenius”)
to commercialize the CytoSorb therapy. Under the agreement reflecting the terms of the partnership, Fresenius was granted exclusive
rights to distribute CytoSorb for critical care applications in France, Poland, Sweden, Denmark, Norway, and Finland. The partnership
allows Fresenius to offer an innovative and easy way to use blood purification therapy for removing cytokines in patients that
are treated in the ICU. To promote the success of CytoSorb, Fresenius agreed to also engage in the ongoing clinical development
of the product. This includes the support and publication of a number of small case series and patient case reports as well as
the potential for future larger, clinical collaborations. In May 2016, Fresenius launched the product in the six countries for
which it was granted exclusive distribution rights. In January 2017, the Fresenius partnership was expanded pursuant to a revised
three year agreement. The terms of the revised agreement extended Fresenius’ exclusive distributorship of CytoSorb for all
critical care applications in their existing territories through 2019 and include guaranteed minimum quarterly orders and payments,
evaluable every one and a half years.
At the same time, we entered into a comprehensive
co-marketing agreement with Fresenius. Under the terms of the co-marketing agreement, CytoSorbents and Fresenius agreed to jointly
market CytoSorb to Fresenius’ critical care customer base in all countries where CytoSorb is being actively commercialized.
CytoSorb continues to be sold by our direct sales force or through our international network of distributors and partners, while
Fresenius sells all ancillary products to their customers. Fresenius further provides written endorsements of CytoSorb for use
with their multiFiltrate and multiFiltratePRO acute care dialysis machines that can be used by us and our distribution partners
to promote CytoSorb worldwide. Training and preparation for this co-marketing program began in five initial countries in 2017 and
is continuing, with implementation of the co-marketing program in additional countries planned for the future.
In December 2018, the Fresenius agreement
signed in December 2014 was amended, to grant Fresenius exclusive distribution rights for the Czech Republic and Finland and all
critical care medicine and ICU applications on dialysis or ECMO machines for France. In addition, starting in 2019, Poland, Sweden,
Denmark, and Norway will be transitioned into the co-marketing program. Finally, the guaranteed minimum quarterly purchases and
payments requirements were removed for 2019.
In addition, also in December 2018, we
entered into agreements to expand the partnership with Fresenius into South Korea and Mexico. Under the terms of these agreements,
Fresenius has exclusive rights to distribute CytoSorb for acute care and other hospital applications in South Korea and Mexico.
Commercial sales of CytoSorb are expected to commence after securing market registration clearance from the South Korean and Mexican
health authorities. These multi-year agreements include an initial stocking order and are subject to annual minimum purchases of
CytoSorb to maintain exclusivity.
In September 2016, we entered into a multi-country
strategic partnership with Terumo Cardiovascular Group (“Terumo”) to commercialize CytoSorb for cardiac surgery applications.
Under the terms of the agreement, Terumo has exclusive rights to distribute the CytoSorb cardiopulmonary bypass (“CPB”)
procedure pack for intra-operative use during cardiac surgery in France, Sweden, Denmark, Norway, Finland and Iceland. Terumo launched
the product in these six countries in December 2016.
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 continuously evaluate other potential
distributor and strategic partner networks in other countries where we are approved to market the device.
In the second quarter of 2018, we officially
opened a new expanded CytoSorb manufacturing facility in New Jersey that quadruples manufacturing capacity and is expected to improve
product gross margins in the future.
Concurrent with our commercialization plans,
we intend to conduct or support additional clinical studies in sepsis, cardiac surgery, and other critical care diseases to generate
additional clinical data to expand the scope of clinical experience for marketing purposes, to increase the number of treated patients,
and to support potential future publications. In 2014, we completed a single arm, dose ranging trial in Germany amongst several
clinical trial sites to evaluate the safety and efficacy of CytoSorb when used 24 hours per day for seven days, each day with a
new device, and are conducting final statistical analysis of the data. Patients were stratified for age, cytokine levels, and co-morbid
illnesses in this matched pairs analysis.
In addition to the dosing study, we plan
to use data generated and published in the more than 55 investigator-initiated studies and trials sponsored by us currently planned,
enrolling or completed in Europe and abroad. Approximately 40 of these studies are currently enrolling. These trials, which are
funded and supported by well-known university hospitals and KOLs, are the equivalent of Phase 2 clinical studies. They will provide
invaluable information regarding the success of the device in the treatment of sepsis, cardio-pulmonary bypass surgery, trauma,
and many other indications, and if successful, will be integral in helping to drive additional usage and adoption of CytoSorb.
In addition to sepsis and other critical
care applications, cardiac surgery is an important application for CytoSorb in the European market. There are approximately one
million cardiac surgery procedures performed annually in the U.S. and EU combined including, for example, coronary artery bypass
graft surgery, valve replacement surgery, heart and lung transplant, congenital heart defect repair, aortic reconstruction, and
left ventricular assist device (“LVAD”) implantation. Cardiac surgery can result in inflammation and the production
of high levels of inflammatory cytokines, an activation of complement, and hemolysis, leading to the release of toxic plasma
free hemoglobin. These can lead to post-operative complications such as respiratory failure, circulatory failure, and acute kidney
injury. CytoSorb has a unique competitive advantage as a cytokine and free hemoglobin removal technology that can be used
during the operative procedure and can be easily installed in a bypass circuit in a heart-lung machine without the need for an
additional pump. Direct cytokine and hemoglobin removal with CytoSorb enables it to replace the existing market for leukoreduction
filters in cardiac surgery that attempt to indirectly reduce cytokines by capturing cytokine-producing leukocytes – an inefficient
and suboptimal approach.
In February 2015, the U.S. Food and Drug
Administration (the “FDA”) approved our Investigational Device Exemption (“IDE”) application to commence
a planned U.S. cardiac surgery feasibility study called REFRESH I (REduction of FREe Hemoglobin) amongst 20 patients and three
U.S. clinical sites. The FDA subsequently approved an amendment to the protocol, expanding the trial to a 40 patient randomized
controlled study (20 treatment, 20 control) in eight clinical centers. REFRESH I represented the first part of a larger clinical
trial strategy intended to support the approval of CytoSorb in the U.S. for intra-operative use during cardiac surgery.
The REFRESH I study was designed to evaluate
the safety and feasibility of CytoSorb when used intra-operatively with a heart-lung machine to reduce plasma free hemoglobin (pfHb)
and cytokines in patients undergoing complex cardiac surgery. The study was not powered to measure effect on clinical outcomes.
The length, complexity and invasiveness of these procedures cause hemolysis and inflammation, leading to high levels of plasma
free hemoglobin, cytokines, activated complement, and other substances. These inflammatory mediators are correlated with
the incidence of serious post-operative complications such as kidney injury, renal failure and other organ dysfunction. The
goal of CytoSorb is to actively remove these inflammatory and toxic substances as they are being generated during the surgery and
reduce complications. Enrollment was completed with 46 patients. A total of 38 patients were evaluable for pfHb and completed all
aspects of the study.
The primary safety and efficacy endpoints
of the study were the assessment of serious device related adverse events and the change in plasma free hemoglobin levels, respectively.
On October 5, 2016, we announced positive top-line safety data. In addition, following a detailed review of all reported
adverse events in a total of 46 enrolled patients, the independent Data Safety Monitoring Board (“DSMB”) found no serious
device related adverse events with the CytoSorb device, achieving the primary safety endpoint of the 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 from the study on the reduction of pfHb and activated complement, and disclosed that investigators of the study
have submitted a manuscript of the REFRESH I trial for publication.
In December 2017, the FDA approved our
IDE application for our REFRESH 2-AKI study, permitting us to conduct this pivotal trial designed to provide the key safety and
efficacy data needed to support United States regulatory approval for CytoSorb in cardiac surgery, which we plan to pursue via
the premarket approval (PMA) pathway. The REFRESH 2-AKI trial is a randomized, controlled, multi-center, clinical trial designed
to evaluate intraoperative CytoSorb use as a therapy to reduce the incidence and severity of AKI, as measured by Kidney Disease
Improving Global Outcomes (KDIGO) criteria, following complex cardiac surgery. Postoperative AKI following cardiac surgery
is common and is associated with 1-5 year mortality, and is a risk factor for developing chronic kidney disease requiring hemodialysis
in the future. The trial will enroll up to 400 patients at increased risk of cardiovascular surgery-associated AKI, undergoing
elective, non-emergent open-heart surgery for either valve replacement, or aortic reconstruction with hypothermic cardiac arrest.
In April 2018, we announced the first patient enrollment into the pivotal U.S. REFRESH 2-AKI trial. Based on the recommendations
of key clinical advisors, a protocol amendment was submitted to the FDA on July 18, 2018 to improve operational aspects of the
patient screening process and expand the inclusion criteria. It was the preference of clinical trial sites to defer enrollment
until the amendment was approved by the FDA, which occurred on August 17, 2018. Following the subsequent ethics committee approvals
of the amended protocol at all trial sites, as of May 3, 2019, the trial had 23 initiated sites and another 6 sites that were
undergoing approvals, contracting and initiation. As of May 7, 2019, the trial had enrolled 79 patients. We anticipate that
patient enrollment in the REFRESH 2-AKI trial will be complete by 2020, but this could take longer if enrollment challenges or
other factors causing delays are encountered. If the trial is successful, we plan to submit a PMA application in 2021.
The German government, via the German
Federal Ministry of Education and Research, is funding a 250 patient, multi-center randomized, controlled study
(“REMOVE”) using CytoSorb during valve replacement open heart surgery in patients with infective endocarditis.
The study enrolled its first patient in January 2018. As of May 3, 2019, the trial had enrolled 180 patients at 15 sites. A
planned interim analysis of the first 50 patients has been completed. On February 4, 2019, Prof. Dr. med. Frank Brunkhorst,
Director of the Center for Clinical Studies at Jena University Hospital, who is providing management and oversight to
the REMOVE trial, and Prof. Dr. med. Torsten Doenst, Director of the Clinic for Cardiac and Thoracic Surgery at the
University of Jena, provided the following joint statement, “The Scientific Advisory Board (SAB) of the Center of
Sepsis Control and Care (CSCC) and the Data Safety Monitoring Board (DSMB) of the REMOVE study recommended continuation of
the study, based upon results of a pre-specified interim analysis that analyzed cytokine and vasoactive mediator levels as an
indicator of the mechanistic mode of action of the device in 28 CytoSorb-treated patients and 22 control patients.
There were no device-associated adverse events in the CytoSorb group.”
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, liver failure, pancreatitis, lung injury, ARDS, and others. Severe sepsis and septic shock, a potentially
life-threatening systemic inflammatory response to a serious infection, accounts for approximately 10% to 20% of all ICU admissions
and is one of the largest target markets for CytoSorb. Sepsis is a major unmet medical need 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:
|
·
|
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.
|
|
·
|
CytoSorb XL – an intended
next generation successor to CytoSorb currently in advanced pre-clinical testing designed to reduce a broad range of cytokines
and inflammatory mediators, including lipopolysaccharide (LPS) endotoxin, from blood.
|
|
·
|
VetResQ -
a broad spectrum blood purification adsorber designed to help treat deadly inflammation and toxic injury in animals with critical illnesses such as septic shock, toxic shock syndrome, severe systemic inflammation, toxin-mediated diseases, pancreatitis, trauma, liver failure, and drug intoxication. VetResQ is being commercialized in the United States.
|
|
·
|
HemoDefend – a development-stage blood purification technology designed to remove non-infectious contaminants in blood transfusion products, with the goal of reducing transfusion reactions and improving the quality and safety of blood. With the support of NHLBI, we plan to initiate a U.S. pivotal trial designed to support U.S. FDA approval, expected to begin in the second half of 2019.
|
|
·
|
K+ontrol – a development-stage blood purification
technology designed to reduce excessive levels of potassium in the blood that can be fatal in severe
hyperkalemia.
|
|
·
|
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.
|
|
·
|
DrugSorb – a development-stage extracorporeal hemoperfusion cartridge designed to remove toxic chemicals from the blood (e.g., drug overdose, high dose regional chemotherapy).
|
|
·
|
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.
|
Regulation
The medical devices that we manufacture
are subject to regulation by numerous regulatory bodies, including the FDA and comparable international regulatory agencies. These
agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory
control, the most comprehensive of which requires that a clinical evaluation program be conducted before a device receives approval
for commercial distribution.
In the EU, medical devices are required
to comply with the Medical Devices Directive and obtain CE Mark certification in order to market medical devices. The CE Mark certification,
granted following approval from an independent notified body, is an international symbol of adherence to quality assurance standards
and compliance with applicable European Medical Devices Directives. Distributors of medical devices may also be required to comply
with other foreign regulations such as Ministry of Health Labor and Welfare approval in Japan. The time required to obtain these
foreign approvals to market our products may be longer or shorter than that required in the U.S., and requirements for those approvals
may differ from those required by the FDA. In Europe, our devices are classified as Class IIb, and will need to conform to the
Medical Devices Directive.
In March 2011, we successfully completed
our technical file review with our notified body, and received approval to apply the CE Mark to the CytoSorb device as an extracorporeal
cytokine filter. We also achieved ISO 13485:2003 Full Quality Systems certification, an internationally recognized quality standard
designed to ensure that medical device manufacturers have the necessary comprehensive management systems in place to safely design,
develop, manufacture and distribute medical devices in the EU. In February 2015, we extended the coverage of our ISO 13485 Certificate
with the inclusion of Canadian Quality Systems requirements. This additional level of certification will allow us to apply for
product approvals in Canada in the future.
In June 2016, we successfully completed
an ISO 13485:2003 annual surveillance audit maintaining our good standing with our notified body. In September 2016, we were granted
a two-year renewal for the CytoSorb CE Mark. In June 2018, we received clearance from our notified body to begin production in
our new manufacturing facility. In July 2018, we successfully completed an audit upgrade from an ISO 13485:2003 certification to
an ISO 13485:2016 certification.
In the U.S., specific permission from FDA
to distribute a new device is usually required (that is, other than in the case of very low risk devices), and we expect that some
form of marketing authorization will be necessary for our devices. Marketing authorization is generally sought and obtained in
one of two ways (the
de novo
pathway presents another path to market, but we do not currently anticipate that it will be
utilized for our product candidates). The first process requires that a pre-market notification (510(k) Submission) be made to
the FDA to demonstrate that the device is as safe and effective as, or “substantially equivalent” to, a legally marketed
device that is not subject to pre-market approval (“PMA”). A legally marketed device is a device that (i) was legally
marketed prior to May 28, 1976, (ii) has been reclassified from Class III to Class II or I, or (iii) has been found to be substantially
equivalent to another legally marketed device following a 510(k) Submission. The legally marketed device to which equivalence is
drawn is known as the “predicate” device. Applicants must submit descriptive data and, when necessary, performance
data to establish that the device is substantially equivalent to a predicate device. In some instances, data from human clinical
studies must also be submitted in support of a 510(k) Submission. If so, these data must be collected in a manner that conforms
with specific requirements in accordance with federal regulations including the Investigational Device Exemption (IDE) and human
subjects protections or “Good Clinical Practice” regulations. After the 510(k) application is submitted, the applicant
cannot market the device unless FDA issues “510(k) clearance” deeming the device substantially equivalent. The FDA’s
510(k) review process usually takes from three to six months, but may take longer. The FDA may require additional information,
including clinical data, to make a determination regarding substantial equivalence. After an applicant has obtained clearance,
the changes to existing devices covered by a 510(k) Submission which do not significantly affect safety or effectiveness can generally
be made without additional 510(k) Submissions, but evaluation of whether a new 510(k) is needed is a complex regulatory issue,
and changes must be evaluated on an ongoing basis to determine whether a proposed change triggers the need for a new 510(k), or
even PMA. The 510(k) clearance pathway is not available for all devices: whether it is a suitable path to market depends on several
factors, including regulatory classifications, the intended use of the device, and technical and risk-related issues for the device.
The second, more rigorous, process requires
that an application for PMA be made to the FDA to demonstrate that the device is safe and effective for its intended use as manufactured.
This approval process applies to most Class III devices. A PMA submission includes data regarding design, materials, bench and
animal testing, and human clinical data for the medical device. Again, clinical trials are subject to extensive FDA regulation.
Following completion of clinical trials,
an applicant will submit a PMA with required data. Within 45 days after a PMA is received by the FDA, the agency will notify the
applicant whether the application has been “filed” (a threshold determination that the application is sufficiently
complete to begin an in-depth review), then a substantive review period begins on the date of filing. Although the stated regulatory
timeframe for the FDA’s review of PMAs is 180 days, FDA does not meet this goal for all applications; review often takes
at least one year and may take significantly longer. During this review period, the FDA may request additional information or clarification
of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide recommendations to the FDA. In addition, the FDA generally will conduct a pre-approval
inspection of the manufacturing facility to evaluate compliance with Quality System Regulation, which requires manufacturers to
implement and follow design, testing, control, documentation and other quality assurance procedures.
Following review of a PMA the FDA will
authorize commercial distribution if it determines there is reasonable assurance that the medical device is safe and effective
for its intended purpose. This determination is based on the benefit outweighing the risk for the population intended to be treated
with the device. Alternatively the agency may issue an “approvable letter” or “not approvable letter” identifying
deficiencies of varying degrees, or issue an order denying approval. The PMA process is much more detailed, time-consuming, and
expensive than the 510(k) process. Also, FDA may impose a variety of conditions on the approval of a PMA.
In the U.S., we believe that our potential
devices, if we were to pursue marketing authorization, would likely fall under the classification for “Sorbent Hemoperfusion
Systems” (21 C.F.R. § 876.5870). This category of device is Class II (subject to a 510(k) and special controls) when
the device is intended for the treatment of poisoning and drug overdose, and Class III (subject to premarket approval) when the
device is intended for the treatment of sepsis, hepatic coma and metabolic disturbances or other life-threatening illnesses.
Both before and after a device for the
U.S. market is commercially released, we would have ongoing responsibilities under FDA regulations. The FDA reviews design and
manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other
information to identify potential problems with marketed medical devices. We would also be subject to periodic inspection by the
FDA for compliance with the FDA’s quality system regulations, which govern the methods used in, and the facilities and controls
used for, the design, manufacture, packaging, and servicing of all finished medical devices intended for human use. In addition,
the FDA and other U.S. regulatory bodies (including the Federal Trade Commission, the Office of the Inspector General of the Department
of Health and Human Services, the Department of Justice (DOJ), and various state Attorneys General) monitor the manner in which
we promote and advertise our products. Although physicians are permitted to use their medical judgment to employ medical devices
for indications other than those cleared or approved by the FDA, we are prohibited from promoting products for such “off-label”
uses, and can only market our products for cleared or approved uses. If the FDA were to conclude that we are not in compliance
with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the
FDA could require us to notify health professionals and others that the devices present unreasonable risks of substantial harm
to the public health, order a recall, repair, replacement, or refund of such devices, detain or seize adulterated or misbranded
medical devices, or ban such medical devices. The FDA may also impose operating restrictions, enjoin and/or restrain certain conduct
resulting in violations of applicable law pertaining to medical devices, including a hold on approving new devices until issues
are resolved to its satisfaction, and assess civil or criminal penalties against our officers, employees, or us. The FDA may also
recommend prosecution to the DOJ. Conduct giving rise to civil or criminal penalties may also form the basis for private civil
litigation by third-party payers or other persons allegedly harmed by our conduct.
The delivery of our devices in the U.S.
market would be subject to regulation by the U.S. Department of Health and Human Services and comparable state agencies responsible
for reimbursement and regulation of health care items and services. U.S. laws and regulations are imposed primarily in connection
with the Medicare and Medicaid programs, as well as the government’s interest in regulating the quality and cost of health
care.
Federal health care laws apply when we
or customers submit claims for items or services that are reimbursed under Medicare, Medicaid, or other federally-funded health
care programs. The principal federal laws include: (1) the False Claims Act which prohibits the submission of false or otherwise
improper claims for payment to a federally-funded health care program; (2) the Anti-Kickback Statute which prohibits offers to
pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by
a Federal health care program; (3) the Stark law which prohibits physicians from referring Medicare or Medicaid patients to a provider
that bills these programs for the provision of certain designated health services if the physician (or a member of the physician’s
immediate family) has a financial relationship with that provider; and (4) health care fraud statutes that prohibit false statements
and improper claims to any third-party payer. There are often similar state false claims, anti-kickback, and anti-self referral
and insurance laws that apply to state-funded Medicaid and other health care programs and private third-party payers and some state
laws apply regardless of payor (i.e., even in self-pay scenarios). These and other laws (including, for example, the Physician
Payment Sunshine Act and state transparency and compliance laws) will become increasingly important as we progress toward commercialization
in the U.S. In addition, the U.S. Foreign Corrupt Practices Act can be used to prosecute companies in the U.S. for arrangements
with physicians, or other parties outside the U.S. if the physician or party is a government official of another country and the
arrangement violates the law of that country.
The laws applicable to us are subject to
change, and subject to evolving interpretations. If a governmental authority were to conclude that we are not in compliance with
applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties including
substantial fines and damages, and exclusion from participation as a supplier of product to beneficiaries covered by Medicare or
Medicaid.
The process of obtaining clearance to market
products is costly and time-consuming in virtually all of the major markets in which we expect to sell products and may delay the
marketing and sale of our products. Countries around the world have recently adopted more stringent regulatory requirements, which
are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory
costs of supporting those releases. No assurance can be given that any of our other medical devices will be approved on a timely
basis, if at all, or that our CytoSorb® device will be approved for CE Mark labeling in other potential medical applications
or that it will be approved for cytokine filtration in markets not covered by the CE Mark on a timely basis, or at all. In addition,
regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict
what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
Pertaining to our VetResQ™ device
(offered for veterinary use only), in the U.S., the FDA does not require submission of a 510(k), PMA, or any pre-market approval
for devices used in veterinary medicine. Device manufacturers who exclusively manufacture or distribute veterinary devices are
not required to register their establishments and list veterinary devices and are exempt from post-marketing reporting. FDA does
have regulatory oversight over veterinary devices and can take appropriate regulatory action if a veterinary device is misbranded
or adulterated. It is the responsibility of the manufacturer and/or distributor of these articles to assure that these animal devices
are safe, effective, and properly labeled.
Exported devices are subject to the regulatory
requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most
foreign countries medical devices are regulated. Frequently, device companies may choose to seek and obtain regulatory approval
of a device in a foreign country prior to application in the U.S., as we have done, given the differing regulatory requirements.
However, this does not ensure approval of a device in the U.S.
We have been successful in obtaining technology
development contracts from governmental agencies such as the National Institutes of Health and the U.S. Department of Defense,
including the Defense Advanced Research Projects Agency (“DARPA”), the U.S. Army, U.S. Special Operations Command (“USSOCOM”),
and others.
In August 2012, we were awarded a $3.8
million, five-year contract by DARPA for our “Dialysis-Like Therapeutics” (“DLT”) program to treat sepsis.
DARPA has been instrumental in funding many of the major technological and medical advances since its inception in 1958, including
development of the Internet, development of GPS, and robotic surgery. The DLT program in sepsis sought to develop a therapeutic
blood purification device that was capable of identifying the cause of sepsis (e.g., cytokines, toxins, pathogens, activated cells)
and remove these substances in an intelligent, automated, and efficient manner. Our contract was for advanced technology development
of our hemocompatible porous polymer technologies to remove cytokines and a number of pathogen and biowarfare toxins from blood.
We have completed our work under the contract with DARPA and SSC Pacific under Contract No. N66001-12-C-4199, that provided for
maximum funding of approximately $3,825,000. As of March 31, 2019, we received approximately $3,825,000 in funding under this contract
and no funding remains.
In September 2012, we were awarded a Phase
II SBIR contract by the U.S. Army Medical Research and Material Command to evaluate our technology for the treatment of trauma
and burn injury in large animal models. In 2013, we finalized the Phase II SBIR contract which provided for a maximum funding of
approximately $803,000 with the granting agency. This work is supported by the U.S. Army Medical Research and Material Command
under an amendment to Contract W81XWH-12-C-0038. In June 2016, this contract was further amended to increase the maximum funding
by $443,000 to approximately $1,246,000. As of March 31, 2019, we received approximately $1,246,000 in funding under this contract.
Our performance under this contract has been completed.
In September 2013, the National Heart Lung
and Blood Institute (“NHLBI”) awarded us a Phase I Small Business Innovation Research (“SBIR”) contract,
(number HHSN-268201-300044C), valued at $203,351, to further advance our HemoDefend blood purification technology for pRBC transfusions.
The University of Dartmouth collaborated with us as a subcontractor on the project, entitled “Elimination of blood contaminants
from pRBCs using HemoDefend hemocompatible porous polymer beads.” The overall goal of this program was to reduce the risk
of potential side effects of blood transfusions, and help to extend the useful life of pRBCs. Our performance under this contract
has been completed.
In October 2015, we were awarded a Phase
II SBIR contract by the NHLBI and USSOCOM to help advance our HemoDefend blood purification technology towards commercialization
for the purification of pRBC transfusions. The contract, entitled “pRBCs Contaminant Removal with Porous Polymer Beads”,
(contract number HHSN-268201-600006C), provided for maximum funding of approximately $1,524,000 over a two year period. As of March
31, 2019, we received approximately $1,524,000 under this contract. Our performance under this contract has been completed.
In March 2016, we were awarded a Phase
I SBIR contract for a development program entitled “Mycotoxin Adsorption with Hemocompatible Porous Polymer Beads.”
The purpose of this contract was to develop effective blood purification countermeasures for weaponized mycotoxins that can be
easily disseminated in water, food and air. This work was funded by the U.S. Joint Program Executive Office for Chemical
and Biological Defense, or JPEO-CBD, under contract number W911QY-16-P-0048 and provided for maximum funding of $150,000.
We received approximately $150,000 and no funding remains under this contract. Our performance under this contract has been completed.
In June 2016, we were awarded a Phase I
Small Business Technology Transfer (“STTR”) contract for its development program entitled “Use of Highly Porous
Polymer Beads to Remove Anti-A and Anti-B antibodies from Plasma for Transfusion”. The purpose of this contract was to develop
our HemoDefend blood purification technology to potentially enable universal plasma. This work was funded by the USAMRAA
under contract W81XWH-16-C-0025 and provided for maximum funding of $150,000. We received approximately $150,000 and no funding
remains under this contract.
In July 2016, we were awarded a Phase I
SBIR contract for its development program entitled “Investigation of a sorbent-based potassium adsorber for the treatment
of hyperkalemia induced by traumatic injury and acute kidney injury in austere conditions”. The objective of this Phase I
project was to develop two novel and distinct treatment options for life-threatening hyperkalemia. This work was funded by the
U.S. Army Medical Research Acquisition Activity (“USAMRAA”) under contract W81XWH-16-C-0080 and provided for maximum
funding of approximately $150,000. We received approximately $150,000 and no funding remains under this contract.
In January 2017, we were awarded a Phase
II SBIR contract to continue development of CytoSorb for fungal mycotoxin blood purification. This program focused on demonstrating
the ability of CytoSorb to adsorb mycotoxins
in vivo
and improve survival in animals. This contract, W911QY-17-C-0007, provided
for maximum funding of $999,996 over two years. This program was funded by the Joint Program Executive Office - Chemical and Biological
Defense (“CBD”) SBIR program. As of March 31, 2019, we received approximately $999,996 in funding under this contract
and no further funding remains under this contract.
In May 2017, we were awarded a Phase II
STTR contract entitled “Use of Highly Porous Polymer Beads to Remove Anti-A and Anti-B Antibiotics from Plasma Transfusion”.
The purpose of this contract is to continue development of our HemoDefend blood purification technology to potentially enable universal
plasma. We collaborate with researchers at Penn State University on this project. This contract provides for maximum funding of
$999,070 over two years. This work is being funded by the USAMRAA under contract number W81XWH-17-C-0053. As of March 31, 2019,
we received approximately $879,000 and have approximately $120,000 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 March 31, 2019,
we received approximately $357,000 and have approximately $362,000 remaining under this contract.
In September 2017, the Company was awarded
a Phase II SBIR contract for its development program entitled “Investigation of a sorbent-based potassium adsorber for the
treatment of hyperkalemia induced by traumatic injury and acute kidney injury”. The purpose of this contract is to continue
development of two novel and distinct treatment options for life-threatening hyperkalemia. This work is being funded by the USAMRAA
under contract W81XWH-17-C-0142 and provides for maximum funding of approximately $999,871. As of March 31, 2019, we received approximately
$478,000 and have approximately $522,000 remaining under this contract.
In August 2018, the Company was awarded
a Phase IIB Bridge SBIR contract by the NHLBI to facilitate and accelerate the commercialization of our HemoDefend blood purification
technology for the purification of pRBC transfusions. The contract, entitled “pRBCs Contaminant Removal with Hemocompatible
Porous Polymer Beads” (award number 2R44HL141928-03), provides for maximum funding of approximately $2,971,000 over a three
year period. As of March 31, 2019, we received approximately $491,000 in funding under this contract and have approximately $2,480,000
remaining under this contract. Under the terms of this contract, we must make a matching contribution equal to the funds awarded
thereunder.
Results of Operations
Comparison for the three months ended
March 31, 2019 and 2018:
Revenues:
Revenue from product sales was approximately
$4,577,000 in the three months ended March 31, 2019, as compared to approximately $4,433,000 in the three months ended March 31,
2018 an increase of approximately $144,000, or 3%. This increase was driven by an increase in direct sales of approximately $624,000
resulting from sales to both new customers and repeat orders from existing customers, offset by a decrease in distributor sales
of approximately $480,000. In addition, first quarter 2019 sales were negatively impacted by $363,000 as a result of the decrease
in the average exchange rate of the Euro. For the three months ended March 31, 2019, the average exchange rate of the Euro to the
U.S. dollar was $1.14 as compared to an average exchange rate of $1.23 for the three months ended March 31, 2018.
Grant income was approximately $615,000
for the three months ended March 31, 2019 as compared to approximately $491,000 for the three months ended March 31, 2018, an increase
of approximately $124,000 or 25%. This increase was a result of timing of certain grant revenue and income recognized from a new
grant.
Total revenues were approximately $5,192,000
for the three months ended March 31, 2019, as compared to total revenues of approximately $4,925,000 for the three months ended
March 31, 2018, an increase of approximately $267,000, or 5%.
Cost of Revenues:
For the three months ended March 31, 2019
and 2018, cost of revenue was approximately $1,739,000 and $1,568,000, respectively, an increase of approximately $171,000. Product
cost of revenues increased approximately $52,000 during the three months ended March 31, 2019 as compared to the three months ended
March 31, 2018 due to increased sales. Product gross margins were approximately 74% for each of the three months ended March 31,
2019 and 2018.
Research and Development Expenses
:
For the three months ended March 31, 2019,
research and development expenses were approximately $2,419,000 as compared to research and development expenses of approximately
$1,725,000 for the three months ended March 31, 2018. The increase of approximately $694,000 was due to increase in clinical trial
costs of approximately $888,000, which is primarily related to our REFRESH 2-AKI trial and an increase in non-clinical research
and development salary related costs of approximately $9,000. These increases were offset by an increase in direct labor and other
costs being deployed toward grant-funded activities of approximately $118,000, which had the effect of decreasing the amount of
our non-reimbursable research and development costs, a decrease in new product development costs of approximately $67,000 and a
decrease of other non-clinical research and development costs of approximately $18,000.
Legal, Financial and Other Consulting
Expense:
Legal, financial and other consulting expenses
were approximately $562,000 for the three months ended March 31, 2019, as compared to approximately $416,000 for the three months
ended March 31, 2018. The increase of approximately $146,000 was due to an increase in legal fees of approximately $167,000 related
to patent matters and certain corporate initiatives and an increase in consulting fees of approximately $18,000. These increases
were offset by a decrease in employment agency fees of approximately $36,000 and a decrease in accounting fees of approximately
$3,000.
Selling, General and Administrative
Expense:
Selling, general and administrative expenses
were approximately $4,758,000 for the three months ended March 31, 2019, as compared to approximately $4,317,000 for the three
months ending March 31, 2018. The increase of $441,000 was due to an increase in salaries, commissions and related costs of approximately
$424,000, an increase in travel and entertainment and other costs of approximately $142,000, additional sales and marketing costs,
which include advertising and conferences of approximately $88,000, an increase in royalty expenses of approximately $7,000 due
to the increase in product sales, an increase in rent expense of approximately $11,000 related to the expansion of manufacturing
and office facilities and an increase in other general and administrative cost increases of approximately $21,000. These increases
were offset by a decrease in non-cash stock compensation of approximately $252,000.
Interest Expense, net:
For the three months ended March 31, 2019,
interest expense was approximately $205,000, as compared to interest expense of approximately $239,000 for the three months ended
March 31, 2018. This decrease in interest expense of approximately $34,000 is due to an increase in interest earned on our cash
balances during the three months ended March 31, 2019.
Gain (Loss) on Foreign Currency Transactions:
For the three months ended March 31, 2019,
the loss on foreign currency transactions was approximately $(393,000) as compared to a gain of approximately $358,000 for the
three months ended March 31, 2018. The 2019 loss is directly related to the decrease in the exchange rate of the Euro to the U.S.
dollar at March 31, 2019 as compared to December 31, 2018. The exchange rate of the Euro to the U.S. dollar was $1.12 per Euro
at March 31, 2019, as compared to $1.15 per Euro at December 31, 2018. The 2018 gain is directly related to the increase in the
exchange rate of the Euro at March 31, 2018 as compared to December 31, 2017. The exchange rate of the Euro to the U.S. dollar
was $1.23 per Euro at March 31, 2017 as compared to $1.07 per Euro at December 31, 2017.
History of Operating Losses
:
We have experienced substantial operating
losses since inception. As of March 31, 2019, we had an accumulated deficit of approximately $174,408,000, which included losses
of approximately $4,884,000 and $2,982,000 for the three month periods ended March 31, 2019 and 2018, respectively. Historically,
losses have resulted principally from costs incurred in the research and development of our polymer technology, clinical studies,
and general and administrative expenses.
Liquidity and Capital Resources
Since inception, our operations have been
primarily financed through the issuance of debt and equity securities. At March 31, 2019, we had current assets of approximately
$24,828,000 including cash on hand of approximately $19,647,000 and current liabilities of approximately $6,711,000.
We believe that we have sufficient cash
to fund our operations into 2020. We will need to raise additional capital to support our ongoing operations in the future. In
addition, we will need to raise additional funds to support clinical trials in the U.S. and in Europe.
Contractual Obligations
In January 2019, the Company entered into
a Eighteenth Amendment to Lease Agreement with Princeton Corporate Plaza, LLC, which expands our space to approximately 19,920
square feet. The lease for our corporate headquarters and manufacturing facility expires May 31, 2020. Effective February 1, 2019,
the Company’s base rent obligation increased to $30,443 per month. In addition, the lease amendment provides the Company
with an option to extend the term of the lease for an additional one year period through May 31, 2021 upon certain conditions.
In September 2016, the Company’s
wholly-owned subsidiary, CytoSorbents Europe GmbH, entered into a five year lease agreement with Klimik GmbH for 760 square meters
of office and warehouse space. In May 2018, CytoSorbents Europe GmbH entered into an additional lease agreement with Klimik GmbH
which expanded its office and warehouse space to 960 square meters. The leases have a total rent obligation of $8,827 per month.
Both leases expire on August 31, 2021. The leases also provide the Company with an option to extend the terms for an additional
five year period through August 31, 2026.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements.
Going Concern
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. We believe that we have adequate cash for more than the next 12 months of operations, however,
we may need to raise additional capital to support clinical trials in the U.S. and/or elsewhere. We will be better able to address
this need once the specific protocols of these trials are finalized.
As of March 31, 2019, we had an accumulated
deficit of approximately $174,408,000, which included net losses of approximately $4,884,000 for the three months ended March 31,
2019, and $2,982,000 for the three months ended March 31, 2018. In part due to these losses, our 2018 audited consolidated financial
statements were prepared assuming we will continue as a going concern, and the auditors’ report on the 2018 financial statements
expressed substantial doubt about our ability to continue as a going concern. Our losses have resulted principally from costs incurred
in the research and development of our polymer technology, clinical studies and selling, general and administrative expenses. We
intend to continue to conduct significant additional research, development, and clinical study activities which, together with
expenses incurred for the establishment of manufacturing arrangements and a marketing and distribution presence, and other selling,
general and administrative expenses, are expected to result in continuing operating losses for the foreseeable future. The amount
of future losses and when, if ever, we will achieve profitability are uncertain. Our ability to achieve profitability will depend,
among other things, on successfully completing the development of our technology and commercial products, obtaining additional
requisite regulatory approvals in markets not covered by the CE mark and for potential label extensions of our current CE mark,
establishing manufacturing and sales and marketing arrangements with third parties, and raising sufficient funds to finance our
activities. No assurance can be given that our product development efforts will be successful, that our current CE mark will enable
us to achieve profitability, that additional regulatory approvals in other countries will be obtained, that any of our products
will be manufactured at a competitive cost and will be of acceptable quality, or that the we will be able to achieve profitability
or that profitability, if achieved, can be sustained. These interim consolidated financial statements do not include any adjustments
related to the outcome of this uncertainty.