What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-10 · 78 added, 65 removed, 137 unchanged (51% of the section changed)

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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.

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In August 2021, the Company announced that it was granted a second Breakthrough Device Designation for its DrugSorb-ATR Antithrombotic Removal System by the FDA to remove the direct oral anticoagulants, rivaroxaban and apixaban.

The Company has initiated two U.S.

clinical trials evaluating the use of DrugSorb-ATR during cardiothoracic surgery to remove ticagrelor, apixaban and rivaroxaban to prevent or reduce perioperative bleeding complications in pursuit of U.S.

FDA marketing approval.

The Company has initiated a pivotal randomized, controlled clinical trial in the U.S.

and Canada, called the STAR-T trial, evaluating the use of DrugSorb-ATR during cardiothoracic surgery to remove ticagrelor to prevent or reduce perioperative bleeding complications in pursuit of U.S.

FDA and Health Canada 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.

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● 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 and STAR-D pivotal randomized, controlled trial to reduce the antithrombotic drugs, ticagrelor, apixaban and rivaroxaban to reduce bleeding complications in patients undergoing cardiothoracic surgery while on these drugs.

STAR-T and future STAR-D pivotal randomized, controlled trials to reduce the level of antithrombotic drugs, ticagrelor, apixaban and rivaroxaban to reduce bleeding complications in patients undergoing cardiothoracic surgery while on these drugs.

● 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 maintaining or improving solid organ function.

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.

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Comparison of the year ended December 31, 2022 and 2021

For the year ended December 31, 2022, we generated total revenue, which includes product revenue and grant income, of approximately $34,689,000 as compared to revenues of approximately $43,166,000 for the year ended December 31, 2021, a decrease of approximately $8,477,000, or 20%.

Revenue from product sales was approximately $29,360,000 for the year ended December 31, 2022, as compared to approximately $40,109,000 in the year ended December 31, 2021, a decrease of approximately $10,749,000 or 27%.

Direct sales decreased by approximately $8,983,000 and distributor sales decreased by approximately $1,766,000 during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $300,000 for the year ended December 31, 2022, as compared to approximately $1,690,000 in 2021.

Though difficult to quantify, we estimate that approximately $300,000 and approximately $6,300,000 of total product sales during the years ended December 31, 2022 and 2021 was due to the demand for CytoSorb to treat COVID-19 patients.

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 $3,127,000.

For the year ended December 31, 2022, the average exchange rate of the Euro to the U.S.

dollar was $1.05 as compared to an average exchange rate of $1.18 for the year ended December 31, 2021.

Grant income was approximately $5,329,000 for the year ended December 31, 2022 as compared to approximately $3,057,000 for the year ended December 31, 2021, an increase of approximately $2,272,000, or 74%.

During the year ended December 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.

In 2022, research and development employees were assigned primarily to grant related activities.

Cost of Revenue:

For the years ended December 31, 2022 and 2021, cost of revenue was approximately $13,956,000 and $11,047,000, respectively, an increase of approximately $2,909,000.

This increase was due to an increase in grant cost of revenue of approximately $2,210,000 due to the increase in billable hours charged to our grant related projects.

Product cost of revenues increased approximately $698,000 during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

This increase was primarily due to an equipment failure of a refrigeration unit at our new manufacturing facility that caused a net write-off (after insurance proceeds) of approximately $300,000 of work-in-process inventory (see Note 2 to the financial statements) and inefficiencies associated with lower production due to a decrease in production volume and inefficiencies associated with relocating our production activities to the new facility.

Product gross margins were approximately 70% for the year ended December 31, 2022 and approximately 80% for the year ended December 31, 2021.

Gross Profit:

Gross profit was approximately $20,733,000 for the year ended December 31, 2022, a decrease of approximately $11,385,000 or 35%, versus gross profit of $32,118,000 in 2021.

This decrease is attributed to lower sales, the inventory write-off related to an equipment failure and inefficiencies associated with the process of relocating our production activities to the new facility as discussed above.

Research and Development Expenses:

Our research and development costs were approximately $15,119,000 and $16,381,000 for the years ended December 31, 2022 and 2021, respectively, a decrease of approximately $1,262,000, or 8%.

This decrease was due to a decrease in clinical trial related costs of approximately $2,448,000, due primarily to the temporary pause of our STAR-D clinical trial in the U.S.

and the discontinuation of the Hep-On-Fire clinical trial in Germany, a decrease in rent expense to research and development of approximately $685,000 related to our new facility and a decrease in non-grant related research and development costs of approximately $187,000.

These decreases were offset by an increase in salaries related to our clinical trial activities of approximately $1,694,000 due to the hiring of additional clinical expertise and an increase in other research and development labor costs of approximately $364,000 related to the hiring of additional scientific expertise.

Legal, Financial and Other Consulting Expenses:

Our legal, financial and other consulting costs were approximately $2,848,000 and $2,732,000 for the years ended December 31, 2022 and 2021, respectively, an increase of approximately $116,000, or 4%.

This increase was due to an increase in legal fees of approximately $685,000 due to the abandonment of certain issued patents and patent applications and an increase in accounting fees of approximately $169,000.

These increases were offset by a decrease in consulting fees of approximately $396,000 and a decrease in hiring fees of approximately $342,000.

Selling, General and Administrative Expenses:

Our selling, general and administrative expenses were approximately $34,288,000 and $35,750,000 for the years ended December 31, 2022 and 2021, respectively, a decrease of approximately $1,462,000, or 4%.

This decrease was due to a decrease of salary and commission costs of approximately $594,000 due to a reduction in commissions due to lower sales, a decrease in royalty expense of approximately $915,000 due to lower sales, a decrease in non-cash restricted stock expense of approximately $1,771,000 related to restricted stock units granted to the Company’s executive officers, a decrease in non-cash stock compensation expense of approximately $597,000 and a decrease in other general and administrative expenses of approximately $324,000.

These decreases were offset by an increase sales and marketing costs, which include advertising and conference attendance, of approximately $797,000, an increase in travel and entertainment costs of approximately $530,000 and an increase in occupancy costs of approximately $1,412,000 related to the rent expense on our new manufacturing facility.

Gain (Loss) on Foreign Currency Transactions:

For the year ended December 31, 2022, the loss on foreign currency transactions was approximately $2,449,000, as compared to a loss on foreign currency transactions of approximately $2,578,000 for the year ended December 31, 2021.

The 2022 loss is directly related to the decrease of the exchange rate of the Euro as of December 31, 2022 as compared to December 31, 2021.

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

dollar was $1.07 per Euro at December 31, 2022 as compared to $1.14 per Euro at December 31, 2021.

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

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

dollar was $1.14 per Euro at December 31, 2021 as compared to $1.22 per Euro at December 31, 2020.

Benefit from Income Taxes:

Our benefit from income taxes was approximately $1,093,000 and $736,000 for the years ended December 31, 2022 and 2021, respectively.

These benefits were realized by utilizing the New Jersey Technology Business Tax Certificate Transfer Program whereby the State of New Jersey allows us to sell a portion of our state net operating losses to a third party.

Comparison of the year ended December 31, 2021 and 2020

For the year ended December 31, 2021, we generated total revenue, which includes product revenue and grant income, of approximately $43,166,000 as compared to revenues of approximately $41,005,000 for the year ended December 31, 2020, an increase of approximately $2,161,000, or 5%.

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Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $1,690,000 for the year ended December 31, 2021, as compared to approximately $1,341,000 in 2020.

Though difficult to quantify, we estimate that approximately $6.3 million and $9.4 million of total product sales during the

years ended December 31, 2021 and 2020 was due to the demand for CytoSorb to treat COVID-19 patients.

Though difficult to quantify, we estimate that approximately $6.3 million and $9.4 million of total product sales during the years ended December 31, 2021 and 2020 was due to the demand for CytoSorb to treat COVID-19 patients.

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

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Comparison of the year ended December 31, 2020 and 2019

For the year ended December 31, 2020, we generated total revenue, which includes product revenue and grant income, of approximately $41,005,000 as compared to revenues of approximately $24,949,000 for the year ended December 31, 2019, an increase of approximately $16,056,000, or 64%.

Revenue from product sales was approximately $39,453,000 for the year ended December 31, 2020, as compared to approximately $22,766,000 in the year ended December 31, 2019, an increase of approximately $16,787,000 or 73%.

This increase was driven by an increase in direct sales of approximately $8,917,000 resulting from sales to both new customers and repeat orders from existing customers and an increase in distributor sales of approximately $7,769,000.

Sales to hospitals in the United States under the EUA granted by the FDA amounted to approximately $1,341,000 for the year ended December 31, 2020.

Though difficult to quantify, we estimate that approximately $9.4 million of total product sales during the year ended December 31, 2020 was due to the demand for CytoSorb to treat COVID-19 patients.

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

dollar, sales were positively impacted by approximately $693,000.

For the year ended December 31, 2020, the average exchange rate of the Euro to the U.S.

dollar was $1.14 as compared to an average exchange rate of $1.12 for the year ended December 31, 2019.

Cost of Revenue:

For the years ended December 31, 2020 and 2019, cost of revenue was approximately $11,052,000 and $7,364,000, respectively, an increase of approximately $3,688,000.

Product cost of revenues increased approximately $4,180,000 during the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of the increase in product sales.

Product gross margins were approximately 76% for the year ended December 31, 2020 and approximately 77% for the year ended December 31, 2019.

The decrease in gross margin was due to an increase in percent contribution of lower margin distributor sales as well as certain costs associated with the rapid ramp-up of production during the year ended December 31, 2020.

Gross Profit:

Gross profit was approximately $29,952,000 for the year ended December 31, 2020, an increase of approximately $12,366,000 or 70%, over gross profit of $17,586,000 in 2019.

This increase is attributed to an increase in CytoSorb product sales during 2020.

Research and Development Expenses:

Our research and development costs were approximately $8,811,000 and $12,092,000 for the years ended December 31, 2020 and 2019, respectively, a decrease of approximately $3,281,000, or 27%.

This decrease was due to a decrease in clinical trial and related costs of approximately $3,769,000, due primarily to the pause in our Company-sponsored clinical trials as a result of hospital restrictions due to the COVID-19 pandemic, and a decrease in our non-grant related research and development costs of approximately $393,000.

These decreases were offset by an increase in non-clinical research and development salary related costs of approximately $160,000 due primarily to COVID-19 related incentive pay, decreases in direct labor and other costs being deployed toward grant-funded activities of approximately $675,000, which had the effect of increasing the amount of our non-reimbursable research and development costs and an increase in new product development costs of approximately $46,000.

Legal, Financial and Other Consulting Expenses:

Our legal, financial and other consulting costs were approximately $3,048,000 and $2,462,000 for the years ended December 31, 2020 and 2019, respectively, an increase of approximately $586,000, or 24%.

This increase was due to an increase in employment agency fees of approximately $395,000 related to the hiring of senior level personnel, an increase in consulting fees of approximately $219,000 primarily related to certain financial advisory fees and an increase in accounting and auditing fees of approximately $40,000.

These increases were offset by a decrease in legal fees of approximately $70,000.

Selling, General and Administrative Expenses:

Our selling, general and administrative expenses were approximately $28,464,000 and $22,006,000 for the years ended December 31, 2020 and 2019, respectively, an increase of approximately $6,458,000, or 29%.

This increase was due to an increase in salaries, commissions and related costs of approximately $4,849,000 due primarily to headcount additions and increased commissions due to increase sales, an increase in royalty expenses of approximately $1,327,000 due to the increase in product sales, and an increase in non-cash stock option expense of approximately $1,879,000.

These increases were offset by reductions in sales and marketing costs, which include advertising and conference attendance of approximately $824,000 and travel and entertainment and other general and administrative expenses of approximately $773,000.

These reductions were due primarily to travel restrictions related to the COVID-19 pandemic.

Interest Expense, Net:

For the year ended December 31, 2020, interest expense, net was approximately $1,201,000, as compared to interest expense, net of approximately $1,034,000 for the year ended December 31, 2019.

This increase in net interest expense of approximately $167,000 is related to the final fee that was due upon repayment of our term loans in conjunction with the Third Amendment to the Amended Loan and Security Agreement with Bridge Bank that closed on December 4, 2020.

Gain (Loss) on Foreign Currency Transactions:

For the year ended December 31, 2020, the gain on foreign currency transactions was approximately $2,607,000, as compared to a loss on foreign currency transactions of approximately $350,000 for the year ended December 31, 2019.

The 2020 gain is directly related to the increase of the exchange rate of the Euro at December 31, 2020 as compared to December 31, 2019.

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

dollar was $1.22 per Euro at December 31, 2020 as compared to $1.12 per Euro at December 31, 2019.

The 2019 loss is directly related to the decrease in the exchange rate of the Euro at December 31, 2019, as compared to December 31, 2018.

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

dollar was $1.12 per Euro at December 31, 2019 as compared to $1.15 per Euro at December 31, 2018.

Benefit from Income Taxes:

Our benefit from income taxes was approximately $1,127,000 and $1,092,000 for the years ended December 31, 2020 and 2019, respectively.

History of Operating Losses

We have experienced substantial operating losses since inception.

As of December 31, 2021, we had an accumulated deficit of approximately $221,185,000, which included losses of approximately $24,559,000, $7,837,000 and $19,266,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Historically, our losses have resulted principally from costs incurred in the research and development of our polymer technology, our legal, financial and consulting expenses, and selling, general and administrative expenses, which together were approximately $54,863,000, $40,323,000 and $36,560,000 and for the years ended December 31, 2021, 2020 and 2019, respectively.

Liquidity and Capital Resources

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At December 31, 2022, we had current assets of approximately $33,760,000 including cash, cash equivalents and restricted cash on hand of approximately $23,832,000 and had current liabilities of approximately $9,715,000.

As of December 31, 2021, $25 million of our total shelf amount was allocated to our ATM facility, all of which is still available.

All of the $25 million of our total shelf amount allocated to our ATM facility was available as of December 31, 2022.

On December 27, 2022, we drew down the first $5 million tranche of the Term C loans available under the terms of our Amended Loan and Security Agreement with Bridge Bank (see below).

Also, we expect to receive approximately $1,093,000 in cash from the approved sale of our net operating losses and research and development credits from the State of New Jersey in the first half of 2023.

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

As of December 31, 2022, cash, cash equivalents and restricted cash were $23.8 million compared to $53.8 million as of December 31, 2021.

After taking into account the $5 million related to our debt drawdown, our 2022 cash burn was approximately $35.0 million.

This cash burn was due to lower-than-expected sales volumes, product gross margins that were lower due to decreased production volumes, and operating efficiencies associated with the move to our new manufacturing facility, capital expenditures of approximately $6.3 million related to our new facility and other factors (e.g.

a delay in realizing savings from cost cutting due to notice periods and labor laws in Europe).

A reduction in product gross margins from 80% in 2021 to 70% in 2022, unfavorably impacted our cash burn by approximately $2.9 million.

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

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

clinical program.

while driving cost-cutting throughout our Company.

At the beginning of Q2 2022, we began instituting tighter cost controls and have reduced our headcount (including full and part-time employees and consultants) internationally by 10%, with the goal of reducing our cash burn.

In addition, we have shifted our R&D headcount to funded grant programs, where we have an $11.5 million backlog as of December 31, 2022.

Some of our costs savings of our headcount reduction are not yet visible in our results due to notice periods and labor laws in Europe but will be reflected in our 2023 operating budget.

Meanwhile, we are working diligently to prioritize activities that we believe have a near-term return on investment and advance our strategic priorities, which cutting non-core or non-essential activities and spend.

Our goal is, through a combination of driving an increase in sales and gross margin, and cutting costs, to significantly reduce our cash burn and to extend our operating runway with the resources we have.

Based upon the foregoing, we believe that we have sufficient cash to fund the Company’s operations beyond twelve months from the issuance of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Loan and Security Agreement

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Under the Loan Agreement, the Bank has agreed to loan a tranche of term loans in the aggregate amount of $15 million, which are available for the Company to draw down at its sole discretion in three tranches of $5 million each at any time during the period commencing on the Fourth Amendment Date and ending on the earlier of (i) December 31, 2022 and (ii) the occurrence of an Event of Default (as defined in the Loan Agreement) (the “Term C Loan”).

On December 27, 2022, the Company drew down the first $5 million tranche of the Term C loans available under the terms of the Fourth Amendment.

On December 28, 2022 (the “Fifth Amendment Date”), the Company entered into the Fifth Amendment of its Amended Loan and Security Agreement with Bridge Bank.

The Fifth Amendment extends the draw period under the Fourth Amendment to the earlier of (i) March 1, 2023 and (ii) the occurrence of an Event of Default.

On March 9, 2023, the Company entered into the Sixth Amendment of its Amended Loan and Security Agreement.

The Sixth Amendment further extends the draw period to March 24, 2023.

For further discussion regarding the Loan Agreement and the Term C Loan, please see Note 7 – Long Term Debt to our Consolidated Financial Statements, included elsewhere in this Annual Report on Form 10-K.

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Grant Revenue:

Revenue from grant income is based on contractual agreements.

Revenue from grant income is based on contractual agreements with various agencies of the United States government.

Certain agreements provide for reimbursement of costs, other agreements provide for reimbursement of costs and an overhead margin and certain agreements are performance based, where revenue is earned based upon the achievement of milestones outlined in the contract.

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Lease Commitments

We currently operate two leased facilities near Princeton, New Jersey and two leased facilities in Berlin, Germany as follows:

We currently operate our leased facility in Princeton, New Jersey and two leased facilities in Berlin, Germany as follows:

● In March 2021, we entered into a lease agreement for a new 48,511 square foot operating facility at 305 College Road East, Princeton, New Jersey, which contains office, laboratory, manufacturing and warehouse space.

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As of February 2023, our monthly base rent is approximately $114,000.

● Our Deer Park Drive facility consists of approximately 20,820 sq.

ft., housing research laboratories and manufacturing operations under a lease agreement which expires on December 31 2022.

Our monthly base rent as of February 2022 is approximately $35,300 and additionally we reimburse the landlord for monthly operating expenses of approximately $30,100.

● Our office facility leases in Berlin, Germany require combined base rent payments amounting to approximately $12,100 per month.

● Our office facility leases in Berlin, Germany requires combined base rent payments amounting to approximately $12,100 per month.

The initial lease term of both leases ends August 31, 2026.

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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-K

Item 7. Management’s Discussion and Analysis