Item 2. Management’s Discussion and Analysis
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 the treatment of life-threatening conditions in intensive care and cardiac surgery. We are investigating and commercializing our 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 few to 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 EU 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 EU label expansion for CytoSorb to remove rivaroxaban, a Factor Xa inhibitor, for the same indication.
In April 2020, the Company announced that the FDA had granted CytoSorbents’ technology Breakthrough Designation for the removal of ticagrelor in a cardiopulmonary bypass circuit during emergent and urgent cardiothoracic surgery. If FDA marketing approval for this indication is obtained, the device would be marketed as DrugSorb-ATR in the United States. The DrugSorb-ATR antithrombotic removal system is based on the same polymer technology as CytoSorb. 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 marketing approval, that could expand to $500 million should ticagrelor gain market share as the only reversible mainstream anti-platelet agent. In the event that DrugSorb-ATR also obtains FDA marketing 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 DrugSorb-ATR obtains FDA marketing 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.
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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 an estimated 143,000 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 6,500 human treatments to date in COVID-19 patients. CytoSorbents’ technology has also been granted FDA Breakthrough Designation for the removal of ticagrelor in a cardiopulmonary bypass circuit during emergent and urgent cardiothoracic surgery, and if FDA marketing approval for this indication is obtained, would be marketed as DrugSorb-ATR antithrombotic removal system in the United States. In July 2021, the Company received full approval of its Investigational Device Exemption (“IDE”) to conduct the pivotal STAR-T (Safe and Timely Antithrombotic Removal – Ticagrelor) double-blind randomized control trial (“RCT”) in the United States to support FDA marketing approval.
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 18 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, DrugSorb-ATR, and others.
In March 2011, CytoSorb was “CE Marked” in the E.U. as an extracorporeal cytokine adsorber 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 and our other products in development 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.
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Our proprietary polymer technologies form 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.
• DrugSorb-ATR — an investigational extracorporeal antithrombotic removal system based on the same polymer technology as CytoSorb that is being evaluated in the U.S. STAR-T pivotal randomized, controlled trial to reduce the antithrombotic drug, ticagrelor, and reduce bleeding complications in patients undergoing cardiothoracic surgery while on the drug.
• ECOS-300CY — an adsorption cartridge approved in the E.U. 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.
• 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 radiology 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, 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:
The REFRESH 2-AKI study in the United States has resumed enrollment at multiple trial centers with the remaining sites planned to start by end of 2021. Notwithstanding potential COVID-19 related delays we project that the milestone of the interim analysis will be reached in 2022 .
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In March 2021, we announced the filing of an Investigational Device Exemption (IDE) application to conduct a double-blind, randomized, controlled clinical study for up to 120 patients entitled, “ S afe and T imely A ntithrombotic R emoval – T icagrelor ( STAR-T ),” in the United States to support FDA marketing 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 full IDE approval of this IDE in July 2021and operational activities to begin enrollment are under way. We expect to begin enrollment in the third quarter of 2021, have all study sites activated by the end of the year, and complete the study in 2022.
In April 2020, we received Emergency Use Authorization for the treatment of critically ill COVID-19 patients with evidence of hyperinflammation and confirmed or imminent respiratory failure. The C ytoSorb T herapy in C OVID-19 ( CTC ) Registry was launched to capture outcomes and device utilization patterns from multiple US participating centers. Primary results on observed ICU mortality of COVID-19 patients with acute respiratory distress syndrome (ARDS) requiring extracorporeal membrane oxygenation (ECMO) and treated with CytoSorb according to FDA Emergency Use Authorization criteria, have been accepted for presentation at the International Symposium of Intensive Care Medicine conference at the end of August 2021 in Brussels, Belgium, and have also been submitted for journal publication.
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 been enrolled, but due to the continuing impact of the COVID-19 pandemic, the execution of the CYTATION study has been delayed.
The German PROCYSS multicenter, randomized controlled trial evaluating the ability of CytoSorb to restore hemodynamic stability in patients with refractory septic shock recently received ethics approval and is on track to begin enrollment in 2021, pending any COVID-19 related delays. We also plan to initiate the German multicenter Hep-On-Fire single-arm trial evaluating CytoSorb in patients suffering from acute liver failure due to alcoholic hepatitis later this year, pending any COVID-19 related delays.
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 and economic outcomes in this latest approved indication. We will be ready to receive data entry from Germany and the U.K. this quarter, with plans to gradually expand to additional E.U. countries. Initial data release is planned for 2022.
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 results data are expected to be reported in second half of 2021.
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, thromboses and emboli, 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 143,000 treatments as an approved treatment of cytokine storm in the European Union and is distributed in 68 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 6,500 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 received approval from the Drugs Controller
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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 the 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. The 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.
Research and Development Update
Our research and development efforts are gaining momentum despite the disruption brought on by the COVID-19 pandemic. Since the start of the year, internal and government grant funding have supported the expansion of our R&D staff by approximately 30%, and we expect to increase headcount further by the end of the year to support work associated with awarded grants and contracts. The revenue remaining to be earned on open grant contracts is $12.1 million. To facilitate this growth, we have relocated half the team to the new facility in Princeton, New Jersey where we were able to occupy existing labs with minimal disruption to program timelines. Overall, grant funded programs, HemoDefend-BGA™ (Universal Plasma), HemoDefend-RBC™ and K + ontrol™, continue to progress and have been the beneficiary of ~$9.6 million, $4.7 million and $7.0 million in total funding, respectively, awarded to date.
We are pleased to report acceleration of our HemoDefend-RBC™ filter development, which is designed to remove non-infectious contaminants in transfused packed red blood cells that can cause transfusion reactions. We are currently producing devices for the required preclinical testing that is expected to start this quarter, to support an investigational device exemption (IDE) application to run a small (<30 patient) human study to support FDA marketing approval.
Comparison for the three months ended June 30, 2021 and 2020:
Revenues:
Revenue from product sales was approximately $11,365,000 in the three months ended June 30, 2021, as compared to approximately $9,520,000 in the three months ended June 30, 2020, an increase of approximately $1,845,000, or 19%. This increase was driven by an
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increase in direct sales of approximately $1,492,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $353,000. Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $362,000 for the three months ended June 30, 2021. Though difficult to quantitate, we estimate that approximately $1.7 million of total product sales in the second 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 $819,000. For the three months ended June 30, 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 June 30, 2020.
Grant income was approximately $659,000 for the three months ended June 30, 2021 as compared to approximately $275,000 for the three months ended June 30, 2020, an increase of approximately $384,000, or 140%. This increase was a result of the easing of the COVID-19 pandemic during the three months ended June 30, 2021 and a corresponding increase in grant related work. During the three months ended June 30, 2020, 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 $12,024,000 for the three months ended June 30, 2021, as compared to total revenues of approximately $9,795,000 for the three months ended June 30, 2020, an increase of approximately $2,229,000, or 23%.
Cost of Revenues:
For the three months ended June 30, 2021 and 2020, cost of revenue was approximately $2,710,000 and $3,250,000, respectively, a decrease of approximately $540,000. Product cost of revenue was approximately $2,094,000 and $2,901,000, respectively, for the three months ended June 30, 2021 and 2020, a decrease of approximately $807,000. This decrease was due to certain costs associated with the rapid ramp-up of production during the three months ended June 30, 2020 that did not recur during the three months ended June 30, 2021. Product gross margins were approximately 82% for the three months ended June 30, 2021 as compared to approximately 70% for the three months ended June 30, 2020. The increase in the gross margin percentage in 2021 was due manufacturing efficiencies achieved during the three months ended June 30, 2021 and the impact of the ramp-up costs incurred during the three months ended June 30, 2020 that did not recur in 2021.
Research and Development Expenses :
For the three months ended June 30, 2021, research and development expenses were approximately $3,699,000, as compared to research and development expenses of approximately $2,406,000 for the three months ended June 30, 2020, an increase of approximately $1,293,000. This increase was due to an increase in our clinical trial activities of approximately $452,000 due to pre-enrollment activities related to our STAR-T trial in the United States, an increase in salaries related to our clinical trial activities of approximately $506,000 due to the hiring of clinical expertise, an increase in rent expense of approximately $181,000 related to rent expense on our new facility and an increase in non-grant related research and development labor and other costs of approximately $154,000.
Legal, Financial and Other Consulting Expenses:
Legal, financial and other consulting expenses were approximately $718,000 for the three months ended June 30, 2021, as compared to approximately $846,000 for the three months ended June 30, 2020. The decrease of approximately $128,000 was due to a decrease in legal fees of approximately $98,000, a decrease in employment agency fees of approximately $46,000, and a decrease in accounting and auditing fees of approximately $23,000. The decreases were offset by an increase in consulting fees of approximately $39,000.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were approximately $9,821,000 for the three months ended June 30, 2021, as compared to approximately $6,591,000 for the three months ending June 30, 2020, an increase of $3,231,000. Approximately $1,396,000, or 43%, of this increase was associated with non-cash related expenses including restricted stock expense of approximately $884,000 related to restricted stock units granted to the Company’s executive officers and an increase in stock compensation expense of approximately $512,000. The remaining increases in selling, general and administrative expense are related to an increase in salaries, commissions and related costs of approximately $1,127,000, an increase in royalty expenses of approximately $156,000 due to the increase in product sales, an increase in commercial insurance of approximately $194,000 and an increase in sales and marketing costs, which include
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advertising and conference attendance of approximately $229,000 and an increase in other general and administrative expenses of approximately $129,000.
Interest Expense, net:
For the three months ended June 30, 2021, net interest income was approximately $13,000, as compared to net interest expense of approximately $274,000 for the three months ended June 30, 2020. This decrease in net interest expense 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 June 30, 2021, the gain on foreign currency transactions was approximately $234,000 as compared to a gain of approximately $705,000 for the three months ended June 30, 2020. The 2021 gain was directly related to the increase in the spot exchange rate of the Euro to the U.S. dollar at June 30, 2021 as compared to March 31, 2021. The spot exchange rate of the Euro to the U.S. dollar was $1.18 per Euro at June 30, 2021, as compared to $1.17 per Euro at March 31, 2021. The 2020 gain was directly related to the increase in the spot exchange rate of the Euro at June 30, 2020 as compared to March 31, 2020. The spot exchange rate of the Euro to the U.S. dollar was $1.12 per Euro at June 30, 2020, as compared to $1.10 per Euro at March 31, 2020.
Comparison for the six months ended June 30, 2021 and 2020:
Revenues:
Revenue from product sales was approximately $21,509,000 in the six months ended June 30, 2021, as compared to approximately $17,676,000 in the six months ended June 30, 2020, an increase of approximately $3,833,000, or 22%. This increase was driven by an increase in direct sales of approximately $2,100,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $1,733,000. Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $666,000 for the six months ended June 30, 2021. Though difficult to quantitate, we estimate that approximately $3.5 million of total product sales in the six months ended June 30, 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 $1,608,000. For the six months ended June 30, 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 six months ended June 30, 2020.
Grant income was approximately $1,114,000 for the six months ended June 30, 2021 as compared to approximately $826,000 for the six months ended June 30, 2020, an increase of approximately $288,000 or 35%. This increase was a result of the easing of the COVID-19 pandemic during the three months ended June 30, 2021 and a corresponding increase in grant related work. During the six months ended June 30, 2020, 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 $22,623,000 for the six months ended June 30, 2021, as compared to total revenues of approximately $18,502,000 for the six months ended June 30, 2020, an increase of approximately $4,121,000, or 22%.
Cost of Revenues:
For the six months ended June 30, 2021 and 2020, cost of revenue was approximately $5,462,000 and $5,635,000, respectively, a decrease of approximately $173,000. Product cost of revenue was approximately $4,426,000 and $4,878,000, respectively, for the six months ended June 30, 2021 and 2020, a decrease of approximately $452,000. This decrease was related to certain costs associated with the rapid ramp-up of production of approximately $884,000 during the period ended June 30, 2020 that did not recur during the period ended June 30, 2021. These decreases were offset by the negative impact of non-recurring costs related to prior years tariffs as a result of an audit by the German Customs Authorities of approximately $732,000 (see Note 6 to the financial statements) and the offsetting non-recurring positive impact of the Employee Retention Tax Credit of approximately $388,000, both of which were recorded in the first quarter of 2021. Product gross margins were approximately 79% for the six months ended June 30, 2021 and approximately 72% for the six months ended June 30, 2020. Excluding the impact of the non-recurring costs outlined above, product gross margins were approximately 81% for the six months ended June 30, 2021.
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Research and Development Expenses :
For the six months ended June 30, 2021, research and development expenses were approximately $5,981,000 as compared to research and development expenses of approximately $4,371,000 for the six months ended June 30, 2020, an increase of approximately $1,610,000. This increase was due to an increase in costs associated with our clinical trial activities of approximately $839,000, an increase in salaries related to our clinical trial activities of approximately $457,000 due to the hiring of clinical expertise, an increase in rent expense of approximately $181,000 related to rent expense on our new facility and an increase in non-grant related research and development labor and other costs of approximately $133,000.
Legal, Financial and Other Consulting Expenses:
Legal, financial and other consulting expenses were approximately $1,426,000 for the six months ended June 30, 2021, as compared to approximately $1,365,000 for the six months ending June 30, 2020. The increase of approximately $61,000 was due to an increase in hiring fees of approximately $105,000 due to the hiring of certain senior level personnel and an increase in consulting fees of approximately $150,000 primarily related to certain financial advisory and information systems consulting fees. These increases were offset by decreases in legal fees of approximately $157,000 and accounting fees of approximately $37,000.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were approximately $17,531,000 for the six months ended June 30, 2021, as compared to $12,908,000 for the six months ended June 30, 2020, an increase of $4,623,000. This increase is related to an increase in salaries, commissions and related costs of approximately $2,699,000, an increase in royalty expenses of approximately $312,000 due to the increase in product sales, and an increase in non-cash restricted stock expense of approximately $849,000 related to restricted stock units granted to the Company’s executive officers, an increase in non-cash stock compensation expense of approximately $450,000, an increase in commercial insurance of approximately $260,000 and an increase in sales and marketing costs, which include advertising and conference attendance and other general and administrative expenses of approximately $243,000. These increases were offset by a decrease in travel and entertainment costs of approximately $190,000 due primarily to travel restrictions related to the COVID-19 pandemic.
Interest Expense, net:
For the six months ended June 30, 2021, interest income was approximately $3,000, as compared to interest expense of approximately $579,000 for the six months ended June 30, 2020. This decrease in net interest expense of approximately $582,000 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 six months ended June 30, 2021, the loss on foreign currency transactions was approximately $1,071,000 as compared to a gain of approximately $36,000 for the six months ended June 30, 2020. The 2021 loss was directly related to the decrease in the spot exchange rate of the Euro to the U.S. dollar at June 30, 2021 as compared to December 31, 2020. The spot exchange rate of the Euro to the U.S. dollar was $1.18 per Euro at June 30, 2021, as compared to $1.22 per Euro at December 31, 2020. The 2020 gain was directly related to the increase in the spot exchange rate of the Euro at June 30, 2020 as compared to December 31, 2019.
History of Operating Losses :
We have experienced substantial operating losses since inception. As of June 30, 2021, we had an accumulated deficit of approximately $205,472,000, which included losses of approximately $8,845,000 and $6,320,000 for the six month periods ended June 30, 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 June 30, 2021, we had current assets of approximately $77,085,000 including cash on hand of approximately $65,609,000 and current liabilities of
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approximately $10,796,000. 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 received 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 during the three months ended June 30, 2021.
We believe that we have sufficient cash to fund our operations well into the future.
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 $1.7 million and $3.5 million of our revenues were directly or indirectly related to COVID-19 during the three and six month periods ended June 30, 2021, respectively. Given the order patterns we are currently experiencing, we expect the COVID-19 pandemic will have a much lower impact on product revenues in the second half of 2021. COVID-19 revenues are expected to decline in future periods, 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 $362,000 and $666,000 for the three and six months ended June 30, 2021, 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 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, since the beginning of the COVID-19 pandemic, we have experienced 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, it is difficult to 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 CYTATION study in Germany and other clinical trials in Europe. Because of ongoing COVID-19-related delays in the U.K., we elected to stop our TISORB single arm trial, in favor of dedicating those resources to the U.S. STAR-T randomized controlled trial. The clinical study results of the REMOVE study sponsored by the German government have also been delayed as a result of COVID-19. Our U.S. based REFRESH 2-AKI trial was paused as a result of COVID-19, but has since resumed enrollment. These clinical trial activities and related expenses are expected to increase substantially as the impact of the COVID-19 pandemic continues to ease.
In addition, certain of our second quarter 2021 selling, general, and administrative expenses, such as travel and conference expenses, were 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 as a result of the COVID-19 pandemic. 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 at 305 College Road East, Princeton, New Jersey, which contains office, laboratory, manufacturing and warehouse space. The commencement date of the lease was April 1, 2021. The Initial Early Term began on the commencement date (April 1, 2021) and lasts to June 1, 2021. The Early Term commenced 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 provided 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 at our existing Monmouth Junction facility which became 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 is 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 commenced 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 June 30, 2021, the Company’s cash balance was approximately $65.6 million, which the Company expects will fund the Company’s operations well beyond the next twelve months. As a result, the Company continues to assert that the going concern risk has been substantially mitigated.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.