What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-02 compared with 2022-05-03 · 134 added, 78 removed, 242 unchanged (47% of the section changed)

6 unchanged sentences

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.

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, 2021, as filed with the SEC on March 10, 2022.

We are a leader in the treatment of life-threatening conditions in the intensive care (“ICU”) and cardiac surgery using blood purification via our proprietary polymer adsorption technology.

We have a number of products commercialized and in development based on this technology platform.

Our flagship product, CytoSorb®, is already commercialized, and is being investigated to reduce deadly uncontrolled inflammation and dangerous substances in hospitalized patients around the world, with the goal of preventing or treating multiple organ failure, bleeding, and other potentially fatal complications.

Our flagship product, CytoSorb®, is already commercialized, and is being used to reduce deadly uncontrolled inflammation and dangerous substances in hospitalized patients around the world, with the goal of preventing or treating multiple organ failure, bleeding, and other potentially fatal complications.

Organ failure is the cause of nearly half of all deaths in the ICU, with little to improve clinical outcome.

CytoSorb, is approved in the European Union (“EU”) as an effective extracorporeal cytokine absorber, designed to reduce the “cytokine storm” or “cytokine release syndrome” that could otherwise cause massive inflammation, organ failure and death in common critical illnesses such as sepsis, burn injury, trauma, lung injury, cytokine release syndrome due to cancer immunotherapy, and pancreatitis.

CytoSorb, is approved in the European Union (“EU”) as an effective extracorporeal cytokine absorber, designed to reduce the “cytokine storm” or “cytokine release syndrome” that could otherwise cause massive inflammation, organ failure and death in common critical illnesses such as sepsis, burn injury, trauma, lung injury, liver failure, cytokine release syndrome due to cancer immunotherapy, and pancreatitis.

These are conditions where the mortality is extremely high, yet few to no effective treatments exist.

12 unchanged sentences

FDA marketing approval.

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.

22 unchanged sentences

for use with ex vivo organ perfusion systems to remove cytokines and other inflammatory mediators in the organ perfusate, with the goal of maintaining or improving solid organ function.

prior to transplant.

In 2021, commercialization of PerSorb™ and Aferetica’s PerLife™ ex vivo organ perfusion system commenced in Italy.

16 unchanged sentences

In October 2021, the first patient was enrolled, and the STAR-T study is now actively recruiting at multiple sites.

Pending continuing uncertainty from the ongoing COVID-19 pandemic, we expect the study to reach its first scheduled milestone of 33% patient enrollment that will trigger the first Data Safety Monitoring Board (DSMB) meeting during the summer of 2022 and for the overall study enrollment to be complete in the first quarter of 2023.

Pending continuing uncertainty from the ongoing COVID-19 pandemic and widespread staffing shortages at participating institutions, the speed of enrollment remains uncertain, however, we anticipate that the study to reach its first scheduled milestone of 33% patient enrollment that will trigger the first Data Safety Monitoring Board (DSMB) meeting in the 3 rd quarter of 2022 and that overall study enrollment will complete in 2023.

In October 2021, we also received full FDA approval 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 – D irect Oral Anticoagulants ( STAR-D ),” in the United States to support FDA marketing approval.

1 unchanged sentence

This Breakthrough Device designation covers the removal of the Direct Oral Anticoagulants (DOACs) apixaban and rivaroxaban in a cardiopulmonary bypass circuit to reduce the likelihood of serious perioperative bleeding during urgent cardiac surgery.

The first sites have been activated and are actively recruiting.

The first patient was enrolled in April 2022 and pending the continuing uncertainty from the ongoing COVID-19 pandemic we expect the study to complete enrollment in 12-18 months.

The first patient was enrolled in April 2022 and currently we have the majority of sites activated and recruiting.

Pending the continuing uncertainty from the long-standing impact of the COVID-19 pandemic that has resulted in widespread staffing shortages at participating institutions, we expect the study to complete enrollment in 2023.

In January 2020, CytoSorb received European Union CE Mark label expansion to include the removal of ticagrelor during cardiopulmonary bypass in patients undergoing cardiothoracic surgery.

3 unchanged sentences

and Germany and is planned to expand to additional EU countries before the end of 2022.

The intent of the Registry is to report outcomes at international conferences and submit the results for publication on a rolling basis as enrollment progresses.

The intent of the Registry is to report outcomes at international conferences and submit the results for publication on a rolling basis as enrollment progresses and we expect initial data readouts starting in 2023.

In April 2020, we received U.S.

5 unchanged sentences

The initial CTC results were presented at the International Symposium of Intensive Care Medicine conference in August 2021 in Brussels, Belgium, and published in the peer reviewed journal Frontiers in Medicine .

The CTC has completed enrollment and the final results will also be submitted for publication.

The CTC has completed enrollment and the final results will be presented at the European Society of Intensive Care Medicine conference in October 2022 and have also been submitted for publication.

The German PROCYSS multicenter, randomized controlled trial evaluating the ability of CytoSorb to restore hemodynamic stability in patients with refractory septic shock is now actively enrolling at multiple sites.

The speed of enrollment remains uncertain due to COVID-19 however we currently estimate that the next important milestone of the interim analysis after 50% enrollment will occur in 2023.

The German multicenter Hep-On-Fire single-arm trial evaluating CytoSorb in patients suffering from acute liver failure due to alcoholic hepatitis received Ethics Committee approval in October 2021 and is currently actively recruiting.

We expect that the first patient will be enrolled in the study in the first half of 2022 and that the next important milestone of the interim analysis after 50% enrollment will occur in 2023.

The German multicenter Hep-On-Fire study was designed to evaluate CytoSorb in patients suffering from acute liver failure due to alcoholic hepatitis, however, it has experienced executional delays in its current form and has not initiated enrollment to date.

Accordingly, we are actively evaluating available options for study optimization and are targeting the relaunch of the study in 2023.

The international COSMOS Registry was designed to capture real world outcomes and device utilization patterns across multiple critical care indications including but not limited to sepsis, acute respiratory failure, postoperative vasoplegia, acute liver failure, and acute pancreatitis.

The Registry is undergoing start-up activities and scheduled to begin enrollment in the first half of 2022 with the goal of being active in multiple countries in 2023.

The Registry is undergoing start-up activities and scheduled to begin enrollment in the second half of 2022 with the goal of being active in multiple countries in 2023.

The intent of the Registry is to report outcomes at international conferences and submit the results for publication on a rolling basis as enrollment progresses.

11 unchanged sentences

• New Exclusive Private Hospital Chain Partnerships:

We are now the preferred supplier of hemoadsorption technology to the three largest private hospital chains in Germany, including, as announced yesterday, Asklepios Kliniken GmbH, and the former hospitals of RHÖN-KLINIKUM AG.

Many of these hospitals are already current customers and our agreements facilitate access and sales of CytoSorb to these and all other relevant institutions within these hospital networks.

In May 2022, we entered into a 3-year preferred supplier agreement with Asklepios, making CytoSorb available without restrictions to all of the approximate 170 healthcare facilities across 14 states throughout Germany that Asklepios operates.

This includes Asklepios Klinik St.

Georg in Hamburg, Germany, which pioneered the use of CytoSorb to remove antithrombotic drugs during cardiothoracic surgery, and is well-known for their seminal publication on CytoSorb use for this application during emergency cardiac surgery in patients at high risk of bleeding.

• Rise of Existing and New Applications:

1 unchanged sentence

Many studies have highlighted the ability of CytoSorb to remove inflammatory mediators and help to stabilize shock, a potentially fatal drop in blood pressure, in a wide range of patients.

A recent 2019 meta-analysis, found that approximately 10% of ICU patients have septic shock at admission and 8% of patients admitted to the ICU have septic shock at some point in their hospital stay, with a high mortality of 38%.

A 2019 meta-analysis, found that approximately 10% of ICU patients have septic shock at admission and 8% of patients admitted to the ICU have septic shock at some point in their hospital stay, with a high mortality of 38%.

CytoSorb is being used around the world as a treatment of shock and we are conducting the PROCYSS RCT to formally evaluate CytoSorb as a treatment of this common and major unmet medical need.

9 unchanged sentences

This would greatly simplify treatment with CytoSorb in the ICU - potentially enabling its more ubiquitous and earlier use on more patients while opening the door for more new applications in the emergency room, surgery suites, and elsewhere, in what we call the “hospital-wide” application.

We have initially partnered with a major international dialysis company to distribute a high-quality hemoperfusion machine in Germany, Austria, and Luxembourg and are in the midst of a soft launch, to be followed by a broader rollout in these countries later this year, and in more countries in the not-to-distant future.

The machine is only as good as the therapy that is being run on it, and CytoSorb is the market leading cytokine adsorbing technology that makes this an excellent combination treatment and a potentially game-changing new business model going forward.

In June 2022, we announced that, following a successful pilot program in three countries, we have signed an expanded non-exclusive agreement with Nikkiso Europe GmbH (Nikkiso) to distribute their PureADJUST stand-alone hemoperfusion pump and accessories in a total of 14 countries.

In addition to securing the rights to sell Nikkiso’s stand-alone pump and accessories, we will also be able to provide field support services in these countries.

• Expansion of direct sales territories:

7 unchanged sentences

COVID-19 Business Update

COVID-19 patients develop life-threatening complications such as acute respiratory distress syndrome (ARDS), shock (i.e.

a potentially fatal drop in blood pressure), kidney failure, acute cardiac injury, thromboses and emboli, and secondary bacterial infections.

COVID-19 patients develop life-threatening complications such as acute respiratory distress syndrome (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 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.

1 unchanged sentence

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 to treat dangerous inflammation and related life-threatening complications in more than 7,650 COVID-19 patients in more than 30 countries as of March 31, 2022.

CytoSorb has now been used to treat dangerous inflammation and related life-threatening complications in more than 7,650 COVID-19 patients in more

than 30 countries as of June 30, 2022.

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.

26 unchanged sentences

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, 2021, as filed with the SEC on March 10, 2022.

The following additional research grant has been awarded subsequent to the filing of our Annual Report on Form 10-K:

On May 9, 2022, the Company received a U.S.

Army Medical Research Acquisition Activity Award (the “USAMRAAA”) entitled “Demonstration of the Safety and Efficacy of Field-Ready Blood Group Antibody (BGA) Adsorber in the Porcine Universal Transfusion Model.” The Department of Defense (DoD) Defense Medical Research and Development Program (DMRDP) Joint Program Committee 6 (JPC-6) Combat Casualty Care Research Program (CCCRP) Battlefield Resuscitation for the Immediate Stabilization of Combat Casualties Award, for up to $1,977,024, was granted to the Company to validate the safety and efficacy of the BGA device in a preclinical study in pigs.

This award is being funded by the USAMRAAA under Contract No.

W81XWH-22-1-0235.

The contract effective date is August 1, 2022.

Research and Development Update

2 unchanged sentences

Our recruiting process is ongoing, so that we can obtain the technical staff required to be able to timely execute on our various grant and non-grant related research and development projects.

As of March 31, 2022, the revenue remaining to be earned on open grant contracts is $9.4 million.

As of June 30, 2022, the revenue remaining to be earned on open grant contracts is $10.2 million.

Overall, grant funded programs, HemoDefend-BGA™ (Universal Plasma), HemoDefend-RBC™ and K + ontrol™, continue to progress and we have been the beneficiary of approximately $11.5 million, $4.7 million and $7.7 million in total funding, respectively, awarded to date.

The development of our HemoDefend-RBC™ filter, which is designed to remove potassium and non-infectious contaminants in transfused packed red blood cells, has also been impacted by the COVID-19 pandemic.

The development of this filter requires the use blood procured from commercial blood banks to perform the validation testing necessary to support an IDE submission.

Currently, due primarily to the COVID-19 pandemic, the national blood supply is experiencing blood shortages and will not supply blood for research purposes.

The development of this filter requires the use of human blood procured from commercial blood banks to perform the validation testing necessary to support an IDE submission.

Currently, due primarily to the COVID-19 pandemic, the national blood supply is experiencing blood shortages and supply has been inconsistent for research purposes.

As a result, we have experienced disruptions in our blood supply and cannot predict when deliveries will stabilize.

1 unchanged sentence

This may delay an IDE submission.

Comparison for the three months ended March 31, 2022 and 2021:

Revenue from product sales was approximately $7,924,000 in the three months ended March 31, 2022, as compared to approximately $10,143,000 in the three months ended March 31, 2021, a decrease of approximately $2,219,000, or 22%.

This decrease was driven by a decrease in direct sales of approximately $1,971,000 resulting primarily from lower sales in Germany due to COVID-19 pandemic-driven market conditions.

Due to a surge in COVID-19 cases in the first quarter of 2022, many hospitals throughout Germany either maintained or reinstituted restrictions such as visitation rights to non-essential visitors.

However, unlike prior waves in Germany, the rates of severe COVID-19 illness requiring ICU care, and death have been comparatively very low.

This is being partly attributed to high rates of vaccinations that are associated with reduced severity of illness, reduced need for hospitalization, and risk of death.

These factors led to a decrease in both COVID-19 and core non-COVID-19 CytoSorb sales in Germany.

Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $155,000 for the three months ended March 31, 2022 as compared to approximately $304,000 in the first quarter of 2021.

Though difficult to quantify, we estimate that approximately $300,000 of total product sales in the first quarter of 2022 was due to the demand for CytoSorb to treat COVID-19 patients as compared to approximately $1,800,000 in the first quarter of 2021.

In addition, as a result of the decrease in the average exchange rate of the Euro to the U.S.

dollar, 2022 product sales were negatively impacted by approximately $552,000.

For the three months ended March 31, 2022, the average exchange rate of the Euro to the U.S.

dollar was $1.12 as compared to an average exchange rate of $1.21 for the three months ended March 31, 2021.

Grant income was approximately $767,000 for the three months ended March 31, 2022 as compared to approximately $455,000 for the three months ended March 31, 2021, an increase of approximately $312,000 or 68%.

This increase was a result of the easing of the COVID-19 pandemic in the United States during the three months ended March 31, 2022 and a corresponding increase in grant related work.

During the three months ended March 31, 2021, 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 $8,691,000 for the three months ended March 31, 2022, as compared to total revenues of approximately $10,599,000 for the three months ended March 31, 2021, a decrease of approximately $ 1,907,000, or 18%.

Comparison for the three months ended June 30, 2022 and 2021:

Revenue from product sales was approximately $7,331,000 in the three months ended June 30, 2022, as compared to approximately $11,365,000 in the three months ended June 30, 2021, a decrease of approximately $4,034,000, or 36%.

The decrease in the average exchange rate of the Euro to the U.S.

dollar negatively impacted 2022 product sales by approximately $840,000.

For the three months ended June 30, 2022, the average exchange rate of the Euro to the U.S.

dollar was $1.06 as compared to an average exchange rate of $1.21 for the three months ended June 30, 2021.

We estimate that demand for CytoSorb to treat COVID-19 patients was di minimis in the second quarter of 2022 as compared to approximately $1.7 million in the second quarter of 2021.

This decrease is partly attributed to high rates of vaccinations that are associated with reduced severity of illness, reduced need for hospitalization, and risk of death.

Overall direct sales declined by approximately $3,408,000 resulting primarily from lower sales in Germany due to COVID-19 pandemic-driven market conditions and unfavorable currency conversions.

Although improved, COVID-19 restrictions remain in place at many hospitals throughout Germany and these restrictions continue to limit our access to hospital personnel, particularly the physicians.

Grant income was approximately $1,165,000 for the three months ended June 30, 2022 as compared to approximately $659,000 for the three months ended June 30, 2021, an increase of approximately $506,000, or 77%.

During the three months ended June 30, 2021, 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.

In 2022, research and development employees were assigned exclusively to grant and other research and development activities.

Total revenues were approximately $8,496,000 for the three months ended June 30, 2022, as compared to total revenues of approximately $12,024,000 for the three months ended June 30, 2021, a decrease of approximately $3,528,000, or 29%.

Cost of Revenues:

For the three months ended March 30, 2022 and 2021, cost of revenue was approximately $2,278,000 and $2,751,000, respectively, a decrease of approximately $474,000.

Product cost of revenues decreased approximately $776,000 during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily as a result of decreased sales.

Product gross margins were approximately 80% for the three months ended March 31, 2022 as compared to approximately 77% for the three months ended March 31, 2021.

The increase in the gross margin percentage in 2022 was due the 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 in the three months ended March 31, 2021 that did not recur in 2022.

For the three months ended June 30, 2022 and 2021, cost of revenue was approximately $3,551,000 and $2,710,000, respectively, an increase of approximately $840,000, of which approximately $482,000 was due to an increase in grant cost of revenue.

Product cost of revenue was approximately $2,453,000 and $2,094,000, respectively, for the three months ended June 30, 2022 and 2021, an increase of approximately $359,000.

The increase is due primarily to inefficiencies associated with the relocation of our production activities to our new manufacturing facility in Princeton, New Jersey during the second quarter of 2022.

Product gross margins were approximately 67% for the three months ended June 30, 2022 as compared to approximately 82% for the three months ended June 30, 2021.

The decrease in the gross margin percentage in 2022 was due primarily to the move to our new production facility as mentioned above.

In addition, to a lesser extent, product gross margin was negatively impacted due to an increase in the percent contribution of lower margin distributor sales.

Research and Development Expenses :

For the three months ended March 31, 2022, research and development expenses were approximately $4,243,000 as compared to research and development expenses of approximately $2,282,000 for the three months ended March 31, 2021, an increase of approximately $1,961,000.

This increase was due to an increase in costs associated with our clinical trial activities of approximately $1,410,000, an increase in salaries related to our clinical trial activities of approximately $187,000 due to the hiring of clinical expertise, an increase in rent expense of approximately $65,000 related to rent expense on our new facility, an increase in other research and development labor costs of approximately $102,000 related to the hiring of additional scientific expertise and an increase in other research and development costs of approximately $197,000.

For the three months ended June 30, 2022, research and development expenses were approximately $4,183,000, as compared to research and development expenses of approximately $3,699,000 for the three months ended June 30, 2021, an increase of approximately $484,000.

This increase was due to an increase in our clinical trial activities of approximately $541,000 due to activities related to our STAR-T and STAR-D trials in the United States.

This was offset by a decrease in non-grant related labor and other costs of approximately $57,000.

Legal, Financial and Other Consulting Expenses:

Legal, financial and other consulting expenses were approximately $801,000 for the three months ended March 31, 2022, as compared to approximately $708,000 for the three months ended March 31, 2021.

The increase of approximately $93,000 was due to an increase in legal fees of approximately $324,000 due to the abandonment of certain patent applications and an increase in audit fees of approximately $83,000.

These increases were offset by decreases in employment agency fees of approximately $255,000 and consulting fees of approximately $59,000.

Legal, financial and other consulting expenses were approximately $679,000 for the three months ended June 30, 2022, as compared to approximately $718,000 for the three months ended June 30, 2021.

The decrease of approximately $39,000 was due to a decrease in legal fees of approximately $20,000, a decrease in employment agency fees of approximately $9,000, and a decrease in consulting fees of approximately $49,000.

The decreases were offset by an increase in accounting fees of approximately $39,000.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses were approximately $9,161,000 for the three months ended March 31, 2022, as compared to approximately $7,710,000 for the three months ending March 31, 2021, an increase of $1,451,000.

This increase is related to an increase in salaries, commissions and related costs of approximately $936,000, an increase in occupancy costs of approximately $373,000 related to rent on our new facility in Princeton, NJ, an increase in sales and marketing costs, which include advertising and conference attendance of approximately $286,000, an increase in travel and entertainment costs of approximately $153,000 and an increase in non-cash stock option compensation expense of approximately $120,000 and an increase in commercial insurance costs of approximately $86,000.

These increases were offset by a decrease in non-cash restricted stock expense of approximately $283,000, a decrease in royalty expense of approximately $183,000 due to a decrease in sales, a decrease in public relations consulting expense of approximately $73,000 and a decrease in other general and administrative expenses of approximately $37,000.

Selling, general and administrative expenses were approximately $8,439,000 for the three months ended June 30, 2022, as compared to approximately $9,821,000 for the three months ending June 30, 2021, a decrease of $1,382,000.

This decrease was related to a decrease in royalty expenses of approximately $348,000 due to the decrease in product sales, a decrease in non-cash restricted stock expense of approximately $1,459,000 related to restricted stock units granted to the Company’s executive officers, a decrease in non-cash stock compensation expense of approximately $797,000, and a decrease in other general and administrative expenses of approximately $116,000, offset by an increase in salaries, commissions and related costs of approximately $275,000, an increase in sales and marketing costs, which include advertising and conference attendance of approximately $396,000, an increase in travel and entertainment costs of approximately $317,000 and an increase in occupancy costs of approximately $350,000 related to the rent expense on our new manufacturing facility.

Gain (Loss) on Foreign Currency Transactions:

For the three months ended March 31, 2022, the loss on foreign currency transactions was approximately $1,213,000 as compared to a loss of approximately $1,306,000 for the three months ended March 31, 2021.

For the three months ended June 30, 2022, the loss on foreign currency transactions was approximately $2,523,000 as compared to a gain of approximately $234,000 for the three months ended June 30, 2021.

The 2022 loss was directly related to the decrease in the spot exchange rate of the Euro to the U.S.

dollar as of March 31, 2022 as compared to December 31, 2021.

dollar at June 30, 2022 as compared to March 31, 2022.

The spot exchange rate of the Euro to the U.S.

dollar was $1.11 per Euro as of March 31, 2022, as compared to $1.14 per Euro as of December 31, 2021.

The 2021 loss was directly related to the decrease in the spot exchange rate of the Euro as of March 31, 2021 as compared to December 31, 2020.

dollar was $1.05 per Euro at June 30, 2022, as compared to $1.11 per Euro at March 31, 2022.

The 2021 gain was directly related to the increase in the spot exchange rate of the Euro at June 30, 2021 as compared to March 31, 2021.

The spot exchange rate of the Euro to the U.S.

dollar was $1.17 per Euro as of March 31, 2021, as compared to $1.22 per Euro at December 31, 2020.

dollar was $1.19 per Euro at June 30, 2021, as compared to $1.17 per Euro at March 31, 2021.

Comparison for the six months ended June 30, 2022 and 2021:

Revenue from product sales was approximately $15,255,000 in the six months ended June 30, 2022, as compared to approximately $21,509,000 in the six months ended June 30, 2021, a decrease of approximately $6,254,000, or 29%.

The decrease in the average exchange rate of the Euro to the U.S.

dollar negatively impacted 2022 product sales by approximately $1,400,000.

For the six months ended June 30, 2022, the average exchange rate of the Euro to the U.S.

dollar was $1.09 as compared to an average exchange rate of $1.21 for the six months ended June 30, 2021.

Though difficult to quantify, we estimate that approximately $300,000 of total product sales in the six months ended June 30, 2022 was due to the demand for CytoSorb to treat COVID-19 patients as compared to $3.5 million in the six months ended June 30, 2021.

This decrease is partly attributed to high rates of vaccinations that are associated with reduced severity of illness, reduced need for hospitalization, and risk of death.

Overall direct sales declined by of approximately $5,379,000 resulting primarily from lower sales in Germany due to COVID-19 pandemic-driven market conditions and unfavorable currency exchange conversions.

Although improved, COVID-19 restrictions remain in place at many hospitals throughout Germany and these restrictions continue to limit our access to hospital personnel, particularly the physicians.

Grant income was approximately $1,932,000 for the six months ended June 30, 2022 as compared to approximately $1,114,000 for the six months ended June 30, 2021, an increase of approximately $818,000 or 73%.

During the six months ended June 30, 2021, 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.

In 2022, research and development employees were assigned exclusively to grant and other research and development activities.

Total revenues were approximately $17,187,000 for the six months ended June 30, 2022, as compared to total revenues of approximately $22,623,000 for the six months ended June 30, 2021, a decrease of approximately $5,436,000, or 24%.

Cost of Revenues:

For the six months ended June 30, 2022 and 2021, cost of revenue was approximately $5,828,000 and $5,462,000, respectively, an increase of approximately $366,000.

Product cost of revenue was approximately $4,008,000 and $4,426,000, respectively, for the six months ended June 30, 2022 and 2021, a decrease of approximately $418,000.

This decrease was due primarily to lower sales.

Product gross margins were approximately 74% for the six months ended June 30, 2022 and approximately 79% for the six months ended June 30, 2021.

The reduction in product gross margin is due primarily to inefficiencies associated with the relocation of our production activities to our new manufacturing facility in Princeton, New Jersey during the second quarter of 2022.

In addition, to a lesser extent, product gross margin was negatively impacted due to an increase in the percent contribution of lower margin distributor sales.

Research and Development Expenses:

For the six months ended June 30, 2022, research and development expenses were approximately $8,427,000 as compared to research and development expenses of approximately $5,981,000 for the six months ended June 30, 2021, an increase of approximately $2,446,000.

This increase was due to an increase in costs associated with our clinical trial activities of approximately $1,951,000 due to activities related to our STAR-T and STAR-D trials in the United States, an increase in salaries related to our clinical trial activities of approximately $142,000 due to the hiring of clinical expertise and an increase in non-grant related research and development labor of approximately $193,000 and an increase in non-grant related research and development costs of approximately $160,000.

Legal, Financial and Other Consulting Expenses:

Legal, financial and other consulting expenses were approximately $1,480,000 for the six months ended June 30, 2022, as compared to approximately $1,426,000 for the six months ending June 30, 2021.

The increase of approximately $54,000 was due to an increase in legal fees of approximately $304,000 due to the abandonment of certain patent applications and an increase in accounting fees of approximately $122,000.

These increases were offset by decreases in hiring fees of approximately $264,000 and consulting fees of approximately $108,000.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses were approximately $17,600,000 for the six months ended June 30, 2022, as compared to $17,531,000 for the six months ended June 30, 2021, an increase of $69,000.

This increase is related to an increase in salaries, commissions and related costs of approximately $1,210,000, an increase in sales and marketing costs, which include advertising and conference attendance of approximately $682,000, an increase in travel and entertainment costs of approximately $469,000 and an increase in occupancy costs of approximately $723,000 related to the rent expense on our new manufacturing facility.

These increases were offset by a decrease in royalty expenses of approximately $531,000, a decrease in non-cash restricted stock expense of approximately $1,742,000 related to restricted stock units granted to the Company’s executive officers, a decrease in non-cash stock compensation expense of approximately $677,000, and a decrease in other general and administrative expenses of approximately $65,000.

Gain (Loss) on Foreign Currency Transactions:

For the six months ended June 30, 2022, the loss on foreign currency transactions was approximately $3,736,000 as compared to a loss of approximately $1,071,000 for the six months ended June 30, 2021.

The 2022 loss was directly related to the decrease in the spot exchange rate of the Euro to the U.S.

dollar as of June 30, 2022 as compared to December 31, 2021.

The spot exchange rate of the Euro to the U.S.

dollar was $1.05 per Euro as of June 30, 2022, as compared to $1.14 per Euro at December 31, 2021.

The 2021 loss was directly related to the decrease in the spot exchange rate of the Euro as of June 30, 2021 as compared to December 31, 2020.

History of Operating Losses:

We have experienced substantial operating losses since inception.

As of March 31, 2022, we had an accumulated deficit of approximately $230,152,000, which included losses of approximately $8,966,000 and $4,168,000 for the three-month periods ended March 31, 2022 and 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of approximately $241,031,000, which included losses of approximately $19,846,000 and $8,845,000 for the six-month periods ended June 30, 2022 and 2021, 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.

1 unchanged sentence

Since inception, our operations have been primarily financed through the issuance of debt and equity securities.

As of March 31, 2022, we had current assets of approximately $55,854,000 including unrestricted cash on hand of approximately $43,023,000 and current liabilities of approximately $14,672,000.

As of March 31, 2022, $25 million of our total shelf amount was allocated to our ATM facility, all of which is still available.

As of June 30, 2022, we had current assets of approximately $41,647,000 including unrestricted cash on hand of approximately $30,164,000 and current liabilities of approximately $10,554,000.

As of June 30, 2022, $25 million of our total shelf amount was allocated to our ATM facility, all of which is still available.

In addition, we have $15 million of debt availability, providing financial flexibility, if needed.

In April of 2022, we received approximately $740,000 in cash from the approved sale of our net operating losses and research and development credits from the State of New Jersey.

As of June 30, 2022, cash and cash equivalents were $31.9 million, including $1.7 million in restricted cash, compared to $44.7 million as of March 31, 2022.

The change in cash, or our second quarter 2022 cash burn, was approximately $12.9 million.

This included non-recurrent expenditures of $4.8 million related to the construction, capital equipment and other costs associated with the build out of our new manufacturing facility.

Most of the costs associated with the new facility have already been incurred, except for an estimated $300,000 in additional costs to be paid over the remainder of 2022.

In addition, the inefficiencies caused by necessary production shutdowns associated with the relocation to our new production facility and lower sales volumes, reduced gross margins from greater than 80% in the first quarter of 2022 to 67% in the second quarter of 2022, unfavorably impacting our cash burn by approximately $1.0 million.

We expect gross margins to return to previous levels as we complete the relocation to the new facility by the end of this year, end the lease at our Deer Park Drive facility, and begin to capture manufacturing efficiencies driven by expected improvement in market conditions and increased product demand.

In addition, due to the timing of certain collections, grant and accounts receivables grew by $0.6 million in the second quarter.

Excluding these aforementioned factors impacting our second quarter 2022 cash burn, our burn for the second quarter 2022 would have been approximately $6.5 million.

Over the past quarters, we have strategically built up our inventory as a buffer against any potential disruption in production with the transition to the new facility.

By December 31, 2022, we expect to be able to reduce our inventory by approximately $1.0 million, which will be a source of working capital.

We are also managing our resources proactively, continuing to invest in key areas such as our U.S.

1 unchanged sentence

In April 2022, we began instituting tighter cost controls which are expected to reduce our planned cash burn by an additional $2 million per quarter.

We believe that we have sufficient cash to fund the Company’s operations beyond twelve months from the issuance of these financial statements.

We are currently actively engaged in making further reductions to our operating costs to reduce our future cash burn.

We believe that we have sufficient cash to fund the Company’s operations beyond twelve months from the issuance of these consolidated financial statements.

COVID-19 Impact on Financial Results

Product revenues in the three months ended March 31, 2022 were negatively impacted by pandemic-driven adverse market conditions, especially in Germany which is our largest market.

This was due to another wave in new COVID-19 cases in Germany, driven by the Omicron variant, which peaked in March.

Product revenues in the six months ended June 30, 2022 were negatively impacted by pandemic-driven adverse market conditions, especially in Germany which is our largest market.

This was due to another wave in new COVID-19 cases in Germany, driven by the Omicron variant.

This prompted many hospitals throughout Germany to either maintain or reinstitute restrictions such as visitation rights to non-essential visitors.

1 unchanged sentence

This is being partly attributed to high rates of vaccinations that are associated with reduced severity of illness, reduced need for hospitalization, and risk of death.

Our product revenues decreased by 22% during the three months ended March 31, 2022 to approximately $7.9 million from approximately $10.1 million in the three months ended March 31, 2021.

Though difficult to quantify, we estimate that approximately $300,000 of our product revenues were directly or indirectly related to COVID-19 during the three-month period ended March 31, 2022 as compared to $1.8 million during the three months ended March 31, 2021.

Our product revenues decreased by 29% during the six months ended June 30, 2022 to approximately $15.3 million from approximately $21.5 million in the six months ended June 30, 2021.

Though difficult to quantify, we estimate that approximately $300,000 of our product revenues were directly or indirectly related to COVID-19 during the six-month period ended June 30, 2022 as compared to $3.5 million during the six months ended June 30, 2021.

We expect that COVID-19 revenues will continue to decline in future periods, as increasing vaccinations globally result in fewer new cases, hospitalizations, and deaths from COVID-19.

1 unchanged sentence

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 $155,000 for the three months ended March 31, 2022.

Sales to hospitals in the United States under the EUA amounted to approximately $173,000 for the six months ended June 30, 2022.

Given the significant decrease in COVID-19 cases in the U.S.

6 unchanged sentences

These disruptions have been amplified more recently in Germany as a result of a wave of new COVID-19 cases.

For example, we have experienced decreased access of our sales representatives to hospitals and fewer sales meetings with physicians, approximately 40% of our direct salesforce in Germany contracting COVID-19 during Q1, decreased effectiveness of virtual medical conferences, and limits on our ability to market new indications, such as ticagrelor and rivaroxaban removal.

For example, we have experienced decreased access of our sales representatives to hospitals and fewer sales meetings with physicians, approximately 40% of our direct salesforce in Germany contracting COVID-19 during 2022, decreased effectiveness of virtual medical conferences, and limits on our ability to market new indications, such as ticagrelor and rivaroxaban removal.

Additionally, hospitals have 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.

These factors negatively impacted our critical care and cardiac surgery markets in Germany, resulting in lower-than-expected sales of CytoSorb during the quarter ended March 31, 2022.

These factors negatively impacted our critical care and cardiac surgery markets in Germany, resulting in lower-than-expected sales of CytoSorb during the quarter ended June 30, 2022.

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.

We would expect over time to regain unrestricted access to hospitals and physicians which should positively impact our product sales in the future.

The COVID-19 pandemic did not impact grant income during the first quarter of 2022 but did negatively impact first quarter 2021 results, when our research and development employees were either deployed to work-from-home or reassigned to assist in production activities to increase production of CytoSorb.

The COVID-19 pandemic did not impact grant income during the first half of 2022 but did negatively impact first half 2021 results, when 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.

Our grant income increased by 68% during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Our grant income increased by 73% during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

However, this may change depending on whether there is a resurgence of COVID-19, which may result in a reduction of grant income 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.

This has resulted in temporary pauses and delays in a number of our company-sponsored clinical trials.

There has been a worldwide slowdown in clinical trial activities as medical providers focus on COVID-19 patients, as well as widespread staffing shortages.

This has resulted in temporary pauses and delays in a number of our company-sponsored clinical trials, which has resulted in lower-than-expected costs and expenses associated with clinical trial activity.

In addition, because of ongoing COVID-19-related delays in the U.K., we elected to stop our TISORB single arm trial in April 2021, in favor of dedicating those resources to the U.S.

1 unchanged sentence

These clinical trial activities and related expenses are expected to increase substantially as the impact of the COVID-19 pandemic continues to ease, especially in the U.S.

In addition to the acute impact of the pandemic relating to the strain from high COVID-19 patient numbers, major healthcare systems throughout the world, including the United States and Germany, where we have substantial clinical trial activities, are also challenged by the long-term effects of the pandemic on the health care system and are encountering difficulty retaining and recruiting hospital personnel including personnel needed to support research activities.

In addition to the acute impact of the pandemic relating to the strain from high COVID-19 patient numbers, major healthcare systems

throughout the world, including the United States and Germany, where we have substantial clinical trial activities, are also challenged by the long-term effects of the pandemic on the health care system and are encountering difficulty retaining and recruiting hospital personnel including personnel needed to support research activities.

It is uncertain when these complex headwinds on health care delivery and clinical research activities will resolve and until then these factors may result in reduced capabilities of institutions to contribute patient recruitment into clinical trials with the potential to slow enrollment in our Company-sponsored clinical trials.

1 unchanged sentence

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.

Contractual Obligations

16 unchanged sentences

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.

Under the terms of this amendment, the Company vacated 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.

13 unchanged sentences

We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies and estimates is contained in our Annual Report on Form 10-K.

Going Concern

2 unchanged sentences

Gross proceeds from the Offering amounted to approximately $57.5 million and, after deducting the underwriting discounts and commissions and expenses related to the Offering, the Company received total net proceeds of approximately $53.8 million.

As of March 31, 2022, the Company’s cash and cash equivalents and restricted cash were approximately $44.7 million, which the Company expects will fund the Company’s operations beyond twelve months from the issuance of these financial statements.

As of June 30, 2022, the Company’s cash, cash equivalents and restricted cash balances were approximately $31.9 million, which the Company expects will fund the Company’s operations beyond twelve months from the issuance of these consolidated financial statements.

In addition, the Company has $15 million of debt availability and $25 million of availability under its ATM facility to provide additional liquidity, as needed.

As a result, the Company has determined that the going concern risk has been substantially mitigated.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis