Cytosorbents Corp - Quarter Report: 2021 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36792

CYTOSORBENTS CORPORATION

(Exact name of registrant as specified in its charter)

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(732) 329-8885

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 every Interactive Data File required to be submitted 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 such files). Yes þ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 May 1, 2021, there were 43,319,297 shares of the issuer’s common stock outstanding.

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CytoSorbents Corporation

FORM 10-Q

TABLE OF CONTENTS

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This Quarterly Report on Form 10-Q includes our trademarks and trade names, such as “CytoSorb,” “CytoSorb XL,” “BetaSorb,” “ContrastSorb,” “DrugSorb,” “HemoDefend,” “K⁺ontrol^” and “VetResQ,” which are protected under applicable intellectual property laws and are the property of CytoSorbents Corporation and our subsidiaries. This Quarterly Report on Form 10-Q also contains the trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q may appear without the ™, ®, or ^SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CYTOSORBENTS CORPORATION

CONSOLIDATED BALANCE SHEETS

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See accompanying notes to consolidated financial statements.

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CYTOSORBENTS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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See accompanying notes to consolidated financial statements.

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CYTOSORBENTS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2021 and 2020 (Unaudited):

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See accompanying notes to consolidated financial statements.

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CYTOSORBENTS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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See accompanying notes to consolidated financial statements.

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CytoSorbents Corporation

Notes to Consolidated Financial Statements

(UNAUDITED)

March 31, 2021

1.    BASIS OF PRESENTATION

The interim consolidated 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 consolidated financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2021. The results for the three months ended March 31, 2021 and 2020 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.

Prior to June 30, 2020, the Company's consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

On July 24, 2020, the Company closed an underwritten public offering of 6,052,631 shares of its common stock at a public offering price of $9.50 per share (the “Offering”).  Gross proceeds from the Offering amounted to approximately $57.5 million and, after deducting the underwriting discounts and commissions and expenses related to the Offering, the Company received total net proceeds of approximately $53.8 million. See Note 3. As of March 31, 2021, the Company’s cash balance was approximately $68.5 million, which the Company expects will fund the Company’s operations well beyond the next twelve months. As a result, the Company has determined that the going concern risk has been substantially mitigated.

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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 CytoSorb device. In March 2016, the Company formed CytoSorbents Switzerland GmbH, a wholly-owned subsidiary of CytoSorbents Europe GmbH. This subsidiary, which began operations during the second quarter of 2016, provides marketing and direct sales services in Switzerland. 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. In the third quarter of 2019, the Company formed CytoSorbents UK Limited, a wholly-owned subsidiary of CytoSorbents Medical, Inc. which is responsible for the management of our clinical trial activities in the United Kingdom. CytoSorb, the Company’s flagship product, was approved in the European Union (“EU”) in March 2011, and is currently being marketed and distributed in sixty-seven 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. In January 2020, CytoSorb received European Union CE Mark label expansion to include the removal of ticagrelor during cardiopulmonary bypass in patients undergoing cardiothoracic surgery. In May 2020, CytoSorb also received European Union CE Mark label expansion to include rivaroxaban removal for the same indication.

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In April 2020, the Company announced that the United States Food and Drug Administration (the “FDA”) granted Emergency Use Authorization (“EUA”) of CytoSorb for use in critically-ill patients infected with COVID-19.  Under the EUA, the Company can make CytoSorb available, through commercial sales, to all hospitals in the United States for use in patients, 18 years of age or older, with confirmed COVID-19 infection who are admitted to the intensive care unit (ICU) with confirmed or imminent respiratory failure who have early acute lung injury or acute respiratory distress syndrome (“ARDS”), severe disease, or life-threatening illness resulting in respiratory failure, septic shock, and/or multiple organ dysfunction or failure. The CytoSorb device has neither been cleared nor approved for the indication to treat patients with COVID-19 infection. The EUA will be effective until a declaration is made that the circumstances justifying the EUA have terminated or until revoked by the FDA.

In April 2020, the Company also announced that the FDA had granted Breakthrough Designation to CytoSorb for the removal of ticagrelor in a cardiopulmonary bypass circuit during emergent and urgent cardiothoracic surgery. The Breakthrough Devices Program provides for more effective treatment of life-threatening or irreversibly debilitating disease or conditions, in this case the need to reverse the effects of ticagrelor in emergent or urgent cardiac surgery that can otherwise cause a high risk of serious or life-threatening bleeding. Through Breakthrough Designation, the FDA intends to work with CytoSorbents to expedite the development, assessment, and regulatory review of CytoSorb for the removal of ticagrelor, while maintaining statutory standards of regulatory approval (e.g., 510(k), de novo 510(k) or premarket approval) consistent with the FDA’s mission to protect and promote public health.

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 adsorption. The Company has numerous products under development based upon this unique blood purification technology, which is protected by 16 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 2021 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 consolidated financial statements include CytoSorbents Switzerland GmbH and CytoSorbents Poland Sp. z.o.o., wholly owned subsidiaries of CytoSorbents Europe GmbH, and CytoSorbents UK Limited, a wholly-owned subsidiary of CytoSorbents Medical, Inc. 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 the European subsidiary are included in operations. The Euro is the functional currency of the European Subsidiary. Foreign currency transaction loss included in net loss amounted to approximately $(1,306,000) and $(668,000) for the three months ended March 31, 2021 and 2020, respectively.  The Company translates assets and liabilities of CytoSorbents Europe GmbH at the exchange rate in effect at the consolidated 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 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.

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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 $65,000 and $47,000 at March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, the Company’s inventory was comprised of finished goods, which amounted to $1,622,401 and $1,164,635, respectively; work in process which amounted to $1,176,067 and $1,222,062, respectively; and raw materials, which amounted to $309,733 and $287,102, 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. Donated devices are removed from inventory and charged to selling, general and administrative expenses.

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 consolidated statements of operations and comprehensive loss 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 Revenue: Revenue from grant income is based on contractual agreements. Certain agreements provide for reimbursement of costs, other agreements provide for reimbursement of costs and an overhead margin and certain agreements are performance based, where revenue is earned based upon the achievement of milestones outlined in the contract. Revenues are recognized when the associated performance obligation is fulfilled. Costs are recorded as incurred. Amounts invoiced in excess of costs actually incurred on fixed price contracts are classified as deferred revenue. 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.

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Advertising Expenses

Advertising expenses are charged to activities when incurred. Advertising expenses amounted to approximately $154,000 and $31,500 for the three months ended March 31, 2021 and 2020, respectively, and are included in selling, general, and administrative expenses on the consolidated statements of operations and comprehensive loss.

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, 2021 or December 31, 2020. 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, CytoSorbents Poland Sp. Z.o.o. and CytoSorbents UK Limited file an annual corporate tax return, VAT return and a trade tax return in Germany, Switzerland, Poland and the United Kingdom, respectively.

Use of Estimates

The preparation of consolidated 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. The valuation of options granted is a significant estimate in these consolidated financial statements.

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 government agencies in the United States. (See Note 4 for further information relating to the Company’s revenue.)

As of March 31, 2021, one distributor accounted for approximately 21% of outstanding grants and accounts receivable.  As of December 31, 2020, no agency, distributor/strategic partners or direct customer represented more than 10% of outstanding grants and accounts receivables. For the three months ended March 31, 2021 one distributor accounted for approximately 11% of the Company's total revenue and for the three months ended March 31, 2020, 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, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair values due to their short-term nature.

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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 are 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 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.

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 $63,000 and $133,000, respectively, for the three months ended March 31, 2021 and 2020.

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3.    STOCKHOLDERS’ EQUITY

Preferred Stock

In June 2019, the Company amended and restated its certificate of incorporation. 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

In June 2019, the Company amended and restated its certificate of incorporation. The amended and restated certificate of incorporation increased the number of shares of common stock authorized for issuance from 50,000,000 shares to 100,000,000 shares.

July 24, 2020 Offering

On July 24, 2020, the Company closed an underwritten public offering of 6,052,631 shares of its common stock at a public offering price of $9.50 per share (the "Offering"). The Company completed the Offering pursuant to the terms of an Underwriting Agreement, dated as of July 21, 2020, by and among the Company and Cowen and Company, LLC and SVB Leerink LLC, as representatives of the several underwriters named therein. The Company received gross proceeds of approximately $57.5 million from the Offering and after deducting the underwriting discounts and commissions and fees and expenses payable by the Company in connection with the Offering, the Company received net proceeds of approximately $53.8 million.

Shelf Registration

On July 26, 2018, the Company filed a 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.

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Open Market Sale Agreement with Jefferies LLC and B. Riley FBR, Inc.

On July 9, 2019, the Company entered into an Open Market Sale Agreement (the “New Sale Agreement”) with Jefferies LLC and B. Riley FBR, Inc. (each an “Agent” and, together, the “Agents”), pursuant to which the Company may sell, from time to time, at its option, shares of the Company’s common stock having an aggregate offering price of up to $25 million through the Agents, as the Company’s sales agents. All shares of the Company’s common stock offered and sold, or to be offered and sold under the New Sale Agreement were or will be issued and sold pursuant to the Company’s 2018 Shelf by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, in block transactions or if specified by the Company, in privately negotiated transactions.

On April 20, 2020, the Company and the Agents entered into an amendment to the New Sale Agreement (the "Amendment") to provide for an increase in the aggregate offering amount under the New Sales Agreement, such that as of April 20, 2020, the Company may offer and sell Shares having an additional aggregate offering price of up to $50 million under the New Sale Agreement, as amended by the Amendment (the "Amended Sale Agreement").

Subject to the terms of the Amended Sales Agreement, the Agents are required to use their commercially reasonable efforts consistent with their normal sales and trading practices to sell the shares of the Company’s common stock from time to time, based upon the Company’s instructions (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company is required to pay the Agents a commission of up to 3.0% of the gross proceeds from the sale of the shares of the Company’s common stock sold thereunder, if any. The Company has also agreed to provide the Agents with customary indemnification rights. The offering of the shares of the Company’s common stock under the Amended Sales Agreement will terminate upon the earliest of (a) the sale of the maximum number or amount of the shares of the Company’s stock permitted to be sold under the Amended Sale Agreement and (b) the termination of the Amended Sale Agreement by the parties thereto. During the year ended December 31, 2019, the Company sold 191,244 shares pursuant to the Amended Sale Agreement, at an average selling price of $4.11 per share, generating net proceeds of approximately $762,000.  During the year ended December 31, 2020, the Company sold 4,110,625 shares pursuant to the Amended Sale Agreement, at an average selling price of $6.64 per share, generating net proceeds of approximately $26.5 million. There were no sales during the three months ended March 31, 2021. In the aggregate, the Company has sold 4,301,869 shares pursuant to the Amended Sale Agreement, at an average selling price of $6.53 per share, generating net proceeds of approximately $27.2 million. In addition, during the year ended December 31, 2020, the Company paid approximately $49,000 in expenses related to the Amended Sale Agreement.

Stock-Based Compensation

Total share-based employee, director, and consultant compensation for the three months ended March 31, 2021 and 2020 amounted to approximately $667,000 and $729,000, 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, 2021 is as follows:

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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 $8.23 to $11.39 per share) and expected life of the stock option (10 years), the current price of the underlying stock and its expected volatility (60.7 percent), expected dividends (-0- percent) on the stock and the risk free interest rate (ranging from 0.47 to 1.03 percent) for the expected term of the stock option.

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The intrinsic value is calculated as the difference between the market value as of March 31, 2021 of $8.68 and the exercise price of the shares.

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The summary of the status of the Company’s non-vested options for the three months ended March 31, 2021 is as follows:

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As of March 31, 2021, the Company had approximately $5,300,000 of total unrecognized compensation cost related to stock options which will be amortized over approximately 35 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 Amended and Restated CytoSorbents Corporation 2014 Long-Term Incentive Plan.

The following table is a summary of these restricted stock units:

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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 statements of operations for the three months ended March 31, 2021 and 2020.

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Other Awards of Restricted Stock Units:

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, 2021 and 2020, the Company recorded a charge of approximately $11,000 and $9,000 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 2019, on July 22, 2019 the Board of Directors granted 180,300 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued as of December 31, 2019. These awards were valued at approximately $1,300,000 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, 2021 and 2020, the Company recorded a charge of approximately $103,000 and $103,000, 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 2019, on February 28, 2020, the Board of Directors granted 168,100 restricted stock units to certain senior managers of the Company in order to settle bonuses accrued as of December 31, 2020. These awards were valued at approximately $1,014,000 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, 2021 and 2020, the Company recorded a charge of approximately $274,000 and $366,000 respectively, related to these restricted stock unit awards.

Additionally, in 2020 certain employees were offered 60,000 restricted stock units as a condition of their employment. These awards were valued at approximately $465,900 at the date of issuance. 30,000 of these restricted stock units vest upon the earlier of a Change in Control or one-third after the second anniversary of the award, one-third on the third anniversary of the award, and one-third on the fourth anniversary of the award.  The other 30,000 of these restricted stock units vest upon the earlier of a Change in Control or four years from the date of the award. For the three months ended March 31, 2021 and 2020, the Company recorded a charge of approximately $54,000 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, 2021:

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4.    REVENUE

The following table disaggregates the Company’s revenue by customer type and geographic area for the three months ended March 31, 2021:

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The following table disaggregates the Company’s revenue by customer type and geographic area for the three months ended March 31, 2020:

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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.  The majority of sales of the device are outside the United States, as CytoSorb is not yet approved for commercial sale in the United States. However, in April 2020, the Company was granted Emergency Use Authorization (“EUA”) of CytoSorb for use in critically-ill patients infected with COVID-19 by the United States Food and Drug Administration (the “FDA”).  Direct sales outside the United States relate to sales to hospitals located in Germany, Switzerland, Austria, Belgium, Luxembourg, Poland, the Netherlands, Sweden, Denmark and Norway.  Direct sales are fulfilled from the Company's office in Berlin, Germany.  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 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).

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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.

Most distributor's/strategic partner's contracts have minimum annual purchase requirements in order to maintain exclusivity in their respective territories.

There is no additional consideration or monetary penalty that would be required to be paid to CytoSorbents if a distributor does not meet the minimum purchase commitments included in the contract, however, at the discretion of the Company, the distributor may lose its exclusive rights in the territory if such commitments are not met.

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 contracts fall into one of the following categories:

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.

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The following table provides information about receivables and contract liabilities from contracts with customers:

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Contract receivables represent balances due from sales to distributors and amounts invoiced on grant contracts.

Contract liabilities represent the value of free of charge goods and credit rebates earned in accordance with the terms of certain direct customer agreements and deferred grant revenue related to the billing on fixed price contracts in excess of costs incurred as of March 31, 2021 and December 31, 2020.

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5.    LONG-TERM DEBT, NET

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 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”). On July 31, 2019, the Borrower entered into the First Amendment to the Amended and Restated Loan and Security Agreement (the “First Amendment”) with the Bank, which amended certain provisions of the Amended and Restated Loan and Security Agreement and the 2018 Success Fee Letter (the “2018 Letter”). In connection with the execution of the First Amendment, the draw period for the Term B Loan was extended to August 15, 2019 and the Company drew down the full $5.0 million Term B Loan on the Settlement Date, bringing the total outstanding debt to $15 million at July 31, 2019. The proceeds of Term Loans were used for general business requirements in accordance with the Amended and Restated Loan and Security Agreement. On December 4, 2020 (the “Closing Date”), the Company closed on the Third Amendment (the “Third Amendment”) of its Amended Loan and Security Agreement with Bridge Bank.  Under the terms of the Amendment, the Company repaid the outstanding principal balance of its existing $15 million term loans and simultaneously received a commitment from Bridge Bank to provide a new term loan of $15 million (the “New Term Loan”), if needed.

Under the terms of the Third Amendment, the Company may, at its sole discretion, draw down the New Term Loan at any time over the next twelve months. The New Term Loan, if drawn, shall bear interest at the Index Rate (defined in the Amendment as the greater of 3.25% or the Prime Rate as published by the Wall Street Journal on the last business date of the month immediately preceding the month in which the interest will accrue) plus 1.25%.  In addition, the Company would be required to make payments of interest-only commencing on the first day of the month after the New Term Loan was made until January 2023.  The interest-only period may be further extended through July 2023 if the Company maintains compliance with certain conditions as outlined in the Amendment.  Following the interest-only period, the Company will be required to make equal monthly payments of principal and interest until maturity of the New Term Loan.  The maturity date of the New Term Loan is December 1, 2024.

On the Closing Date, the Company was required to pay a non-refundable closing fee of $75,000. As of the Closing Date, the total unamortized loan costs related to the Term Loans amounted to approximately $45,000.  These costs were written off on the Closing Date as a charge to interest expense.  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.  On the Closing Date, the Company paid a final fee of $375,000.

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).

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2018 Success Fee Letter:

Pursuant to the amended 2018 Letter, the Borrower shall pay to the Bank a success fee in the amount equal to 6.37% of the funded amount of the Term B Loan (as defined in the Restated Loan and Security Agreement) (the “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 the Nasdaq Capital Market being the greater of (i) 70% or more over $7.05, the closing price of the Company’s common stock on March 29, 2018 (after giving effect to any stock splits or consolidations effected after the date thereof) for five successive business days, or (ii) at least 26.13% more than the average price of Company’s common stock for the 365 day period ending on the date of the funding of the Term B Loan.  This obligation shall terminate on the fifth anniversary of the funding of the Term B Loan and shall survive the termination of the loan agreement and the prepayment of the Term B Loan.

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6.    COMMITMENTS AND CONTINGENCIES

Customs Examination

In October 2020, the Company received a notice from the German Customs Authorities that they would be conducting an audit of the Company’s import transactions for the years 2018 through 2020 in order to determine if any import taxes would be due.  The audit commenced in early December 2020. The primary import activity of the Company is the importation of CytoSorb devices from the United States.  The German Customs Authorities are challenging the Harmonized Code that the Company utilizes to import the CytoSorb devices into Germany.  The code that has been utilized by the Company has zero import taxes associated with it. The German Customs Authorities have indicated that the Company’s device might be better classified under a different code which has a 1.7% tax attached to it.  As part of the audit process, the Company has provided the German Customs Authorities with extensive information about the CytoSorb device, including data regarding the uses of the device, as well as the instructions for use.  In addition, employees of the Company gave the auditors a technical presentation of the scientific properties of the device, focusing on it as an adsorber, as opposed to a filter.  On March 15, 2021, based on a review of all the information presented to the German Customs Authority’s technical staff, the German Customs Authority informed us that the Company must use the code that carries the 1.7% tax. The audit process is on-going and the authorities have indicated it is expected to be completed by approximately June 30, 2021. Based on a thorough review of these facts, management has concluded that it is probable that this contingency is likely to occur. Approximately $132,000 of the expense relates to 2018, approximately $229,000 relates to 2019, approximately $371,000 relates to 2020 and approximately $89,000 relates to the three months ended March 31, 2021. Accordingly, an expense and related liability in the amount of approximately $821,000 has been recorded to cost of goods sold in the Company’s March 31, 2021 consolidated financial statements related to this contingency.

Employment Agreements

On July 30, 2019, CytoSorbents Corporation entered into amended and restated executive employment agreements with its principal executives, Dr. Phillip P. Chan, Chief Executive Officer, Vincent Capponi, President and 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, 2019. On April 12, 2020, CytoSorbents Corporation entered into an executive employment agreement with Dr. Efthymios Deliargyris, who began employment as Chief Medical Officer on May 1, 2020, with an initial term that expires on December 31, 2021. After the expiration of the initial terms, the employment agreements will automatically renew for additional terms of one year unless either party provides written notice of non-renewal at least 60 days prior to a renewal.

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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 in 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 Agreement

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 perpetual royalty of 3% on all gross revenues received by the Company from the sale of its CytoSorb device which such rights were assigned to an existing investor in 2017. For the three months ended March 31, 2021 and 2020, the Company recorded royalty expenses of approximately $301,000 and $242,000, respectively. These expenses are included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss.

License Agreement

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, the Company has agreed to pay license fees 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, 2021 and 2020 per the terms of the license agreement, the Company recorded licensing expenses of approximately $501,000 and $404,000, respectively. These expenses are included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss.

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7.    LEASES

The Company leases its operating facilities in both the United States and Germany under operating lease agreements. In the United States, in May 2020, the Company entered into a Nineteenth Amendment to Lease with the landlord which became effective May 1, 2020. This amendment expands the Company’s space to 20,821 square feet and extends the term of the lease to May 31, 2021. The Company’s base rent is approximately $34,000 per month. In addition, the Company is obligated to pay monthly operating expenses of approximately $30,000 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 $9,000 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.

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Right-Of-Use Asset and Lease Liability:

The Company's consolidated balance sheets 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- use asset and related lease liability is as follows:

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The maturities of the lease liabilities are as follows during the year ended March 31:

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For the three months ended March 31, 2021 and 2020, operating cash flows paid in connection with operating leases amounted to approximately $230,865 and $234,000, respectively.

As of March 31, 2021 and December 31, 2020, the weighted average remaining lease term was 4.0 years, respectively.

In March 2021, CytoSorbents Medical Inc. entered into a lease agreement for a new operating facility which contains office, laboratory, manufacturing and warehouse space. The commencement date of the lease is the date the landlord receives approval for the construction of certain improvements.  The Initial Early Term begins on the commencement date (April 1, 2021) and lasts to June 1, 2021. The Early Term commences on June 1, 2021 and lasts until the date of issuance of the certificate of occupancy for the manufacturing space (expected to be September 30, 2021).  The lease also contains two five-year renewal options however the Company has determined that it is not likely that they will exercise these options. Commencing on the date of the receipt of the certificate of occupancy (September 30, 2021), the remaining lease term will last for 15.5 years. The lease requires monthly rental payments of $25,208 for the Initial Early Term, $88,254 for the Early Term and initial monthly payments of approximately $111,171 in the first year of the remaining term. Following the first year of the remaining term, the annual base rent will increase by approximately 2.75% annually over the remaining term. The lease also contains six months of rent abatement (months 1, 2, 3, 25, 26 and 27 of the remaining lease term).  In addition to the base rent, payments of operating expenses and real estate taxes will be required. These payments are to be based on actual amounts incurred during 2021 times the Company’s share of the total building space (92.3%).  The landlord will also provide an allowance of approximately $1,455,000 related to certain building improvements as outlined in the lease. In April 2021, the Company was required to provide the landlord with a letter of credit in the amount of approximately $1,334,000 as security.  The Company has determined that this lease should be treated as an operating lease in accordance with the provisions of ASC 842. On April 1, 2021, the Company will record a Right of Use asset and related lease liability of approximately $11.6 million, which represents the estimated present value of the lease payments at the commencement date discounted at the Company’s incremental borrowing rate of 9.8%. In addition, due to the six months of rent abatement and annual base rent escalations, the Company will recognize rent expense on this lease on straight line basis over the term of the lease and record a liability for the difference between the rent expense recognized and the required payments under the lease.  

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In January 2021, CytoSorbents Europe GmbH entered into a lease for 1,068 square meters of additional warehouse space. The lease commences on April 1, 2021, requires monthly payments of base rent of $7,784 and other costs of approximately $239 and has a term of five years.  The lease also has an option to extend the lease term for an additional five-year period through March 31, 2031. The Company has determined that this lease should be treated as an operating lease in accordance with the provisions of ASC 842. On April 1, 2020, the Company will record a Right of Use asset and related lease liability at the estimated present value of the lease payments at the commencement date. This amounted to approximately $594,000.

In April 2021, the Company entered into a Twentieth Amendment to Lease with the landlord which will become effective May 31, 2021.  This amendment extends the term of the lease for the Company’s existing facility to May 31, 2022. The Company’s base rent will be approximately $35,000 per month. In addition, the Company is obligated to pay monthly operating expenses of approximately $30,000 per month. Under the terms of this amendment, the Company will vacate a portion of the space as of May 31, 2022.  The Company will continue to lease the remaining space until December 31, 2022, at which time the Company will vacate the remaining space and the lease will terminate.  The Company’s base rent for the remaining space will be approximately $20,000 per month.  Monthly operating expenses will be approximately $11,000 per month.  In addition, the Company agreed to increase its security deposit by approximately $54,000 to a total of $150,000.  At the end of the lease term, the entire security deposit will be paid to the landlord for the purpose of making any needed repairs to the vacated premises, and the Company will have no further obligation to pay for repairs to the vacated premises. Effective April 1, 2021, the Company adjusted its incremental borrowing rate to the incremental borrowing rate used in the College Road lease and recalculated the right of use asset and lease liability under the amended terms of this lease.  In addition, the Company also adjusted the incremental borrowing rate and related right of use asset and lease liability on the existing Germany office lease effective April 1, 2021.

8.    NET LOSS PER SHARE

Basic loss per share and diluted loss per share for the three months ended March 31, 2021 and 2020 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 options and restricted stock awards representing approximately 7,821,000 and 7,891,000 incremental shares at March 31, 2021 and 2020, respectively, have been excluded from the computation of diluted loss per share as they are anti-dilutive.

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9.     SUBSEQUENT EVENTS

On April 28, 2021, the Company entered into a Twentieth Amendment to Lease with the landlord which will become effective May 31, 2021.  This amendment extends the term of the lease for the Company’s existing facility to May 31, 2022. The Company’s base rent will be approximately $35,000 per month. Under the terms of this amendment, the Company will vacate a portion of the space as of May 31, 2022. The Company will continue to lease the remaining space until December 31, 2022, at which time the Company will vacate the remaining space and the lease will terminate. The Company’s base rent for the remaining space will be approximately $20,000 per month.  In addition, the Company agreed to increase its security deposit by approximately $54,000 to a total of $150,000.  At the end of the lease term, the entire security deposit will be paid to the landlord for the purpose of making any needed repairs to the vacated premises, and the Company will have no further obligation to pay for repairs to the vacated premises.

On April 19, 2021, the Company received notification that it received a U.S. Army Medical Research Acquisition Activity Award (the “USAMRAAA”) entitled "Investigation of a potassium adsorber for the treatment of hyperkalemia induced by traumatic injury and acute kidney injury in austere medicine." The USAMRAAA Phase II Sequential Award, for up to $1,499,987, was granted to the Company to continue development of two novel and distinct treatment options for life-threatening hyperkalemia. This Award is being funded by the USAMRAAA under Contract No. W81XWH21C0045.

On April 12, 2021, the Board of Directors approved the 2021 operating milestones.  The Board also granted options to purchase 1,323,400 shares of Common Stock to certain specified Company employees. These options will vest only upon the achievement of certain specific, predetermined milestones related to the Company’s 2021 operating performance. Once awarded, these options will vest in four equal tranches, the first tranche vesting on the date of the award and the remaining tranches vest on each of the three subsequent anniversaries of the Board’s determination. The grant date fair value of these unvested options amounted to approximately $7,111,566 based upon the Black Sholes calculation.  

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On April 12, 2021, the Board granted options to purchase 350,450 shares of Common Stock at an exercise price of $8.99 per share to certain executives of the Company. These options will vest in four equal tranches, the first tranche vesting on the date of the award and the remaining tranches vest on each of the three subsequent anniversaries of the award, subject to applicable executive’s continued service as of applicable vesting date.  Additionally, on April 12, 2021, the Board granted 235,765 restricted stock units to certain executives of the Company. These restricted stock unit will vest in three equal tranches, the first tranche vesting on the date of the award and the remaining two tranches vest on the subsequent anniversaries of the award, subject to applicable executive’s continued service as of applicable vesting date and will be settled into Common Stock upon vesting.

On April 12, 2021, the Board granted options to purchase 86,250 shares of Common Stock at an exercise price of $8.99 to non-employee members of the Company’s Board of Directors.  One quarter of these options vested on April 12, 2021, one quarter will vest on June 30, 2021, one quarter will vest on September 30, 2021 and one quarter will vest on December 31, 2021, subject to the director’s continued service as of the applicable vesting date.

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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 our expectations of the effects of the COVID-19 pandemic 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, in any prospectus or prospectus supplement filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, 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, 2020, as filed with the SEC on March 9, 2021.

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 May 2018, we received a label expansion for CytoSorb covering use of the device for the removal of bilirubin and myoglobin in the treatment of liver disease and trauma, respectively. In January 2020, we received a further label expansion for CytoSorb to remove the anti-platelet agent, ticagrelor, during urgent and emergent cardiothoracic surgery on cardiopulmonary bypass. In May 2020, we received another label expansion for CytoSorb to remove rivaroxaban, a Factor Xa inhibitor, for the same indication. We believe the current addressable market in the United States for ticagrelor removal in cardiac surgery is approximately $250 million based on our current pricing model, assuming FDA approval, that could expand to $500 million should ticagrelor gain market share as the only reversible mainstream anti-platelet agent. In the event that CytoSorb also obtains FDA approval to remove novel oral anticoagulants (“NOACs”) such as rivaroxaban and apixaban, we believe the total addressable market in the United States for ticagrelor and NOAC removal during cardiac surgery could potentially increase to approximately $1.0 billion. In the event that CytoSorb obtains FDA approval to be used prophylactically to remove ticagrelor and NOACs in all patients undergoing surgery, we believe it would potentially expand the total addressable market in the United States to approximately $2.0 billion.

CytoSorb is used during and after cardiac surgery to remove inflammatory mediators, such as cytokines, activated complement, and free hemoglobin that can lead to post-operative complications such as acute kidney injury, lung injury, shock, and stroke. We believe CytoSorb has the potential to be used in many other inflammatory conditions, including the treatment of autoimmune disease flares, cytokine release syndrome in cancer immunotherapy, and other applications in cancer, such as cancer cachexia. CytoSorb has been used globally in more than 131,000 human treatments to date in critical illnesses and in cardiac surgery. CytoSorb has received CE-Mark label expansions for the removal of bilirubin (liver disease), myoglobin (trauma) and both ticagrelor and rivaroxaban during cardiothoracic surgery. CytoSorb has also received FDA Emergency Use Authorization in the United States for use in critically-ill COVID-19 patients with imminent or confirmed respiratory failure, in defined circumstances. The EUA will be effective until a declaration is made that the circumstances justifying the EUA have terminated or until revoked by the FDA. CytoSorb has been used globally in more than 5,750 human treatments to date in COVID-19 patients. CytoSorb has also been granted FDA Breakthrough Designation for the removal of ticagrelor in a cardiopulmonary bypass circuit during emergent and urgent cardiothoracic surgery.

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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. The technology is protected by 16 issued U.S. patents and multiple international patents, with applications pending both in the U.S. and internationally. In October 2020, we announced the E.U. approval of the ECOS-300CY™ adsorption cartridge for use with ex vivo organ perfusion systems to remove cytokines and other inflammatory mediators in the organ perfusate, with the goal of improving solid organ support or rehabilitation. We have numerous other product candidates under development based upon this unique blood purification technology, including CytoSorb XL, K⁺ontrol, HemoDefend-RBC, HemoDefend-BGA, ContrastSorb, DrugSorb, and others.

In March 2011, CytoSorb was “CE Marked” in the E.U. as an extracorporeal cytokine filter indicated for use in clinical situations where cytokines are elevated, allowing for commercial marketing. The CE Mark demonstrates that a conformity assessment has been carried out and the product complies with the Medical Devices Directive. The goal of CytoSorb is to prevent or treat organ failure by reducing cytokine storm and the potentially deadly systemic inflammatory response syndrome (“SIRS”) in diseases such as sepsis, trauma, burn injury, acute respiratory distress syndrome, pancreatitis, 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.

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, acute respiratory distress syndrome (“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 responsible for an estimated one in every five deaths worldwide. Sepsis 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, liver disease, 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 and regulatory submissions.

Our proprietary polymer technologies form the basis of a broad technology portfolio. Some of our products and product candidates include:

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Clinical Studies Update

For a complete discussion regarding our clinical study history, please refer to the section entitled Clinical Studies included in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 9, 2021. The following discusses the status of our clinical studies subsequent to the filing of the Company’s Annual Report on Form 10-K:

On November 25, 2019, the Company announced a voluntary pause in enrollment for the REFRESH 2-AKI study at the recommendation of the study’s Data Monitoring Committee (the “DMC”).  On July 24, 2020, the DMC recommended the resumption of the trial with only minor modifications based on their review of requested study data.  The Company has now resumed the study at multiple trial centers, with others planned to start, notwithstanding potential COVID-19 related delays.

The German government-sponsored and investigator-initiated REMOVE endocarditis study completed its enrollment with a total of 289 patients in early-2020, but the COVID-19 pandemic has caused delays in data monitoring and data analysis. Topline data are expected to be reported in the first half of 2021 with full data presentation thereafter.

The COVID-19 pandemic has also severely impacted our TISORB (Ticagrelor CytoSorb Hemoadsorption) trial execution in the United Kingdom.  The COVID-19 pandemic has severely hampered execution of non-COVID-19-related clinical research in the UK, including TISORB.  As a result, TISORB only enrolled five patients over the past eighteen months, a time period well beyond that originally intended to complete the study.  Accordingly, the decision has been made to stop the TISORB study and focus our clinical resources on the execution of the U.S. randomized clinical trial on ticagrelor removal (STAR-T).

In December 2020, the Company initiated CYTATION (CytoSorb Ticagrelor Hemoadsorption), a Company-sponsored multicenter study in Germany to prospectively evaluate the removal of ticagrelor during cardiopulmonary bypass in patients on ticagrelor undergoing emergent cardiothoracic surgery. The first patients have successfully been recruited, but due to the continuing impact of COVID-19 pandemic, the execution of the CYTATION study has been delayed.

In March 2021, we announced the filing of an Investigational Device Exemption (IDE) application to conduct the clinical study, “Safe and Timely Antithrombotic Removal – Ticagrelor (STAR-T),” in the United States to support an initial FDA regulatory approval.  This was done under the previously announced FDA Breakthrough Designation granted for the removal of ticagrelor in a cardiopulmonary bypass circuit during urgent and emergent cardiac surgery. The FDA granted conditional approval of this IDE in April 2021.

CytoSorb received European Union CE Mark label expansion for the removal of ticagrelor and rivaroxaban during cardiopulmonary bypass in patients undergoing cardiothoracic surgery in January 2020 and May 2020, respectively.  Although the severity and duration of the COVID-19 pandemic is uncertain, we are in the process of launching the STAR (Safe and Timely Antithrombotic Removal) Registry in Europe during 2021 to capture real world clinical outcomes in this latest approved indication.

Pending resolution of the continued impact of the COVID-19 pandemic, we plan to initiate the randomized PROCYSS trial in Germany in 2021, evaluating the ability of CytoSorb to restore hemodynamic stability in patients with refractory septic shock. We also plan to initiate the Hep-On-Fire single arm trial, evaluating CytoSorb in patients suffering from acute alcoholic hepatitis, in Germany later this year.

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COVID-19 Business Update

COVID-19 patients develop life-threatening complications such as ARDS, shock (i.e. a potentially fatal drop in blood pressure), kidney failure, acute cardiac injury, and secondary bacterial infections. The underlying cause for these complications is often a cytokine storm that results in a massive, systemic inflammatory response, leading to the damage of vital organs such as the lungs, heart, and kidneys, and ultimately multiple organ failure and death in many cases. CytoSorb has been used in more than 131,000 treatments as an approved treatment of cytokine storm in the European Union and is distributed in 67 countries around the world, where it has helped physicians control severe inflammation while helping to reverse shock and improve lung and other organ function.

The use of CytoSorb in patients infected with COVID-19 in Italy, China, Germany and France began in March 2020.  CytoSorb has now been used in approximately 5,750 COVID-19 patients to help treat cytokine storm and the related life-threatening complications in more than 30 countries. Based upon initial data and reports from physicians treating these complications, CytoSorb use has generally been associated with a marked reduction in cytokine storm and inflammation, improved lung function, weaning from mechanical ventilation, decannulation from extracorporeal membrane oxygenation (ECMO), and a reversal of shock. CytoSorb has been specifically recommended in the Italy Brescia Renal COVID Task Force Guidelines to treat patients with severe COVID-19 infection and Stage 3 renal failure on continuous renal replacement therapy. CytoSorb has also been recommended in the National Treatment Guidelines from Panama for Adult COVID-19 Patients if patients have either refractory shock, or have severe or refractory respiratory failure requiring either high ventilator support or extracorporeal membrane oxygenation.  CytoSorb has now received approval from the Drugs Controller General of India to treat COVID-19 patients in certain instances.  CytoSorb has also received approval to treat patients with COVID-19 from the Israel Ministry of Health (AMAR). In January 2021, Health Canada granted Medical Device Authorization for the importation, sale, and emergency use of CytoSorb in hospitalized COVID-19 patients.

The use of CytoSorb has not been approved in the U.S. by FDA. However, under certain circumstances, investigational medical devices that have not yet been FDA-approved may be made available for emergency use in the U.S. under the FDA’s Expanded Access Program (“EAP”). On April 13, 2020, we announced that the FDA, in a different program than the EAP, granted Emergency Use Authorization (EUA) of CytoSorb for use in U.S. COVID-19 patients. Under the EUA, CytoSorbents can make CytoSorb available, through commercial sales, to all hospitals in the U.S. for use in patients, 18 years of age or older, with confirmed COVID-19 infection who are admitted to the intensive care unit with confirmed or imminent respiratory failure and who have early acute lung injury or ARDS, severe disease, or life-threatening illness resulting in respiratory failure, septic shock, and/or multiple organ dysfunction or failure. The CytoSorb device has been authorized by FDA under an EUA. It has neither been cleared nor approved for the indication to treat patients with COVID-19 Infection. The EUA will be effective until a declaration is made that the circumstances justifying the EUA have terminated or until revoked by the FDA.

The CTC (CytoSorb Therapy in COVID-19) Registry has been launched and is systematically capturing usage patterns and outcomes associated with the use of CytoSorb under the EUA at U.S. institutions.  

Government Research Grants:

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. For a complete discussion of the various research grants we have obtained, please refer to the section entitled Government Research Grants included in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 9, 2021. There following additional research grant has been awarded subsequent to the filing of our Annual Report on Form 10-K:

On April 19, 2021, the Company received notification that it received a U.S. Army Medical Research Acquisition Activity Award (the “USAMRAAA”) entitled "Investigation of a potassium adsorber for the treatment of hyperkalemia induced by traumatic injury and acute kidney injury in austere medicine." The USAMRAAA Phase II Sequential Award, for up to $1,499,987, was granted to the Company to continue development of two novel and distinct treatment options for life-threatening hyperkalemia. This Award is being funded by the USAMRAAA under Contract No. W81XWH21C0045.

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Comparison for the three months ended March 31, 2021 and 2020:

Revenues:

Revenue from product sales was approximately $10,143,000 in the three months ended March 31, 2021, as compared to approximately $8,156,000 in the three months ended March 31, 2020, an increase of approximately $1,987,000, or 24%. This increase was driven by an increase in direct sales of approximately $608,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $1,379,000. Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $304,000 for the three months ended March 31, 2021.  Though difficult to quantitate, we estimate that approximately $1.8 million of total product sales in the first quarter of 2021 was due to the demand for CytoSorb to treat COVID-19 patients.  In addition, as a result of the increase in the average exchange rate of the Euro to the U.S. dollar, 2021 product sales were positively impacted by approximately $790,000.  For the three months ended March 31, 2021, the average exchange rate of the Euro to the U.S. dollar was $1.21 as compared to an average exchange rate of $1.10 for the three months ended March 31, 2020.  

Grant income was approximately $455,000 for the three months ended March 31, 2021 as compared to approximately $551,000 for the three months ended March 31, 2020, a decrease of approximately $96,000 or 17%.  This decrease was a result of delays in grant related work caused by the COVID-19 pandemic as our research and development employees were either deployed to work-from-home status or reassigned to assist in activities related to increasing the production of CytoSorb.

Total revenues were approximately $10,599,000 for the three months ended March 31, 2021, as compared to total revenues of approximately $8,707,000 for the three months ended March 31, 2020, an increase of approximately $1,892,000, or 22%.

Cost of Revenues:

For the three months ended March 30, 2021 and 2020, cost of revenue was approximately $2,751,000 and $2,385,000, respectively, an increase of approximately $366,000. Product cost of revenues increased approximately $354,000 during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 primarily as a result of increased sales.  Product gross margins were approximately 77% for the three months ended March 31, 2021 and approximately 76% for the three months ended March 31, 2020.  The increase in the gross margin percentage in 2021 was due manufacturing efficiencies achieved during the three months ended March 31, 2021 and the receipt of approximately $388,000 related to the Employee Retention Tax Credit under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  These increases were offset by the impact of costs related to prior years tariffs as a result of an audit by the German Customs Authorities.  Excluding the non-recurring negative impact of the 2018, 2019 and 2020 tariff adjustments of approximately $732,000 and the offsetting non-recurring positive impact of the Employee Retention Tax Credit which were recorded in the first quarter of 2021, product gross margins were approximately 81% for the three months ended March 31, 2021. Please see Note 6 to the financial statements for details related to this matter.

Research and Development Expenses:

For the three months ended March 31, 2021, research and development expenses were approximately $2,282,000 as compared to research and development expenses of approximately $1,965,000 for the three months ended March 31, 2021, an increase of approximately $317,000.  This increase was due to an increase in salaries related to our clinical trial activities of approximately $333,000 due to the hiring of additional personnel dedicated to the design of protocol and the anticipated start of a clinical trial in the United States for the removal of ticagrelor in emergent and urgent cardiac surgery patients and an increase in non-grant related research and development costs of approximately $65,000.  These increases were offset by a decrease in new product development costs of approximately $81,000.

Legal, Financial and Other Consulting Expenses:

Legal, financial and other consulting expenses were approximately $708,000 for the three months ended March 31, 2021, as compared to approximately $519,000 for the three months ended March 31, 2020.  The increase of approximately $189,000 was due to an increase in hiring fees of approximately $151,000 due to the hiring of certain senior level personnel and an increase in consulting fees of approximately $111,000 primarily related to certain financial advisory fees and information systems consulting.  These increases were offset by decreases in legal fees of approximately $60,000 and accounting fees of approximately $13,000.

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Selling, General and Administrative Expenses:

Selling, general and administrative expenses were approximately $7,710,000 for the three months ended March 31, 2021, as compared to approximately $6,317,000 for the three months ending March 31, 2020, an increase of $1,393,000.   This increase is related to an increase in salaries, commissions and other employee-related costs of approximately $1,551,000, an increase in royalty expenses of approximately $156,000 due to the increase in product sales, an increase in commercial insurance of approximately $75,000 and an increase other general and administrative expenses of approximately $50,000. These increases were offset by reductions in sales and marketing costs, which include advertising and conference attendance of approximately $151,000 and travel and entertainment costs of approximately $190,000 due primarily to travel restrictions related to the COVID-19 pandemic and a decrease in non-cash stock option and restricted stock expense of approximately $98,000.

Interest Expense, net:

For the three months ended March 31, 2021, net interest expense was approximately $10,000, as compared to net interest expense of approximately $306,000 for the three months ended March 31, 2020. This decrease in net interest expense of approximately $296,000 was the result of the payoff of our outstanding term loans with Bridge Bank in December of 2020.

Gain (Loss) on Foreign Currency Transactions:

For the three months ended March 31, 2021, the loss on foreign currency transactions was approximately $1,306,000 as compared to a loss of approximately $668,000 for the three months ended March 31, 2020. The 2021 loss was directly related to the decrease in the spot exchange rate of the Euro to the U.S. dollar at March 31, 2021 as compared to December 31, 2020.  The spot exchange rate of the Euro to the U.S. dollar was $1.17 per Euro at March 31, 2021, as compared to $1.22 per Euro at December 31, 2020.  The 2020 loss was directly related to the decrease in the spot exchange rate of the Euro at March 31, 2020 as compared to December 31, 2019.  The spot exchange rate of the Euro to the U.S. dollar was $1.10 per Euro at March 31, 2020, as compared to $1.12 per Euro at December 31, 2019.

History of Operating Losses

We have experienced substantial operating losses since inception. As of March 31, 2021, we had an accumulated deficit of approximately $200,794,000, which included losses of approximately $4,168,000 and $3,453,000 for the three month periods ended March 31, 2021 and 2020, 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, 2021, we had current assets of approximately $79,635,000 including cash on hand of approximately $68,468,000 and current liabilities of approximately $9,759,000. During the period from January 1, 2020 through July 15, 2020, we raised approximately $26,427,000 by utilizing our ATM facility with co-agents Jefferies LLC and B. Riley FBR.  In addition, we received net proceeds of approximately $53,800,000 from our underwritten public offering that closed on July 24, 2020.  Also, we expect to receive approximately $1,127,000 in cash from the approved sale of our net operating losses and research and development credits from the State of New Jersey in the second quarter of 2021.

We believe that we have sufficient cash to fund our operations well into the future.

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COVID-19 Impact on Financial Results

Product revenues in 2021 were positively impacted by underlying strength in our critical care and cardiac surgery business, and the use of CytoSorb to treat critically-ill COVID-19 patients in the ICU.  Though difficult to quantitate, we estimate that approximately $1.8 million of our first quarter 2021 revenues were directly or indirectly related to COVID-19.  Given the order patterns we are currently experiencing, we expect the COVID-19 pandemic will continue to have a positive impact on product revenues in the second quarter of 2021. However, COVID-19 revenues are expected to decline over the rest of 2021, as increasing vaccinations globally result in fewer new cases, hospitalizations, and deaths from COVID-19. These expectations may change depending on whether there is a resurgence of COVID-19, or a containment of the pandemic.

In addition, as a result of the EUA granted by the FDA on April 11, 2020, we began shipping CytoSorb to hospitals in the United States. Sales to hospitals in the United States under the EUA amounted to approximately $304,000 for the three months ended March 31, 2021.  We are continuing to receive inquiries and orders for CytoSorb.  However, at this time, we cannot predict the overall impact U.S. sales will have on our overall product sales during the remainder of 2021.

The COVID-19 pandemic has generally been a positive driver for CytoSorb sales and it has highlighted the use of CytoSorb to treat cytokine storm and hyperinflammation.  This has been a catalyst for CytoSorb orders from existing customers, but also from new hospitals in countries where CytoSorb was not previously sold. We believe this increased usage during the COVID-19 pandemic, as well as increased awareness of CytoSorb resulting from the increased sales, could help drive further CytoSorb sales in the future.  However, during the past several quarters, the COVID-19 pandemic also caused disruptions to our normal sales processes, which decreased access of our sales force to hospitals, decreased effectiveness of virtual medical conferences, limited our ability to market new indications, such as ticagrelor and rivaroxaban removal, reduced the number of surgeries and other non-COVID-19 hospitalized patients, and slowed our ability to generate clinical data to support our sales and marketing efforts. With the pandemic in flux, we cannot predict what the near-term impact of COVID-19 will have on overall ongoing product sales.

Grant revenues have been negatively impacted by the COVID-19 pandemic during 2020 and 2021. Our research and development employees were either deployed to work-from-home or reassigned to assist in production activities to increase production of CytoSorb.  Currently, the team is executing upon our grant contracts, but this may change depending on the severity of COVID-19 cases. As a result, grant revenue may be reduced until such time as the pandemic is over, however, this reduction is not expected to have a material impact on our financial results because of the low gross margins associated with grant activities.

There has been a worldwide slowdown in clinical trial activities as medical providers focus on COVID-19 patients and this resulted in the temporary pause in enrollment of our TISORB study in the United Kingdom, CYTATION study in Germany and other clinical trials in Europe. Because of ongoing delays with the U.K. TISORB single arm trial and slow enrollment, we have decided to stop the study, in favor of dedicating those resources to the pending start of the U.S. STAR-T randomized controlled trial. The clinical study results of our REMOVE study sponsored by the German government have also been delayed as a result of COVID-19. Our U.S. based REFRESH 2 trial has also been paused as a result of COVID-19. These clinical trial activities and related expenses are expected to increase substantially as the impact of the COVID-19 pandemic eases.  

In addition, certain of our first quarter 2021 selling, general, and administrative expenses, such as travel and conference expenses, are lower than pre-COVID-19 levels due to the continuing restrictions on travel and the cancelling of medical and investor conferences during the pandemic.  This is also a temporary situation which is not expected to continue once the pandemic is contained.

There has been no adverse impact on our ability to access capital.  Subject to contractual lock-ups, we have the ability to access capital through our ATM facility and through the equity markets, if needed.  We do not expect that this will change materially in the near future.

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Contractual Obligations

In March 2021, the Company entered into a lease agreement for a new operating facility which contains office, laboratory, manufacturing and warehouse space. The commencement date of the lease is April 1, 2021.  The Initial Early Term begins on the commencement date (April 1, 2021) and lasts to June 1, 2021. The Early Term commences on June 1, 2021 and lasts until the date of issuance of the certificate of occupancy for the manufacturing space (expected to be September 30, 2021).  The lease also contains two five-year renewal options. Commencing on the date of the receipt of the certificate of occupancy (September 30, 2021), the remaining lease term will last for 15.5 years. The lease requires monthly rental payments of $25,208 for the Initial Early Term, $88,254 for the Early Term and initial monthly payments of approximately $111,171 in the first year of the remaining term. Following the first year of the remaining term, the annual base rent will increase by approximately 2.75% annually over the remaining term. The lease also contains six months of rent abatement.  In addition to the base rent, payments of operating expenses and real estate taxes will be required. These payments are to be based on actual amounts incurred during 2021, multiplied by the Company’s share of the total building space (92.3%).  The landlord will also provide an allowance of approximately $1,455,000 related to certain building improvements as outlined in the lease. In April 2021, the Company was required to provide the landlord with a letter of credit in the amount of approximately $1,334,000 as security.  

In April 2021, the Company entered into a Twentieth Amendment to Lease with the landlord which will become effective May 31, 2021.  This amendment extends the term of the lease for the Company’s existing facility to May 31, 2022. The Company’s base rent will be approximately $35,000 per month.  In addition, the Company is obligated to pay monthly operating expenses of approximately $30,000 per month. Under the terms of this amendment, the Company will vacate a portion of the space as of May 31, 2022.  The Company will continue to lease the remaining space until December 31, 2022, at which time the Company will vacate the remaining space and the lease will terminate.  The Company’s base rent for the remaining space will be approximately $20,000 per month.  Monthly operating expenses will be approximately $11,000 per month.  In addition, the Company agreed to increase its security deposit by approximately $54,000 to a total of $150,000.  At the end of the lease term, the entire security deposit will be paid to the landlord for the purpose of making any needed repairs to the vacated premises, and the Company will have no further obligation to pay for repairs to the vacated premises.

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.

In January 2021, CytoSorbents Europe GmbH entered into a lease for 1,068 square meters of additional warehouse space.  The lease commences on April 1, 2021, requires monthly payments of base rent of $7,784 and other costs of approximately $239 and has a term of five years.  The lease also has an option to extend the lease term for an additional five-year period through March 31, 2031.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Going Concern

Prior to June 30, 2020, the Company’s consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. On July 24, 2020, the Company closed an underwritten public offering of 6,052,631 shares of its common stock at a public offering price of $9.50 per share (the “Offering”).  Gross proceeds from the Offering amounted to approximately $57.5 million and, after deducting the underwriting discounts and commissions and expenses related to the Offering, the Company received total net proceeds of approximately $53.8 million. As of March 31, 2021, the Company’s cash balance increased to approximately $68.5 million, which the Company expects will fund the Company’s operations well beyond the next twelve months.  As a result, the Company has determined that the going concern risk has been substantially mitigated.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to certain market risks in the ordinary course of business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions.

To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. Cash is held in checking, savings, and money market funds, which are subject to minimal credit and market risk. We generate sales in both dollars and Euros most significantly, the majority of our sales are in Euros and changes in the exchange rate of the Euro to the U.S. dollar may positively or negatively impact our revenue. On the other hand, should sales decline due to a devaluation of the Euro relative to the U.S. dollar, expenses related to CytoSorbents Europe GmbH would also decline. This produces a natural currency hedge. We believe that the market risks associated with these financial instruments are currently immaterial, although there can be no guarantee that these market risks will be immaterial to us in the future.

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Item 4. Controls and Procedures.

We maintain disclosure controls and procedures designed to ensure information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosures. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in our internal control over financial reporting occurred during the three months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to claims and litigation arising in the ordinary course of business. We intend to defend vigorously against any future claims and litigation. We are not currently a party to any legal proceedings.

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Item 1A. Risk Factors.

For a discussion of risks that affect the Company’s business, please refer to Part I, Item IA, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 9, 2021. There have been no material changes to the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K, except as follows:

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A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business and operations.

The outbreak of COVID-19 originated in Wuhan, China in December 2019 and has since spread around the globe. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies has affected and is likely to continue to affect our operations and those of third parties on which we rely, including by causing disruptions in our raw material supply, the manufacturing of our lead product, CytoSorb, the commercialization of CytoSorb, and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic has affected and is likely to continue to affect the operations of the U.S. Food and Drug Administration and other health authorities, which could result in delays of reviews and approvals, including with respect to CytoSorb and our product candidates. The evolving COVID-19 pandemic has impacted and is likely to continue to directly or indirectly impact our clinical trials, including but not limited to, the anticipated completion date of these trials and the pace of enrollment in our clinical trials for at least the next several months and possibly longer as patients may avoid or may not be able to travel to healthcare facilities and physicians’ offices unless due to a health emergency and clinical trial staff can no longer get to the clinic. Such facilities and offices have and may continue to be required to focus limited resources on non-clinical trial matters, including treatment of COVID-19 patients, and may not be available, in whole or in part, for clinical trial services. In particular, due to delays resulting from impacts of the COVID-19 pandemic, analysis of the study data for the 250 patient, multi-center randomized, controlled study (“REMOVE”) using CytoSorb during valve replacement open heart surgery in patients with infective endocarditis is now anticipated to be completed in mid-2021(rather than by mid-2020 that we initially anticipated), with top-line data potentially in the second quarter of 2021 and the full study report thereafter, and there may be further delays in patient enrollment in the REFRESH 2, CYTATION and STAR clinical trials. For example, we have decided to stop the TISORB single arm study due to continued delays and poor enrollment caused by the COVID-19 pandemic in the U.K., in favor of redirecting those resources to the U.S. STAR-T randomized, controlled trial. In addition, employee disruptions and remote working environments related to the COVID-19 pandemic and the federal, state and local responses to such virus, could materially impact the efficiency and pace with which we work and develop our product candidates, our ability to execute and invoice upon government grants and contracts, and the manufacturing of CytoSorb. As of the date of this filing, our manufacturing facilities remain operational and we have resumed certain research and development activities that were temporarily suspended as a result of the COVID-19 pandemic. Further, while the potential economic impact brought on by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. Additionally, the stock market has been unusually volatile during the COVID-19 outbreak and such volatility may continue. To date, during certain periods of the COVID-19 pandemic, our stock price fluctuated significantly, and such fluctuation will likely continue to occur. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or clinical trial activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely. The Company estimated that approximately $9.4 million of its 2020 product sales and approximately $1.8 million of its product sales in the three months ended March 31, 2021 were related to the treatment of COVID-19 patients. Should the pandemic ease, it is uncertain whether the Company will be able to replace some or all of this revenue in the future.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

None.

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Item 6. Exhibits.

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*In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

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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.

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