Cytosorbents Corp - Quarter Report: 2010 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended September 30,
2010
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
transition period from __________ to __________
Commission
file number: 000-51038
CYTOSORBENTS
CORPORATION
(f/k/a
MedaSorb Technologies Corporation)
|
Nevada
|
98-0373793
|
|
|
(State
or Other Jurisdiction of
Incorporation
Or Organization)
|
(I.R.S.
Employer Identification
No.)
|
7 Deer Park Drive, Suite K,
Monmouth Junction, New Jersey 08852
(Address
of Principal Executive Offices)
(732)
329-8885
(Registrant’s
Telephone Number, Including Area Code)
___________________
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. þ
Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer, large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
|
Non-accelerated
filer ¨ (Do
not check if a
smaller
reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes þ No
As of
November 16, 2010 there were 118,166,919 shares of the issuer’s common stock
outstanding.
CytoSorbents
Corporation
(a
development stage company)
FORM
10-Q
TABLE
OF CONTENTS
|
Page
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
Item
1. Financial Statements (September 30, 2010 and 2009 are
unaudited)
|
||
|
Consolidated
Balance Sheets
|
3
|
|
|
Consolidated
Statements of Operations
|
4
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)
|
5
|
|
|
Consolidated
Statements of Cash Flows
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
13
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
14
|
|
|
Item
4(T). Controls and Procedures
|
14
|
|
|
PART
II. OTHER INFORMATION
|
||
|
Item
1. Legal Proceedings
|
15
|
|
|
Item
1A. Risk Factors
|
15
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
15
|
|
|
Item
3. Defaults of Senior Securities
|
15
|
|
|
Item
4. (Removed and Reserved)
|
15
|
|
|
Item
5. Other Information
|
15
|
|
|
Item
6. Exhibits
|
15
|
2
PART
I — FINANCIAL INFORMATION
Item 1. Financial
Statements.
CYTOSORBENTS
CORPORATION
(a
development stage company)
CONSOLIDATED
BALANCE SHEETS
|
September30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
758,224
|
$
|
1,595,628
|
||||
|
Prepaid
expenses and other current assets
|
70,910
|
369,091
|
||||||
|
Total
current assets
|
829,134
|
1,964,719
|
||||||
|
Property
and equipment - net
|
13,131
|
18,853
|
||||||
|
Other
assets
|
268,001
|
254,908
|
||||||
|
Total
long-term assets
|
281,132
|
273,761
|
||||||
|
Total
Assets
|
$
|
1,110,266
|
$
|
2,238,480
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$
|
828,362
|
$
|
852,167
|
||||
|
Accrued
expenses and other current liabilities
|
337,759
|
118,598
|
||||||
|
Convertible
notes payable, net of debt discount in the amount of
$105,562
|
871,688
|
---
|
||||||
|
Total
current liabilities
|
2,037,809
|
970,765
|
||||||
|
Total
long term liabilities
|
--
|
—
|
||||||
|
Total
liabilities
|
2,037,809
|
970,765
|
||||||
|
Stockholders’
Equity (Deficit):
|
||||||||
|
10%
Series B Preferred Stock, Par Value $0.001, 200,000 shares authorized at
September 30, 2010 and December 31, 2009, respectively; 60,603.54 and
68,723.88 shares issued and outstanding, respectively
|
61
|
69
|
||||||
|
10%
Series A Preferred Stock, Par Value $0.001, 12,000,000 shares authorized
at September 30, 2010 and December 31, 2009, respectively; 5,879,463 and
6,255,813 shares issued and outstanding, respectively
|
5,879
|
6,256
|
||||||
|
Common
Stock, Par Value $0.001, 500,000,000 Shares authorized at September 30,
2010 and December 31, 2009, respectively, 111,256,867 and 66,374,856
shares issued and outstanding, respectively
|
111,256
|
66,375
|
||||||
|
Additional
paid-in capital
|
81,888,348
|
80,097,536
|
||||||
|
Deficit
accumulated during the development stage
|
(82,933,087
|
)
|
(78,902,521
|
)
|
||||
|
Total
stockholders' equity (deficit)
|
(927,543
|
)
|
1,267,715
|
|||||
|
Total
Liabilities and Stockholders' Equity (Deficit)
|
$
|
1,110,266
|
$
|
2,238,480
|
||||
See
accompanying notes to consolidated financial statements.
3
CYTOSORBENTS
CORPORATION
(a
development stage company)
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
Period
from
|
||||||||||||||||||||
|
January
22,1997
|
||||||||||||||||||||
|
(date
of
inception)
to
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||||||||
|
September
30,
2010
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||||
|
Revenue
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Research
and development
|
47,813,869 | 1,560,146 | 1,602,636 | 526,043 | 532,705 | |||||||||||||||
|
Legal,
financial and other consulting
|
7,550,581 | 242,604 | 228,231 | 42.226 | 100,459 | |||||||||||||||
|
General
and administrative
|
23,686,958 | 620,061 | 628,591 | 212,388 | 207,402 | |||||||||||||||
|
Change
in fair value of management and incentive units
|
(6,055,483 | ) | — | — | — | — | ||||||||||||||
|
Total
expenses
|
72,995,925 | 2,422,811 | 2,459,458 | 780,657 | 840,566 | |||||||||||||||
|
Other
(income)/expenses:
|
||||||||||||||||||||
|
Gain
on disposal of property and equipment
|
(21,663 | ) | — | — | — | — | ||||||||||||||
|
Gain
on extinguishment of debt
|
(216,617 | ) | — | — | — | — | ||||||||||||||
|
Interest
(income)/expense, net
|
5,618,349 | 10,954 | (6,304 | ) | 7,779 | 492 | ||||||||||||||
|
Penalties
associated with non-registration of Series A Preferred
Stock
|
361,495 | — | — | — | — | |||||||||||||||
|
Total
other (income)/expense, net
|
5,741,564 | 10,954 | (6,304 | ) | 7,779 | 492 | ||||||||||||||
|
Loss
before benefit from income taxes
|
(78,737,489 | ) | (2,433,765 | ) | (2,453,154 | ) | (788,436 | ) | (841,058 | ) | ||||||||||
|
Benefit
from income taxes
|
(547,318 | ) | — | — | — | — | ||||||||||||||
|
Net
loss
|
(78,190,171 | ) | (2,433,765 | ) | (2,453,154 | ) | (788,436 | ) | (841,058 | ) | ||||||||||
|
Preferred
Stock Dividend
|
4,742,916 | 1,596,801 | 514,403 | 401,750 | 174,638 | |||||||||||||||
|
Net
Loss available to common shareholders
|
$ | (82,933,087 | ) | $ | (4,030,566 | ) | $ | (2,967,557 | ) | $ | (1,190,186 | ) | $ | (1,015,696 | ) | |||||
|
Basic
and diluted net loss per common share
|
$ | (0.04 | ) | $ | (0.08 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||
|
Weighted
average number of shares of
|
||||||||||||||||||||
|
common
stock outstanding
|
91,663,158 | 35,693,072 | 106,250,720 | 42,029,900 | ||||||||||||||||
See
accompanying notes to consolidated financial statements.
4
CYTOSORBENTS
CORPORATION
(a
development stage company)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
(DEFICIT)
Period
from
December
31, 2009 to
September
30, 2010
(Unaudited)
|
Members
|
|
Common
Stock
|
Preferred
Stock B
|
Preferred
Stock A
|
Additional
|
Deficit
Accumulated
During
the
|
Total
Stockholders'
|
|||||||||||||||||||||||||||||||||||||
|
Equity
(Deficiency)
|
Deferred
Compensation
|
Shares
|
Par
value
|
Shares
|
Par
Value
|
Shares
|
Par
0Value
|
Paid-In
Capital
|
Development
Stage
|
Equity
(Deficit)
|
||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | — | $ | — | 66,374,856 | $ | 66,375 | 68,723.88 | $ | 69 | 6,255,813 | $ | 6,256 | $ | 80,097,536 | $ | (78,902,521 | ) | $ | 1,267,715 | ||||||||||||||||||||||||
|
Stock
based compensation – employees, consultants and directors
|
— | — | — | — | — | — | — | — | 108,594 | — | 108,594 | |||||||||||||||||||||||||||||||||
|
Issuance
of Series A Preferred Stock as dividends
|
— | — | — | — | — | — | 443,213 | 443 | 126,809 | (127,252 | ) | — | ||||||||||||||||||||||||||||||||
|
Issuance
of Series B Preferred Stock as dividends
|
— | — | — | — | 4,742.44 | 4 | — | — | 1,469,545 | (1,469,549 | ) | — | ||||||||||||||||||||||||||||||||
|
Conversion
of Series A and Series B into Common
|
— | 43,728,165 | 43,728 | (12,862.78 | ) | (12 | ) | (819,563 | ) | (820 | ) | (42,896 | ) | — | — | |||||||||||||||||||||||||||||
|
Cost
of Raising Capital
|
— | — | 1,153,846 | 1,153 | — | — | — | — | 16,347 | 17,500 | ||||||||||||||||||||||||||||||||||
|
Relative
fair value of warrants in connection with issuance of convertible
notes
|
— | — | — | — | — | — | — | — | 112,413 | — | 112,413 | |||||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | — | — | — | (2,433,765 | ) | (2,433,765 | ) | |||||||||||||||||||||||||||||||
|
Balance
at September 30, 2010
|
$ | — | $ | — | 111,256,867 | $ | 111,256 | 60,603.54 | $ | 61 | 5,879,463 | $ | 5,879 | $ | 81,888,348 | $ | (82,933,087 | ) | $ | (927,543 | ) | |||||||||||||||||||||||
5
CYTOSORBENTS
CORPORATION
(a
development stage company)
CONSOLIDATED
STATEMENTS OF
CASH
FLOWS
|
Periodfrom
|
||||||||||||
|
January
22,1997
|
||||||||||||
|
(dateof
inception)to
|
Nine
months
ended
|
Nine
months
ended
|
||||||||||
|
September
30,2010
|
September
30,
2010
|
September
30,
2009
|
||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$
|
(78,190,171
|
)
|
$
|
(2,433,765
|
)
|
$
|
(2,453,154
|
)
|
|||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Common
stock issued as inducement to convert convertible notes payable and
accrued interest
|
3,351,961
|
—
|
—
|
|||||||||
|
Issuance
of common stock to consultant for services
|
30,000
|
—
|
—
|
|||||||||
|
Depreciation
and amortization
|
2,405,719
|
13,258
|
38,263
|
|||||||||
|
Amortization
of debt discount
|
1,006,851
|
6,851
|
—
|
|||||||||
|
Gain
on disposal of property and equipment
|
(21,663
|
)
|
—
|
—
|
||||||||
|
Gain
on extinguishment of debt
|
(216,617
|
)
|
—
|
—
|
||||||||
|
Interest
expense paid with Series B Preferred Stock in connection with conversion
of notes payable
|
3,147
|
—
|
—
|
|||||||||
|
Abandoned
patents
|
183,556
|
—
|
—
|
|||||||||
|
Bad
debts - employee advances
|
255,882
|
—
|
—
|
|||||||||
|
Contributed
technology expense
|
4,550,000
|
—
|
—
|
|||||||||
|
Consulting
expense
|
237,836
|
—
|
—
|
|||||||||
|
Management
unit expense
|
1,334,285
|
—
|
—
|
|||||||||
|
Expense
for issuance of warrants
|
533,648
|
---
|
14,885
|
|||||||||
|
Expense
for issuance of options
|
1,598,794
|
108,594
|
179,105
|
|||||||||
|
Amortization
of deferred compensation
|
74,938
|
—
|
—
|
|||||||||
|
Penalties
in connection with non-registration event
|
361,496
|
—
|
—
|
|||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Prepaid
expenses and other current assets
|
(342,458
|
)
|
298,181
|
52,976
|
||||||||
|
Other
assets
|
(56,394
|
)
|
10,240
|
|
||||||||
|
Accounts
payable and accrued expenses
|
2,995,377
|
197,795
|
(54,264
|
) | ||||||||
|
Accrued
interest expense
|
1,823,103
|
—
|
—
|
|||||||||
|
Net
cash used by operating activities
|
(58,080,710
|
)
|
(1,809,086
|
)
|
(2,211,949
|
)
|
||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from sale of property and equipment
|
32,491
|
—
|
—
|
|||||||||
|
Purchases
of property and equipment
|
(2,226,932
|
)
|
—
|
(6,411
|
) | |||||||
|
Patent
costs
|
(458,715
|
)
|
(23,068
|
)
|
(7,149
|
)
|
||||||
|
Purchases
of short-term investments
|
(393,607
|
)
|
—
|
—
|
||||||||
|
Proceeds
from sale of short-term investments
|
393,607
|
—
|
199,607
|
|||||||||
|
Loan
receivable
|
(1,632,168
|
)
|
—
|
—
|
||||||||
|
Net
cash (used)/providedby investing activities
|
(4,285,324
|
)
|
(23,068
|
)
|
186,047
|
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of common stock
|
400,490
|
—
|
—
|
|||||||||
|
Proceeds
from issuance of preferred stock
|
9,579,040
|
—
|
—
|
|||||||||
|
Equity
contributions - net of fees incurred
|
43,064,452
|
17,500
|
214,010
|
|||||||||
|
Proceeds
from borrowings
|
9,580,881
|
977,250
|
—
|
|||||||||
|
Proceeds
from subscription receivables
|
499,395
|
—
|
—
|
|||||||||
|
Net
cash provided by financing activities
|
63,124,258
|
994,750
|
214,010
|
|||||||||
See
accompanying notes to consolidated financial statements.
6
|
Net
change in cash and cash equivalents
|
758,224
|
(837,404
|
)
|
(1,811,892
|
) | |||||||
|
Cash
and cash equivalents - beginning of period
|
—
|
1,595,628
|
2,749,208
|
|||||||||
|
Cash
and cash equivalents - end of period
|
$
|
758,224
|
$
|
758,224
|
$
|
937,316
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the period for interest
|
$
|
590,189
|
$
|
—
|
$
|
—
|
||||||
|
Supplemental
schedule of noncash investing and financing activities:
|
||||||||||||
|
Debt
discount in connection with issuance of convertible debt
|
$
|
112,413
|
$ |
112,413
|
$ |
—
|
||||||
|
Note
payable principal and interest conversion to equity
|
$
|
10,434,319
|
$
|
—
|
$
|
57,605
|
||||||
|
Issuance
of member units for leasehold improvements
|
$
|
141,635
|
$
|
—
|
$
|
—
|
||||||
|
Issuance
of management units in settlement of cost of raising
capital
|
$
|
437,206
|
$
|
—
|
$
|
—
|
||||||
|
Change
in fair value of management units for cost of raising
capital
|
$
|
278,087
|
$
|
—
|
$
|
—
|
||||||
|
Exchange
of loan receivable for member units
|
$
|
1,632,168
|
$
|
—
|
$
|
—
|
||||||
|
Issuance
of equity in settlement of accounts payable
|
$
|
1,609,446
|
$
|
—
|
$
|
—
|
||||||
|
Issuance
of common stock in exchange for stock subscribed
|
$
|
399,395
|
$
|
—
|
$
|
—
|
||||||
|
Costs
paid from proceeds in conjunction with issuance of preferred
stock
|
$
|
768,063
|
$
|
—
|
$
|
---
|
||||||
|
Preferred
stock dividends
|
$
|
4,742,916
|
$
|
1,596,801
|
$
|
514,403
|
||||||
|
Net
effect of conversion of common stock to preferred stock prior to
merger
|
$
|
559
|
$
|
—
|
$
|
—
|
During
the nine months ended September 30, 2010 and 2009, 12,862.78 and 4,407.29 Series
B Preferred Shares were converted into 35,532,542 and 12,174,834 Common shares,
respectively. During the nine months ended September 30, 2010 and 2009,
819,563 and 1,162,323 Series A Preferred Shares were converted into 8,195,623
and 10,673,236 Common shares, respectively. For the period from
January 22, 1997 (date of inception) to September 30, 2010, 19,491.33 Series B
Preferred Shares and 4,709,698 Series A Preferred Shares were converted into
53,843,453 and 31,619,793 Common Shares, respectively.
See
accompanying notes to consolidated financial statements.
7
CytoSorbents
Corporation
Notes
to Consolidated Financial Statements
(UNAUDITED)
September
30, 2010
1. BASIS OF
PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q of the Securities and
Exchange Commission (the “Commission”) and include the results of CytoSorbents
Corporation (the “Parent”), f/k/a MedaSorb Technologies Corporation and
CytoSorbents, Inc. (f/k/a MedaSorb Technologies, Inc.), its wholly-owned
operating subsidiary (the “Subsidiary”), collectively referred to as “the
Company.” Accordingly, certain information and footnote disclosures required in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. Interim
statements are subject to possible adjustments in connection with the annual
audit of the Company's accounts for the year ended December 31, 2010. In the
opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for the fair
presentation of the Company's consolidated financial position as of September
30, 2010 and the results of its operations and cash flows for the nine and three
month periods ended September 30, 2010 and 2009, and for the period January 22,
1997 (date of inception) to September 30, 2010. Results for the nine and three
months ended are not necessarily indicative of results that may be expected for
the entire year. The unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements of the
Company and the notes thereto as of and for the year ended December 31, 2009 as
included in the Company’s Form 10-K filed with the Commission on April 9,
2010.
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. The Company has experienced
negative cash flows from operations since inception and has a deficit
accumulated during the development stage at September 30, 2010 of $82,933,087.
The Company is not currently generating revenue and is dependent on the proceeds
of present and future financings to fund its research, development and
commercialization program. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. The Company is continuing its
fund-raising efforts. Although the Company has historically been
successful in raising additional capital through equity and debt financings,
there can be no assurance that the Company will be successful in raising
additional capital in the future or that it will be on favorable terms.
Furthermore, if the Company is successful in raising the additional financing,
there can be no assurance that the amount will be sufficient to complete the
Company's plans. These consolidated financial statements do not include any
adjustments related to the outcome of this uncertainty.
The
Company is a development stage company and has not yet generated any revenues.
Since inception, the Company's expenses relate primarily to research and
development, organizational activities, clinical manufacturing, regulatory
compliance and operational strategic planning. Although the Company has
made advances on these matters, there can be no assurance that the Company will
continue to be successful regarding these issues, nor can there be any assurance
that the Company will successfully implement its long-term strategic
plans.
The
Company has developed an intellectual property portfolio, including 27 issued
and multiple pending patents, covering materials, methods of production, systems
incorporating the technology and multiple medical uses.
2. PRINCIPAL BUSINESS ACTIVITY AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature
of Business
The
Company, through its subsidiary, is engaged in the research, development and
commercialization of medical devices with its platform blood purification
technology incorporating a proprietary adsorbent polymer technology. The
Company is focused on developing this technology for multiple applications in
the medical field, specifically to provide improved blood purification for the
treatment of acute and chronic health complications associated with blood
toxicity. As of September 30, 2010, the Company has not commenced commercial
operations and, accordingly, is in the development stage. The Company has
yet to generate any revenue and has no assurance of future revenue.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Parent,
CytoSorbents Corporation, and its wholly-owned subsidiary, CytoSorbents, Inc.
All significant intercompany transactions and balances have been eliminated in
consolidation.
8
Development
Stage Corporation
The
accompanying consolidated financial statements have been prepared in accordance
with the provisions of accounting and reporting by development stage
enterprises.
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.
Short
Term Investments
Short-term
investments include short-term bank certificates of deposit with original
maturities of between three and twelve months. These short-term notes are
classified as held to maturity and are valued at cost, which approximates fair
value. These investments are considered Level 2 investments under
accounting standards for fair value measurements.
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 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.
Research
and Development
All
research and development costs, payments to laboratories and research
consultants are expensed when incurred.
Income
Taxes
Income
taxes are accounted for under the asset and liability method prescribed by
accounting standards for accounting for income taxes. Deferred income taxes are
recorded for temporary differences between financial statement carrying amounts
and the tax basis of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax asset will not be
realized. Under Section 382 of the Internal Revenue Code the net operating
losses generated prior to the 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 the accounting standards associated with uncertain tax
provisions. The adoption of this standard did not have a material impact
on the Company’s consolidated statements of operations or financial
position. Upon adoption of this accounting standard, the Company had no
unrecognized tax benefits. Furthermore, the Company had no unrecognized
tax benefits at September 30, 2010. The Company files tax returns in the
U.S. federal and state jurisdictions. The Company has no open years prior to
December 31, 2007.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 the valuation of preferred shares issued as
stock dividends.
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.
Financial
Instruments
The
carrying values of cash and cash equivalents, short-term investments, accounts
payable and other debt obligations approximate their fair values due to their
short-term nature.
Net
Loss Per Common Share
Basic EPS
is computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period. The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on
earnings (See Note 6).
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.
9
Effects
of Recent Accounting Pronouncements
There
have been no recently issued accounting standards which would have an impact on
the Company’s financial statements that have not been previously disclosed in
the Company’s previously issued financial statements.
3. CONVERTIBLE NOTES
In
January 2010 the Company issued a 12-month Promissory Note in the principal
amount of $172,500, which bears interest at the rate of 5% per annum. Should the
Company complete any financing, debt or equity, which includes any equity
component or the right to convert into equity, the entire principal and
outstanding interest of the Note shall automatically be converted into the
creditor’s choice of either 1) the securities issued in such financing under the
same terms, conditions, and pricing (the “Conversion Price”) or 2) applied
toward the exercise of the creditor’s existing warrant for Series A Preferred
Stock. In addition pursuant to the terms of the Promissory Note, upon
conversion, the note holder will receive a five year warrant to purchase that
number of shares of Common Stock equal to the quotient obtained by dividing (x)
50% of the principal plus accrued interest of the Note being converted, by (y)
the Conversion Price, with the resulting number of shares having an exercise
price equal to the Conversion Price. If in the event there is not a new
financing prior to the maturity of the Note or the creditor elects to convert
the outstanding principal and interest toward the exercise of creditor’s
existing Series A warrant, then upon conversion, the note holder will receive a
five year warrant to purchase that number of shares of Common Stock equal to the
quotient obtained by dividing (x) 50% of the principal plus accrued interest of
the Note being converted, by (y) $0.10, with the resulting number of shares
having an exercise price equal to $0.10 per share of common stock.
In August
2010 the Company issued Promissory Notes in the principal amount of $977,250,
which accrue interest at the rate of 8% per annum. This amount
includes principal and accrued interest of Promissory Notes that were originally
issued in January 2010 that, through the option of the Note holder, were
cancelled and exchanged for the new Notes issued in August. Upon this
exchange, the investor who originally owned the January Notes also received an
additional five year warrant to purchase 886,250 shares of Common Stock at an
exercise price of $0.10 per share. Per the terms of the Notes issued
in August, the investors will be repaid in equity of the Company, not
cash. During the term of the Notes, investors may at any time convert
outstanding principal and interest into Common Stock of the Company at a rate of
$0.10 per share. In addition, during the term of the Note, should the
Company complete any subsequent financing, debt or equity, in an aggregate
amount greater or equal to $750,000, which includes any equity component or the
right to convert into equity, the investor shall have the option to exchange any
outstanding principal and interest of the Note into the new
financing. Pursuant to the terms of the Promissory Note, the note
holder will receive warrant coverage in the form of five year warrants to
purchase that number of shares of common stock as follows: that number of shares
of Common Stock equal to the quotient obtained by dividing (x) 50% of the
Principal, by (y) $0.10, with the resulting number of shares having an exercise
price equal to $0.10 per share of Common Stock, plus that number of shares of
Common Stock equal to the quotient obtained by dividing (x) 25% of the
Principal, by (y) $0.125, with the resulting number of shares having an exercise
price equal to $0.125 per share of Common Stock, plus that number of shares of
Common Stock equal to the quotient obtained by dividing (x) 25% of the
Principal, by (y) $0.15, with the resulting number of shares having an exercise
price equal to $0.15 per share of Common Stock. The warrants have a
cashless exercise provision. If during the term of the Note, and as
long as the Note investor continues to own an outstanding balance of the Note,
the Company has an equity financing of less than $750,000 that values the
Company on a pre-money basis at or below $35 million on a fully-diluted basis,
the Note investor will have a right of first refusal to participate in the
financing per the terms of the Note. The Promissory Notes do not have
registration rights for the shares underlying the notes or
warrants.
The
Company allocates the proceeds associated with the issuance of promissory notes
based on the relative fair value of the promissory notes and warrants.
Additionally, the Company evaluates if the embedded conversion option results in
a beneficial conversion feature by comparing the relative fair value allocated
to the promissory notes to the market value of the underlying common stock
subject to conversion. In accordance with FASB Codification Topic 470, the
promissory notes did not result in a beneficial conversion
feature. In connection with the promissory note issuances during the
nine months ended September 30, 2010 the Company received total proceeds of
$977,250. The Company allocated the total proceeds in accordance with FASB
Codification Topic 470 based on the related fair value as follows: $864,837 was
allocated to the promissory notes and $112,413 to the warrants. The value
assigned to the warrants resulting from the relative fair value calculation is
recorded as a debt discount and is presented in the consolidated balance
sheets. The debt discount is being amortized to interest expense over
the term of the promissory notes.
4. STOCKHOLDERS' EQUITY
(DEFICIT)
During
the nine months ended September 30, 2010 the Company recorded non-cash stock
dividends totaling $1,596,801 in connection with the issuance of 4,742.44 shares
of Series B Preferred Stock and 443,113 shares of Series A Preferred Stock as a
stock dividend to its preferred shareholders as of September 30,
2010. Effective January 1, 2010 the Company has changed its basis for
estimating the fair market value of the preferred stock dividends from the
underlying conversion price of the Series B Preferred Stock to a five day volume
weighted average price of actual closing market prices for the Company’s common
stock.The financial effect of this change in estimating the fair market value
resulted in an increase of approximately $1,082,000 in the non-cash charge taken
for stock dividends for the nine months ended September 30, 2010.
During
the nine months ended September 30, 2010, 12,862.78 Series B Preferred Shares
were converted into 35,532,542 Common shares.During the nine months ended
September 30, 2010, 819,563 Series A Preferred Shares were converted into
8,195,623 Common shares.
During
the nine months ended September 30, 2010, the Company incurred stock-based
compensation expense due to the issuance of stock options and the amortization
of unvested stock options. The aggregate expense for the nine months
ended September 30, 2010 is $108,594, of which $54,531 and $54,063 is presented
in research and development expenses and general and administrative expenses,
respectively.
The
Company has pre-approved options to purchase in the aggregate, up to a total of
425,000 shares of common stock to be issued and priced at the end of December
2010 to Directors. These options have been valued as of the
pre-approval date. The aggregate expense of these options for the
nine months ended September 30, 2010 is approximately $25,500, all of which is
presented in general and administrative expenses.
The
summary of the stock option activity for the nine months ended September 30,
2010 is as follows:
|
Weighted
|
Weighted
|
|||||||||||
|
Average
|
Average
|
|||||||||||
|
Exercise
|
Remaining
|
|||||||||||
|
Shares
|
per
Share
|
Life
(Years)
|
||||||||||
|
Outstanding,
January 1, 2010
|
23,577,704 | $ | 0.84 | 8.3 | ||||||||
|
Granted
|
15,940,000 | $ | 0.144 | 9.8 | ||||||||
|
Cancelled
|
— | $ | — | — | ||||||||
|
Exercised
|
— | $ | — | — | ||||||||
|
Outstanding
September 30, 2010
|
39,517,704 | $ | 0.56 | 8.4 | ||||||||
10
The fair
value of each stock option was valued using the Black Scholes pricing model
which takes into account as of the grant date the exercise price (ranging from
$0.138 to $0.173 per share) and expected life of the stock option (ranging from
5-10 years), the current price of the underlying stock and its expected
volatility (approximately 27 percent), expected dividends (-0- percent) on the
stock and the risk free interest rate (2.5 to 3.8 percent) for the term of the
stock option.
At
September 30, 2010, the aggregate intrinsic value of options outstanding and
currently exercisable amounted to approximately $717,000.
The
summary of the status of the Company’s non-vested options for the nine months
ended September 30, 2010 is as follows:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Grant
Date
|
||||||||
|
Shares
|
Fair
Value
|
|||||||
|
Non-vested,
January 1, 2010
|
6,801,053 | $ | 0.024 | |||||
|
Granted
|
15,940,000 | $ | 0.053 | |||||
|
Cancelled
|
— | — | ||||||
|
Vested
|
(4,945,909 | ) | $ | 0.038 | ||||
|
Exercised
|
— | — | ||||||
|
Non-vested,
September 30, 2010
|
17,795,144 | $ | 0.047 | |||||
As of
September 30, 2010, approximately $838,000 of total unrecognized compensation
cost related to stock options is expected to be recognized over a weighted
average period of 1.2 years. Due to the uncertainty over whether certain options
granted during the nine months ended September 30, 2010 will vest based on
performance milestones in the Company’s long term incentive plan, no charge for
these options has been recorded in the consolidated statements of operations for
the nine months ended September 30, 2010. The Company will evaluate on an
ongoing basis the probability and likelihood of any of these performance
milestones being achieved and will accrue charges as it becomes likely that they
will be achieved.
The
Company has reserved a separate pool of 15.6 million shares of restricted stock
that may be issued to employees and directors as part of a long term incentive
plan tied to corporate objectives. As of September 30, 2010 none of these shares
have been issued and due to the uncertainty over whether they will be issued, no
charge for these shares has been recorded in the consolidated statement of
operations for the nine months ended September 30, 2010.
As of
September 30, 2010, the Company has the following warrants to purchase common
stock outstanding:
|
Number
of Shares
To
be Purchased
|
Warrant
Exercise
Price
per
Share
|
Warrant
Expiration
Date
|
|||||
| 816,691 | $ | 4.98 |
June
30, 2011
|
||||
| 1,200,000 | $ | 0.90 |
June
30, 2011
|
||||
| 900,000 | $ | 0.40 |
June
30, 2011
|
||||
| 339,954 | $ | 2.00 |
September
30, 2011
|
||||
| 52,080 | $ | 2.00 |
July
31, 2011
|
||||
| 400,000 | $ | 0.40 |
October
31, 2011
|
||||
| 240,125 | $ | 1.25 |
October
24, 2016
|
||||
| 3,986,429 | $ | 0.035 |
June
25,2013
|
||||
| 397,825 | $ | 0.0362 |
September
30, 2014
|
||||
| 12,483,665 | $ | 0.107 |
October
5, 2010
|
||||
| 5,772,500 | $ | 0.10 |
August
16, 2015
|
||||
| 1,954,500 | $ | 0.125 |
August
16, 2015
|
||||
| 1,628,750 | $ | 0.15 |
August
16, 2015
|
||||
|
30,172,519
|
|||||||
As of
September 30, 2010, the Company has the following warrants to purchase Series A
Preferred Stock outstanding:
|
Warrant
Exercise
|
|||||||
|
Number
of
|
Price
per
|
Warrant
|
|||||
|
Shares
to be
Purchased
|
Preferred
Share
|
Expiration
Date
|
|||||
|
525,000
|
$
|
1.00
|
June
30,
2011
|
||||
If the
holder of warrants for preferred stock exercises in full, the holder will
receive additional five-year warrants to purchase a total of 210,000 shares of
common stock at $0.40 per share.
In May
2010, the Company executed a purchase agreement, or the Purchase Agreement, and
a registration rights agreement, or the Registration Rights Agreement, with
Lincoln Park Capital Fund, LLC (“LPC”). Under the Purchase Agreement, LPC
is obligated, under certain conditions, to purchase from the Company up to $6
million of our Common Stock, from time to time over a 750 day (twenty-five (25)
monthly) period.
The
Company has the right, but not the obligation, to direct LPC to purchase up to
$6,000,000 of its Common Stock in amounts up to $50,000 as often as every two
business days under certain conditions. The Company can also accelerate the
amount of its common stock to be purchased under certain circumstances. No
sales of shares may occur at a purchase price below $0.10 per share or without a
registration statement having been declared effective. The purchase price
of the shares will be based on the market prices of our shares at the time of
sale as computed under the Purchase Agreement without any fixed discount.
The Company may at any time at its sole discretion terminate the Purchase
Agreement without fee, penalty or cost upon one business days notice. The
Company issued 1,153,846 shares of our Common Stock to LPC as a commitment fee
for entering into the agreement, and is obligated to issue up to an additional
1,153,846 shares pro rata as LPC purchases up to $6,000,000 of its Common Stock
as directed by the Company. LPC may not assign any of its rights or
obligations under the Purchase Agreement.
11
5. COMMITMENTS AND
CONTINGENCIES
Employment
Agreements
The
Company has employment agreements with certain key executives through December
2010. The agreements provide for annual base salaries of varying
amounts.
Litigation
The
Company is currently not involved, but may at times be involved in various
claims and legal actions. Management is currently of the opinion that
these claims and legal actions would have no merit, and any ultimate outcome
will not have a material adverse impact on the consolidated financial position
of the Company and/or the results of its operations.
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. The Company has not generated any revenue
from this product and has not incurred any royalty costs through September 30,
2010. The amount of future revenue subject to the royalty agreement could not be
reasonably estimated nor has a liability been incurred, therefore, an accrual
for royalty payments has not been included in the consolidated financial
statements.
License
Agreements
In an
agreement dated September 1, 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, CytoSorbents 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. The Company has not generated
any revenue from its products and has not incurred any royalty costs through
September 30, 2010. The amount of future revenue subject to the license
agreement could not be reasonably estimated nor has a liability been incurred,
therefore, an accrual for royalty payments has not been included in the
consolidated financial statements.
Warrant
agreement
As
inducement to invest additional funds in the private placement of Series B
Preferred Stock, additional consideration was granted to the participants of the
Series B Preferred Stock offering in the event that litigation is commenced
against CytoSorbents prior to June 30, 2018, claiming patent infringement on
certain of the Company’s issued patents. In the event this litigation
arises the Company may be required to issue warrants to purchase in the
aggregate up to a maximum of ten million shares of Common Stock subject to
certain adjustments. Through September 30, 2010 no such litigation
has arisen and due to the deemed low probability of this potential outcome; the
Company has not booked a contingent liability for this
agreement.
6.
NET LOSS PER SHARE
Basic
loss per share and diluted loss per share for the nine and three month periods
ended September 30, 2010 and 2009 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 representing 69,690,223
and 31,228,552 incremental shares at September 30, 2010 and 2009, respectively,
as well as shares issuable upon conversion of Series A and Series B Preferred
Stock and Preferred Stock Warrants representing 185,501,736 and 232,908,744
incremental shares at September 30, 2010 and 2009, respectively, as well as
potential shares issuable upon Promissory Note conversion into Common Stock
representing approximately 9,772,500 and -0- shares at September 30, 2010 and
2009, respectively, and have been excluded from the computation of diluted loss
per share as they are anti-dilutive.
7.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events occurring after the balance sheet
date.
During
October and November 2010 a total of 1,120.8 shares of Series B Preferred Stock
were converted into 3,096,133 shares of Common Stock.
In
October 2010, warrants to purchase approximately 12.5 million shares of Common
Stock at an exercise price of $0.107 per share expired and were
cancelled.
In
October 2010 the Company issued Promissory Notes in the principal amount of
$258,000, which accrue interest at the rate of 8% per annum. Per the terms of
the Note, the investors will be repaid in equity of the Company, not cash.
During the term of the Notes, investors may at any time convert outstanding
principal and interest into Common Stock of the Company at a rate of $0.10 per
share. In addition, during the term of the Note, should the Company
complete any subsequent financing, debt or equity, in an aggregate amount
greater or equal to $750,000, which includes any equity component or the right
to convert into equity, the investor shall have the option to exchange any
outstanding principal and interest of the Note into the new financing.
Pursuant to the terms of the Promissory Note, the note holder will receive 100%
warrant coverage in the form of five year warrants to purchase that number of
shares of common stock as follows: that number of shares of Common Stock equal
to the quotient obtained by dividing (x) 50% of the Principal, by (y) $0.10,
with the resulting number of shares having an exercise price equal to $0.10 per
share of Common Stock, plus that number of shares of Common Stock equal to the
quotient obtained by dividing (x) 25% of the Principal, by (y) $0.125, with the
resulting number of shares having an exercise price equal to $0.125 per share of
Common Stock, plus that number of shares of Common Stock equal to the quotient
obtained by dividing (x) 25% of the Principal, by (y) $0.15, with the resulting
number of shares having an exercise price equal to $0.15 per share of Common
Stock. The warrants have a cashless exercise provision. If during
the term of the Note, and as long as the Note investor continues to own an
outstanding balance of the Note, the Company has an equity financing of less
than $750,000 that values the Company on a pre-money basis at or below $35
million on a fully-diluted basis, the Note investor will have a right of first
refusal to participate in the financing per the terms of the Note. The
Promissory Notes do not have registration rights for the shares underlying the
notes or warrants.
During
October and November 2010, the Company sold a total of 3,736,999 shares of
Common Stock per the terms of the Purchase Agreement with LPC (See Note 4) at an
average price of $0.107 per share of Common. Per the terms of the
Purchase Agreement the Company also issued an additional 76,920 shares of Common
Stock as additional Commitment Fee shares.
In
October 2010, the Company received notice of an award for a cash grant of up to
$488,958 from the Federal Qualifying Therapeutic Discovery Project program for
two products in the Company’s research pipeline.
12
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
These
unaudited condensed consolidated financial statements and management’s
discussion should be read in conjunction with the audited financial statements
of the Company and the notes thereto as of and for the year ended December 31,
2009 as included in the Company’s Form 10-K filed with the Securities and
Exchange Commission (the “Commission”) on April 9, 2010.
Forward-looking
statements
Statements contained in this
Quarterly Report on Form 10-Q, other than the historical financial information,
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All such forward-looking statements
involve known and unknown risks, uncertainties or other factors which may cause
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievement expressed or
implied by such forward-looking statements. Primary risk factors include, but
are not limited to: ability to successfully develop
commercial operations; the ability to obtain adequate financing in the future
when needed; dependence on key personnel; acceptance of the Company's medical
devices in the marketplace; obtaining government approvals, including required
FDA approvals; compliance with governmental regulations; reliance on research
and testing facilities of various universities and institutions; product
liability risks; limited manufacturing experience; limited marketing, sales and
distribution experience; market acceptance of the Company's products;
competition; unexpected changes in technologies and technological advances; and
other factors detailed in the Company's Current Report on Form 10-K filed with
the Commission on April 9, 2010.
Plan
of Operations
We are a
development stage company and expect to remain so for at least the next several
quarters. We have not generated revenues to date and do not expect to do so
until we commercialize and receive the necessary regulatory approvals to sell
our proposed products. We will seek to commercialize a blood purification
technology that efficiently removes middle molecular weight toxins from
circulating blood and physiologic fluids.
We are
focusing our efforts on the commercialization of our CytoSorb™ product. The
first indication for CytoSorb™ will be in the adjunctive treatment of sepsis
(bacterial infection of the blood), which causes systematic inflammatory
response syndrome. CytoSorb™ has been designed to prevent or reduce the
accumulation of high concentrates of cytokines in the bloodstream associated
with sepsis. It is intended for short term use as an adjunctive device to the
standard treatment of sepsis. To date, we have manufactured the CytoSorb™ device
on a limited basis for testing purposes, including for use in clinical studies.
We believe that current state of the art blood purification technology (such as
dialysis) is incapable of effectively clearing the toxins intended to be
adsorbed by our CytoSorb™ device.
Following
the sepsis indication, we intend to continue our research in other acute
conditions where CytoSorb™ has indicated potential in preliminary studies to
prevent or reduce the accumulation of cytokines in the bloodstream. These
conditions include burn and smoke inhalation injury, trauma, acute respiratory
distress syndrome, the prevention of post-operative complications of cardiac
surgery (cardiopulmonary bypass surgery) and damage to organs donated for
transplant prior to organ harvest. We are also exploring the potential benefits
the CytoSorb™ device may have in removing drugs from blood.
In
December 2006, we submitted a proposed pilot study for approval to the FDA with
respect to our CytoSorb™ device. In the first quarter of 2007, we received
approval from the FDA to conduct a limited study of five patients in the
adjunctive treatment of sepsis. Based on management’s belief that proceeding
with the approved limited study would add at least one year to the approval
process for the United States, we made a determination to focus our efforts on
obtaining regulatory approval in Europe before proceeding with the
FDA.
We
estimate that the market potential in Europe for our products is substantially
equivalent to that in the U.S. Given the opportunity to conduct a much larger
clinical study in Europe, and management’s belief that the path to a CE Mark
should be faster than FDA approval, we decided to target Europe as the
introductory market for our CytoSorb™ product. To accomplish the European
introduction, in July 2007 we prepared and filed a request for a clinical trial
with a German Central Ethics Committee. We received approval of the final study
design in October of 2007.
We are
currently approved by the German Ethics Committee to conduct a clinical study of
up to 100 patients with acute respiratory distress syndrome or acute lung injury
in the setting of sepsis. The primary endpoint of our clinical trial is cytokine
reduction and is the basis of a planned CE Mark application to approve our
device for clinical use in Europe.
After
reviewing the initial cytokine data from the first 22 patients enrolled in the
protocol, our medical advisors recommended revisions to our protocol to minimize
non-device related artifacts that may potentially arise if the samples are not
processed or handled appropriately. The revisions to the protocol also
include a provision for testing of our targeted endpoints in plasma instead of
serum, changes in cytokine processing and analysis, additional options for
anti-coagulation that the clinical sites may use, and an increase in the number
of patients we may enroll into the study from 80 to 100
These
changes are intended to optimize the accuracy of our cytokine data for CE Mark
submission. The proposed protocol changes and rationale for change were
submitted to the German Ethics Committee and approved. Given these
changes, cytokine data will not be statistically comparable between these 22
patients and those enrolled subsequently in the study. While the
company will continue to review all patient data in the aggregate, including
secondary and exploratory endpoints, the primary use of the data from the first
22 patients will be used to support the planned CE Mark application from a
safety perspective. Cytokine data from all patients enrolled
subsequent to these 22 patients, as well as safety data on all patients enrolled
in the study, will be used for submission to the CE Mark authority.
By
December 31, 2009 we had initiated and opened for enrollment a total of fourteen
(14) hospital units to participate in our clinical study. To date the
Company has enrolled eighty five (85) patients in the clinical
study. We may enroll up to an additional fifteen (15)
patients. In conducting the German Clinical study we have utilized
our CytoSorb™ device in more than 250 treatments to date with no Serious Adverse
Events attributable to the device.
Depending
on the rate of enrollment, we expect to complete the patient enrollment by the
first quarter of 2011. Concurrent with the clinical study, we have commenced our
preparation for the CE Mark approval process. As part of this process, in
September 2010, the Company achieved ISO 13485 Certification, an international
manufacturing quality standard. Assuming availability of adequate and timely
funding, a successful outcome of the study, and CE Mark regulatory approval, the
Company intends to commercialize its product in Europe.
13
The
clinical protocol for our European clinical study has been designed to allow us
to gather information to support future U.S. studies. In the event we receive
the CE Mark and are able to successfully commercialize our products in the
European market, we will review our plans for the United States to determine
whether to conduct clinical trials in support of a 510K or PMA registration. No
assurance can be given that our proposed CytoSorb™ product will work as intended
or that we will be able to obtain CE Mark (or FDA) approval to sell CytoSorb™.
Even if we ultimately obtain CE Mark approval, because we cannot control the
timing of responses from regulators to our submissions, there can be no
assurance as to when such approval will be obtained.
Results
of Operations
Our
research and development costs were, $1,560,146 and $1,602,636, for the nine
months ended September 30, 2010 and 2009 respectively and $526,043 and $532,705
for the three months ended September 30, 2010 and 2009, respectively. We have
experienced substantial operating losses since inception. As of September 30,
2010, we had an accumulated deficit of $82,933,087 which included losses of
$788,436 and $2,433,765 for the three and nine month periods ended September 30,
2010. In comparison, we had losses of $841,058 and $2,453,154 for the three and
nine month periods ended September 30, 2009. Historically, our losses have
resulted principally from costs incurred in the research and development of our
polymer technology, and general and administrative expenses, which together were
$738,431 and $2,180,207 for the three and nine month periods ended September 30,
2010 and $740,107 and $2,231,227 for three and nine month periods ended
September 30, 2009.
Off-balance Sheet
Arrangements
We have
no off-balance sheet arrangements.
Liquidity and Capital
Resources
Since
inception, our operations have been financed through the private placement of
our debt and equity securities. At December 31, 2009 we had cash of $1,595,628.
As of September 30, 2010 we had cash on hand of $758,224, and current
liabilities of $2,037,809.
In
October and November 2010 an additional $258,000 was received by the Company
from investors purchasing convertible notes. Additionally during October and
November 2010, the Company sold Common Stock per the terms of the Purchase
Agreement with LPC (See Financial Statement Note 4) at an average price of
$0.107 per share of Common for which it received gross proceeds of approximately
$400,000. In October 2010 the Company received notice of an award for
a cash grant of up to $488,958 from the Federal Qualifying Therapeutic Discovery
Project program for two products in the Company’s research
pipeline.
We
believe that we have sufficient cash to fund our operations into
the first quarter of 2011, following which we will need additional funding
before we can complete our clinical studies and commercialize our
products. The Company has received SEC approval for a registration
statement filed for the funding agreement with Lincoln Park Capital Fund
LLC. Subject to minimum pricing restrictions per the terms of the
funding agreement, Management believes that the Company will be able to receive
ongoing funding per the terms of this purchase agreement (See Note 4 of
Financial Statements) The agreement with Lincoln Park has the potential to
significantly extend the time that we may be able to fund our
operations. We will continue to seek funding for the long term needs
of the Company. There can be no assurance that we will be able to utilize the
Lincoln Park funding agreement, or that additional financing will be available
on acceptable terms or at all. If adequate funds are unavailable, we may have to
suspend, delay or eliminate one or more of our research and development programs
or product launches or marketing efforts or cease operations.
Our
Annual Report dated December 31, 2009 was prepared assuming we will continue as
a going concern, and the auditors’ report on those financial statements
expresses substantial doubt about our ability to continue as a going
concern.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable to smaller reporting companies.
Item 4(T). Controls and
Procedures.
Management's
annual report on internal control over financial reporting
Management
of CytoSorbents is responsible for establishing and maintaining adequate
internal control over financial reporting under the supervision of the President
and Chief Executive Officer and the Chief Financial Officer. Internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Management
evaluated the design and operation of our internal control over financial
reporting as of September 30, 2010, based on the framework and criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and has concluded that such
internal control over financial reporting is effective. There are no material
weaknesses that have been identified by management.
An
evaluation was performed, under the supervision of, and with the participation
of, our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to
the Securities and Exchange Act of 1934). Based on that evaluation, the
Company’s management, including our Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
adequate and effective, as of September 30, 2010, to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934, is recorded, processed, summarized,
and reported within the time periods specified in the Commission’s rules and
forms, and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
We do not
expect that our disclosure controls and procedures or internal control over
financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable assurance
that the objectives of the system are met and cannot detect all deviations.
Because of the inherent limitations in all control systems, no evaluation of
control can provide absolute assurance that all control issues and instances of
fraud or deviations, if any, within the Company have been detected.
This
report does not include an attestation report of the company's registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this report.
Changes
in internal control over financial reporting
There
were no significant changes in our internal controls over financial reporting
that occurred subsequent to our evaluation of our internal control over
financial reporting for the nine months ended September 30, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
14
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
Company is currently not involved, but may at times be involved in various
claims and legal actions. Management is currently of the opinion that these
claims and legal actions would have no merit, and any ultimate outcome will not
have a material adverse impact on the consolidated financial position of the
Company and/or the results of its operations.
Item
1A. Risk Factors
Not
required to be provided by smaller reporting companies.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. (Removed and Reserved)
None
Item
5. Other Information
None.
Item
6. Exhibits.
|
Number
|
Description
|
|
|
31.1
|
Certification
of Phillip Chan, Chief Executive Officer of the Registrant, pursuant to
Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
31.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to
Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
1934
|
|
|
32.1
|
Certification
of Phillip Chan, Chief Executive Officer of the Registrant, pursuant to
Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|
|
|
32.2
|
Certification
of David Lamadrid, Chief Financial Officer of the Registrant, pursuant to
Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
1934
|
15
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CYTOSORBENTS
CORPORATION
|
||
|
Dated:
November 16, 2010
|
By:
|
/s/
David Lamadrid
|
|
Name:
David Lamadrid
|
||
|
Title:
Chief Financial Officer
|
||
|
(On
behalf of the registrant and as
|
||
|
principal
accounting officer)
|
||
16