Cytosorbents Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Notes Regarding Forward Looking Statements This Quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual results, events and performance could differ materially from those in the forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks discussed in our Annual Report on Form 10-K, as updated by the risks reported in our Quarterly Reports on Form 10-Q, 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, 2019, as filed with the SEC on March 5, 2020. 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 covering the use of the device for the removal of the anti-platelet agent, ticagrelor, in patients undergoing surgery requiring cardiopulmonary bypass. We believe the current addressable market in the United States for ticagrelor removal in cardiac surgery is approximately $250 million, assuming FDA approval for CytoSorb in this application and a price per CytoSorb device of $5,000. 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 $500 million. 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 $1.5 billion. CytoSorb is used during and after cardiac surgery to remove inflammatory mediators, such as cytokines, activated compliment 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 110,000 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. We expect that the Emergency Use Authorization for CytoSorb will remain effective through to spring 2021. CytoSorb has been used globally in more than 2,800 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. 22 Table of Contents 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 19 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, 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 hemocompatible porous polymer bead technology forms the basis of a broad technology portfolio. Some of our products and product candidates include: ​ • CytoSorb — an extracorporeal hemoperfusion cartridge approved in the EU for cytokine removal, with the goal of reducing SIRS and sepsis and preventing or treating organ failure. • ECOS-300CY — an 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. • CytoSorb XL — an intended next generation successor to CytoSorb currently in advanced pre-clinical testing designed to reduce a broad range of cytokines and inflammatory mediators, including lipopolysaccharide endotoxin, from blood. • VetResQ — a broad spectrum blood purification adsorber designed to help treat deadly inflammation and toxic injury in animals with critical illnesses such as septic shock, toxic shock syndrome, severe systemic inflammation, toxin-mediated diseases, pancreatitis, trauma, liver failure, and drug intoxication. VetResQ is being commercialized in the United States. • HemoDefend-RBC — a development-stage blood purification technology designed to remove non-infectious contaminants in blood transfusion products, with the goal of reducing transfusion reactions and improving the quality and safety of blood. • HemoDefend-BGA — a development-stage purification technology that can remove anti-A and anti-B antibodies from plasma and whole blood, to enable “ universal plasma, ” and safer whole blood transfusions, respectively. 23 Table of Contents • K + ontrol — a development-stage blood purification technology designed to reduce excessive levels of potassium in the blood that can be fatal in severe hyperkalemia. • ContrastSorb — a development-stage extracorporeal hemoperfusion cartridge designed to remove IV contrast from the blood of high risk patients undergoing radiological imaging with contrast, or interventional cardiology procedures such as cardiac catheterization and angioplasty. The goal of ContrastSorb is to prevent contrast-induced nephropathy. • DrugSorb — a development-stage extracorporeal hemoperfusion cartridge designed to remove toxic chemicals from the blood (e.g., drug overdose, high dose regional chemotherapy). • BetaSorb — a development-stage extracorporeal hemoperfusion cartridge designed to remove mid-molecular weight toxins, such as b2-microglobulin, that standard high-flux dialysis cannot remove effectively. The goal of BetaSorb is to improve the efficacy of dialysis or hemofiltration. 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, 2019, as filed with the SEC on March 5, 2020. 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 is currently undertaking multiple activities in preparation to resume the study, though in general, COVID-19 restrictions and hospital policies have halted or slowed clinical trial activity in non-COVID-19 studies throughout the industry. We currently do not have strong visibility into the timing for resolution of these issues and cannot predict when the REFRESH 2-AKI trial will be resumed. The German government-sponsored and investigator-initiated REMOVE endocarditis study completed its enrollment with a total of 289 patients in early-2020. Based on recent feedback from the study’s principal investigators, the COVID-19 pandemic has caused delays in data monitoring and data analysis, but they expect to have topline data by year-end 2020, with a full analysis of data expected to be reported in the first half of 2021 unless delayed further by the ongoing COVID-19 pandemic. Also due to the COVID-19 pandemic, our TISORB (Ticagrelor CytoSorb Hemoadsorption) trial in the United Kingdom was paused. Two of the eight study centers re-opened recently and resumed screening for patients for the TISORB trial. However, the recent surge in COVID-19 cases in the United Kingdom and Europe may cause or introduce additional delays. Due to the uncertainty of the COVID-19 pandemic, the Company cannot reliably predict at this time when the TISORB study will be able to resume with all study centers. 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 currently plan to launch the STAR (Safe and Timely Removal of Antithrombotics) registry in Europe in early 2021, followed by the United States and other jurisdictions where or when CytoSorb is available. ​ COVID-19 Business Update A significant problem relating to the COVID-19 pandemic is that many 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 110,000 treatments as an approved treatment of cytokine storm in the European Union and is distributed in 66 countries around the world, where it has helped physicians control severe inflammation while helping to reverse shock and improve lung and other organ function. 24 Table of Contents 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 2,800 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). 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. patients infected with COVID-19. 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 actively enrolling patients with the intent of systematically capturing usage patterns and outcomes associated with the use of CytoSorb under the EUA at U.S. institutions. The CTC Registry may be expanded to outside-U.S. territories based on the evolution of the pandemic in an effort to better characterize best practice patterns and clinical outcomes. To meet the growing demand for CytoSorb worldwide, our manufacturing team continues to make any adjustments required to the production schedule to meet the increased sales demand. 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, 2019, as filed with the SEC on March 5, 2020. The following discusses research grants obtained subsequent to the filing of our Annual Report on Form 10-K: In June 2020, we were awarded a Defense Health Agency Small Business Technology Transfer (STTR) Phase III contract, to advance its HemoDefend-BGA plasma and whole blood adsorber to human clinical trials. The program, entitled “Development of a Highly Efficient Adsorber to Remove Anti-A and Anti-B Antibodies from Blood and Plasma for Transfusion,” is being funded by the U.S. Army Medical Research and Development Command (USAMRDC) office of the Congressionally Directed Medical Research Programs (CDMRP) (award number W81XWH20C0050) provides for maximum funding of approximately $2,897,000 over a two-year period. As of September 30, 2020 we have recognized revenue amounting to $35,478 and have approximately $2,861,714 remaining under this contract. On July 21, 2020, we were notified that we received a U.S. Army Medical Research Acquisition Activity Award (the “USAMRAAA”) for our HemoDefend-BGA™ platform, a development-stage technology designed to be a practical, low cost, and effective way to produce universal plasma and to reduce the risk of whole blood transfusions. The USAMRAAA award, for up to $4,421,487, was granted to us in order to develop a highly efficient adsorber to remove anti-A and Anti-B antibodies from whole blood and plasma for transfusion. This Award is supported by the U.S. Department of Defense Peer Reviewed Medical Research Program 25 Table of Contents (PRMRP)/Congressionally Directed Medical Research Program (CDMRP) under Contract No. W81XWH2010712. We have not yet begun work under this contract as of September 30, 2020. On October 9, 2020, we announced that we received a U.S. Army Medical Research Acquisition Activity (USAMRAA), award of a two-year SBIR Sequential Phase II contract (contract No. W81XWH-20-C-0087) valued at $1,098,588 to optimize development of the HemoDefend-BGA™ adsorber. The HemoDefend-BGA adsorber can rapidly remove greater than 99% of anti-A and anti-B antibodies from plasma to create a “universal plasma” that could be administered to anyone, irrespective of blood type, while maintaining critical coagulation activity. Comparison for the three months ended September 30, 2020 and 2019: Revenues: Revenue from product sales was approximately $10,246,000 in the three months ended September 30, 2020, as compared to approximately $5,728,000 in the three months ended September 30, 2019, an increase of approximately $4,518,000, or 79%. This increase was driven by an increase in direct sales of approximately $2,063,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $2,455,000. Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $262,000 for the three months ended September 30, 2020. Though difficult to quantitate, we estimate that approximately $2.7 million of total product sales in the third quarter of 2020 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, sales were positively impacted by approximately $428,000. For the three months ended September 30, 2020, the average exchange rate of the Euro to the U.S. dollar was $1.17 as compared to an average exchange rate of $1.11 for the three months ended September 30, 2019. Grant income was approximately $301,000 for the three months ended September 30, 2020 as compared to approximately $367,000 for the three months ended September 30, 2019, a decrease of approximately $66,000 or 18%. 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 $10,547,000 for the three months ended September 30, 2020, as compared to total revenues of approximately $6,095,000 for the three months ended September 30, 2019, an increase of approximately $4,452,000, or 73%. Cost of Revenues: For the three months ended September 30, 2020 and 2019, cost of revenue was approximately $2,890,000 and $1,696,000, respectively, an increase of approximately $1,194,000. Product cost of revenues increased approximately $1,279,000 during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 primarily as a result of increased sales. Product gross margins were approximately 74% for the three months ended September 30, 2020 and approximately 77% for the three months ended September 30, 2019. The decrease in gross margin in 2020 was due to an increase in percent contribution of lower margin distributor sales as well as additional costs primarily related to COVID-19 incentive payment to employees as a result of the continued rapid ramp-up of production during the three months ended September 30, 2020. Research and Development Expenses : For the three months ended September 30, 2020, research and development expenses were approximately $1,753,000 as compared to research and development expenses of approximately $3,185,000 for the three months ended September 30, 2019. The decrease of approximately $1,432,000 was due to a decrease in our clinical trial costs of approximately $1,045,000 which is due primarily to the pause in our Company-sponsored clinical trials as a result of hospital restrictions due to the COVID-19 pandemic, a decrease in non-clinical research and development salary related costs of approximately $337,000, a decrease in new product development costs of approximately $49,000 and a decrease in non-grant related research and development costs of approximately $86,000. These decreases were offset by a decrease in direct labor and other costs being deployed toward grant-funded activities of approximately $85,000, which had the effect of increasing the amount of our non-reimbursable research and development costs. 26 Table of Contents Legal, Financial and Other Consulting Expenses: Legal, financial and other consulting expenses were approximately $580,000 for the three months ended September 30, 2020, as compared to approximately $733,000 for the three months ended September 30, 2019. The decrease of approximately $153,000 was due to a decrease in employment agency fees of approximately $34,000 and a decrease in legal fees of approximately $193,000. These increases were offset by an increase in consulting fees of approximately $35,000 and an increase in accounting fees of approximately $39,000. Selling, General and Administrative Expenses: Selling, general and administrative expenses were approximately $7,282,000 for the three months ended September 30, 2020, as compared to approximately $6,108,000 for the three months ending September 30, 2019, an increase of $1,174,000. This increase is related to an increase in salaries, commissions and other employee-related costs of approximately $1,345,000, an increase in royalty expenses of approximately $646,000 due to the increase in product sales, and an increase in non-cash stock compensation expense of approximately $286,000. These increases were offset by a decrease in travel and entertainment expenses of approximately $127,000, a decrease in sales and marketing expenses, which include advertising and conference attendance of approximately $546,000, a decrease in non-cash restricted stock expense of approximately $307,000 related to restricted stock units granted to the Company’s executive officers and a decrease in other general and administrative costs of approximately $123,000. Interest Expense, net: For the three months ended September 30, 2020, net interest expense was approximately $261,000, as compared to net interest expense of approximately $302,000 for the three months ended September 30, 2019. This decrease in net interest expense of approximately $41,000 was primarily a result of the interest income earned on our increased cash balances as a result of equity raised during 2020. Gain (Loss) on Foreign Currency Transactions: For the three months ended September 30, 2020, the gain on foreign currency transactions was approximately $1,380,000 as compared to a loss of approximately $956,000 for the three months ended September 30, 2019. The 2020 gain was directly related to the increase in the spot exchange rate of the Euro to the U.S. dollar at September 30, 2020 as compared to June 30, 2020. The spot exchange rate of the Euro to the U.S. dollar was $1.17 per Euro at September 30, 2020, as compared to $1.12 per Euro at June 30, 2020. The 2019 loss was directly related to the decrease in the spot exchange rate of the Euro at September 30, 2019 as compared to June 30, 2019. The spot exchange rate of the Euro to the U.S. dollar was $1.09 per Euro at September 30, 2019, as compared to $1.14 per Euro at June 30, 2019. 27 Table of Contents Comparison for the nine months ended September 30, 2020 and 2019: Revenues: Revenue from product sales was approximately $27,922,000 in the nine months ended September 30, 2020, as compared to approximately $16,155,000 in the nine months ended September 30, 2019, an increase of approximately $11,767,000, or 73%. This increase was driven by an increase in direct sales of approximately $6,204,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $5,563,000. Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $928,000 for the nine months ended September 30, 2020. Though difficult to quantitate, we estimate that approximately $6.9 million of total product sales in the nine months ended September 30, 2020 was due to the demand for CytoSorb to treat COVID-19 patients. The change in the Euro to us, doller exchange rate did not have a significant impact on sales for the nine months ended September 30, 2020 ascompared to nine months ended September 30,2019. Grant income was approximately $1,127,000 for the nine months ended September 30, 2020 as compared to approximately $1,364,000 for the nine months ended September 30, 2019, a decrease of approximately $237,000 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 production of CytoSorb. Total revenues were approximately $29,049,000 for the nine months ended September 30, 2020, as compared to total revenues of approximately $17,519,000 for the nine months ended September 30, 2019, an increase of approximately $11,530,000, or 66%. Cost of Revenues: For the nine months ended September 30, 2020 and 2019, cost of revenue was approximately $8,525,000 and $5,269,000, respectively, an increase of approximately $3,256,000, primarily as a result of increased sales. Product gross margins were approximately 73% for the nine months ended September 30, 2020 and approximately 76% for the nine months ended September 30, 2019. The decrease in gross margin was due to an increase in percent contribution of lower margin distributor sales as well as certain costs associated with the rapid ramp-up of production during the nine months ended September 30, 2020. Research and Development Expenses : For the nine months ended September 30, 2020, research and development expenses were approximately $6,125,000 as compared to research and development expenses of approximately $8,533,000 for the nine months ended September 30, 2019. The decrease of approximately $2,408,000 was due to a decrease in our clinical trial costs of approximately $2,067,000, which was due primarily to the pause in our Company-sponsored clinical trials as a result of hospital restrictions due to the COVID-19 pandemic, a decrease in non-clinical research and development salary related costs of approximately $563,000 and a decrease in non-grant related research and development costs of approximately $112,000. These decreases were offset by a decrease in direct labor and other costs being deployed toward grant-funded activities of approximately $296,000, which had the effect of increasing the amount of our non-reimbursable research and development costs, and an increase in new product development costs of approximately $38,000. Legal, Financial and Other Consulting Expenses: Legal, financial and other consulting expenses were approximately $1,945,000 for the nine months ended September 30, 2020, as compared to approximately $1,887,000 for the nine months ending September 30, 2019. The increase of approximately $58,000 was due to an increase in employment agency fees of approximately $68,000 related to the hiring of senior level personnel, and increase in accounting and auditing fees of approximately $96,000 and an increase in consulting fees of approximately $7,000. These increases were offset by a decrease in legal fees of approximately $113,000. 28 Table of Contents Selling, General and Administrative Expenses: Selling, general and administrative expenses were approximately $20,190,000 for the nine months ended September 30, 2020, as compared to $15,372,000 for the nine months ended September 30, 2019, an increase of $4,818,000. This increase is related to an increase in salaries, commissions and other employee-related costs of approximately $3,351,000, an increase in royalty expenses of approximately $934,000 due to the increase in product sales, an increase in non-cash stock compensation expense of approximately $1,677,000 and an increase in other general and administrative expenses of approximately $204,000. These increases were offset by a decrease in travel and entertainment expenses of approximately $365,000, a decrease in sales and marketing expenses, which include advertising and conference attendance of approximately $983,000. Interest Expense, net: For the nine months ended September 30, 2020, interest expense was approximately $840,000, as compared to interest expense of approximately $722,000 for the nine months ended September 30, 2019. This increase in interest expense of approximately $118,000 was primarily a result of the additional interest incurred related to the draw down of the $5,000,000 Term B Loan with Bridge Bank on July 31, 2019. Gain (Loss) on Foreign Currency Transactions: For the nine months ended September 30, 2020, the gain on foreign currency transactions was approximately $1,417,000 as compared to a loss of approximately $1,052,000 for the three months ended September 30, 2019. The 2020 gain was directly related to the increase in the spot exchange rate of the Euro to the U.S. dollar at September 30, 2020 as compared to December 31, 2019. The spot exchange rate of the Euro to the U.S. dollar was $1.17 per Euro at September 30, 2020, as compared to $1.12 per Euro at December 31, 2019. The 2019 loss was directly related to the decrease in the spot exchange rate of the Euro at September 30, 2019 as compared to December 31, 2018. The spot exchange rate of the Euro to the U.S. dollar was $1.09 per Euro at September 30, 2019, as compared to $1.15 per Euro at December 31, 2018. History of Operating Losses : We have experienced substantial operating losses since inception. As of September 30, 2020, we had an accumulated deficit of approximately $195,949,000, which included losses of approximately $7,159,000 and $15,316,000 for the nine-month periods ended September 30, 2020 and 2019, respectively. Historically, losses have resulted principally from costs incurred in the research and development of our polymer technology, clinical studies, and general and administrative expenses. Liquidity and Capital Resources Since inception, our operations have been primarily financed through the issuance of debt and equity securities. At September 30, 2020, we had current assets of approximately $96,803,000 including cash on hand of approximately $87,978,000 and current liabilities of approximately $17,356,000. On July 24, 2020, the Company closed the sale of approximately 6,052,631 shares of its Common Stock and received gross proceeds of approximately $57.5 million and, after deducting the underwriting discounts and commissions and expenses related to the offering, received total net proceeds of approximately $53.8 million. In early July 2020, the Company received approximately $2,414,000 in proceeds related to the sale of shares pursuant to the Open Market Sale Agreement with Jefferies LLC and B. Riley FBR, Inc. On July 31, 2019, the Company executed an Amendment to its Loan Agreement with Bridge Bank and, simultaneous with this Amendment, received $5 million in proceeds from an additional term loan. In addition, the Amendment extended the interest-only period of the loan through October 2020. Monthly principal payments of approximately $833,000 commence in November 2020. We believe that we have sufficient cash to fund our operations well into the future. COVID-19 Impact on Financial Results Product revenues in 2020 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 $2.7 29 Table of Contents million of our third quarter 2020 revenues and $6.9 million of our year-to-date revenues at September 30, 2020 were directly or indirectly related to COVID-19. Given the order patterns we are currently experiencing, we expect that the COVID-19 pandemic will continue to have a positive impact on product revenues in the fourth quarter of 2020 and potentially into the first quarter of 2021. These expectations may change depending on the severity of the illness associated with COVID-19, or 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 $262,000 and $928,000 for the three and nine months ended September 30, 2020, respectively. 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 2020. 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 this year. 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 either assisting with CytoSorb production or are executing upon our grant contracts, but this may change depending on the severity of another expected surge in 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 has resulted in the temporary pause in enrollment of our TISORB study in the United Kingdom and other clinical trials in Europe. The clinical study results of our REMOVE study sponsored by the German government have also been delayed as a result of COVID-19. Together with the previously disclosed pause in enrollment of our REFRESH 2 trial, this has resulted in an approximately $1.8 million reduction in our third quarter and a $3.3 million reduction in our year to date clinical trial expenses which has a corresponding reduction in our reported operating loss and quarterly cash burn. These clinical trial activities are expected to resume to normal levels as the impact of the COVID-19 pandemic eases. There has been an approximately $419,000 reduction in our third quarter and a $2,098,000 reduction in our year-to-date 2020 selling, general, and administrative expenses due to the 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. There has also been no adverse impact on our ability to comply with the covenants associated with our debt facility with Bridge Bank. We do not expect that this will change materially in the near future. 30 Table of Contents Contractual Obligations 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. In September 2016, the Company’s wholly-owned subsidiary, CytoSorbents Europe GmbH, entered into a five-year lease agreement with Klimik GmbH for 760 square meters of office and warehouse space. In May 2018, CytoSorbents Europe GmbH entered into an additional lease agreement with Klimik GmbH which expanded its office and warehouse space to 960 square meters. The leases have a total rent obligation of $8,827 per month. Both leases expire on August 31, 2021. The leases also provide the Company with an option to extend the terms for an additional five-year period through August 31, 2026. Off-balance Sheet Arrangements We have no off-balance sheet arrangements. Going Concern 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 September 30, 2020, the Company’s cash balance increased to approximately $88.0 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 eliminated. ​