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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-09 · 132 added, 78 removed, 137 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2022, 2021 and 2020 should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report.

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.

The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2023, 2022 and 2021 should be read in conjunction with our consolidated financial statements, and the notes to those consolidated financial statements that are included elsewhere in this Report.

We are a leader in the treatment of life-threatening conditions in 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.

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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 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.

The Company has completed its 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 prevent or reduce perioperative bleeding complications in pursuit of U.S.

FDA and Health Canada marketing approval.

We believe that the safety and efficacy results of the STAR-T trial will support regulatory submissions for marketing approval by the FDA and Health Canada.

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 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 prior to transplant.

STAR-T pivotal randomized, controlled trial to reduce the level of the antithrombotic drug, ticagrelor, to reduce bleeding complications in patients undergoing cardiothoracic surgery while on this drug.

● ECOS-300CY — an adsorption cartridge approved in the EU 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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Special Operations Command, and others.

Impact of Inflation and Other Issues:

The current high inflationary environment has impacted us in various ways.

Due to the current competitive labor market and rising inflation, our labor costs have risen significantly in order to attract and retain qualified employees throughout our organization.

In addition, we have experienced raw material price increases primarily related to the oil-based chemicals used in the polymer manufacturing process as well additional requests for higher fuel surcharges from most suppliers.

Rising energy costs, including electricity and fossil fuels, have also made it more expensive to support our operations, manufacturing, and commercial activities.

We have also experienced increases in our transportation costs;

however, we have been able to substantially mitigate these cost increases by implementing bulk shipping methods.

In addition, we have been able to mitigate most supply chain issues that existed during the COVID-19 pandemic by ordering larger quantities of inventory as they were available.

Inflationary pressures may continue to impact our product gross margins in the future.

Results of Operations

Comparison of the year ended December 31, 2023 and 2022

For the year ended December 31, 2023, we generated total revenue, which includes product revenue and grant income, of approximately $36,349,000 as compared to revenues of approximately $34,689,000 for the year ended December 31, 2022, an increase of approximately $1,660,000, or 5%.

Revenue from CytoSorb product sales was approximately $31,015,000 for the year ended December 31, 2023, as compared to approximately $28,573,000 in the year ended December 31, 2022, an increase of approximately $2,442,000, or 9%.

Other product revenue was approximately $70,000 for the year ended December 31, 2023, as compared to $787,000 for the year ended December 31, 2022, a decrease of approximately $717,000.

Covid-19 product sales were -0- in 2023 and approximately $300,000 in 2022.

Direct sales increased by approximately $928,000, or 5% and distributor sales increased by approximately $797,000, or 7% during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

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

dollar also positively impacted 2023 product sales by approximately $780,000.

For the year ended December 31, 2023, the average exchange rate of the Euro to the U.S.

dollar was $1.08 as compared to an average exchange rate of $1.05 for the year ended December 31, 2022.

Grant income was approximately $5,264,000 for the year ended December 31, 2023, as compared to approximately $5,329,000 for the year ended December 31, 2022, a decrease of approximately $65,000, or 1%.

Cost of Revenue:

For the years ended December 31, 2023 and 2022, cost of revenue was approximately $13,957,000 and $13,956,000, respectively.

Grant cost of revenue increased approximately $41,000 during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Product cost of revenues decreased approximately $39,000 during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Product gross margins were approximately 72% for the year ended December 31, 2023, and approximately 70% for the year ended December 31, 2022.

This increase was primarily due to inefficiencies related to the relocation of our production activities to our new manufacturing facility in Princeton, New Jersey during the year ended December 31, 2022, that did not recur in 2023.

Gross Profit:

Gross profit was approximately $22,392,000 for the year ended December 31, 2023, an increase of approximately $1,659,000 or 8%, versus gross profit of $20,733,000 in 2022.

This increase is attributed to increased sales and the increase in product gross margin percentage as discussed above.

Research and Development Expenses:

Our research and development costs were approximately $15,729,000 and $15,119,000 for the years ended December 31, 2023 and 2022, respectively, an increase of approximately $610,000, or 4%.

This increase was related to approximately $850,000 of costs incurred related to pre-production manufacturing activities required to bring the new manufacturing plant to a state of commercial readiness and approximately $720,000 of costs related to pre-commercialization activities related to DrugSorb ATR.

These increases were offset by a decrease in clinical trial related costs of approximately $940,000, due primarily to the termination of our STAR-D clinical trial in the U.S., and other non-grant related research and development costs of approximately $20,000.

Legal, Financial and Other Consulting Expenses:

Our legal, financial and other consulting costs were approximately $4,272,000 and $2,848,000 for the years ended December 31, 2023 and 2022, respectively, an increase of approximately $1,424,000, or 50%.

This increase was due to an increase in legal fees of approximately $1,010,000 due to the abandonment of certain issued patents and patent applications, fees related to Company’s equity transactions and the settlement of a litigation matter;

an increase in employment agency fees of approximately $178,000 related to the hiring of certain management personnel, an increase in consulting fees of approximately $179,000 related to regulatory matters on DrugSorb-ATR and an increase in accounting fees of approximately $57,000.

Selling, General and Administrative Expenses:

Our selling, general and administrative expenses were approximately $33,600,000 and $34,288,000 for the years ended December 31, 2023 and 2022, respectively, a decrease of approximately $688,000, or 2%.

This decrease was due to a decrease in sales and marketing costs, which include advertising and conference attendance, of approximately $839,000, a decrease in royalty expense of approximately $109,000, a decrease in non-cash stock compensation expense (which includes both stock options and restricted stock units) of approximately $115,000, a decrease in commercial insurance of approximately $165,000 and a decrease in public relations costs of approximately $135,000.

These decreases were offset by an increase in salaries, commissions, and related costs of approximately $532,000 and an increase in other general and administrative costs of approximately $143,000.

Gain (Loss) on Foreign Currency Transactions:

For the year ended December 31, 2023, the gain on foreign currency transactions was approximately $1,949,000, as compared to a loss on foreign currency transactions of approximately $2,449,000 for the year ended December 31, 2022.

The 2023 gain is directly related to the increase of the exchange rate of the Euro as of December 31, 2023, as compared to December 31, 2022.

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

dollar was $1.11 per Euro as of December 31, 2023, as compared to $1.07 per Euro at December 31, 2022.

The 2022 loss is directly related to the decrease in 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 as of December 31, 2022, as compared to $1.14 per Euro at December 31, 2021.

Benefit from Income Taxes:

Our benefit from income taxes was approximately $814,000 and $1,093,000 for the years ended December 31, 2023 and 2022, respectively.

This benefit was 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, 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%.

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.

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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.

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.

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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%.

Revenue from product sales was approximately $40,109,000 for the year ended December 31, 2021, as compared to approximately $39,453,000 in the year ended December 31, 2020, an increase of approximately $656,000 or 2%.

Direct sales increased by approximately $361,000 and distributor sales increased by approximately $295,000 during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

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.

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 $1,207,000.

For the year ended December 31, 2021, the average exchange rate of the Euro to the U.S.

dollar was $1.18 as compared to an average exchange rate of $1.14 for the year ended December 31, 2020.

Cost of Revenue:

For the years ended December 31, 2021 and 2020, cost of revenue was approximately $11,047,000 and $11,052,000, respectively, a decrease of approximately $5,000.

Product cost of revenues decreased approximately $1,447,000 during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

This decrease was related to certain costs associated with the rapid ramp-up of production during the year ended December 31, 2020 that did not recur during the year ended December 31, 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 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 80% for the year ended December 31, 2021 and approximately 76% for the year ended December 31, 2020.

Gross Profit:

Gross profit was approximately $32,118,000 for the year ended December 31, 2021, an increase of approximately $2,166,000 or 7%, over gross profit of $29,952,000 in 2020.

This increase is attributed to the reasons discussed above.

Research and Development Expenses:

Our research and development costs were approximately $16,381,000 and $8,811,000 for the years ended December 31, 2021 and 2020, respectively, an increase of approximately $7,570,000, or 86%.

This increase was due to an increase in clinical trial and related costs of approximately $4,670,000, due primarily to the start-up of our STAR-T and STAR-D clinical trials in the U.S.

and our PROCYSS and Hep-On-Fire clinical trials in Germany, an increase in salaries related to our clinical trial activities of approximately $1,620,000 due to the hiring of additional clinical expertise, an increase in rent expense of approximately $943,000 related to rent expense on our new facility, an increase in other research and development labor costs of approximately $294,000 related to the hiring of additional scientific expertise and an increase in other research and development costs of approximately $43,000.

Legal, Financial and Other Consulting Expenses:

Our legal, financial and other consulting costs were approximately $2,732,000 and $3,048,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of approximately $316,000, or 10%.

This decrease was due to due to a decrease in hiring fees of approximately $319,000, a decrease in legal fees of approximately $263,000, and a decrease in accounting fees of approximately $28,000.

These increases were offset by an increase in consulting fees of approximately $294,000 related to certain corporate initiatives.

Selling, General and Administrative Expenses:

Our selling, general and administrative expenses were approximately $35,750,000 and $28,464,000 for the years ended December 31, 2021 and 2020, respectively, an increase of approximately $7,286,000, or 26%.

This increase is related to an increase in salaries, commissions and related costs of approximately $4,476,000, an increase in non-cash restricted stock expense of approximately $989,000 related to restricted stock units granted to the Company’s executive officers, an increase in non-cash stock option compensation expense of approximately $507,000, an increase in commercial insurance of approximately $280,000, an increase in sales and marketing costs, which include advertising and conference attendance of approximately $1,152,000 and an increase in travel and entertainment costs of approximately $121,000.

These increases were offset by a decrease in contracted public relations costs of approximately $210,000 and a decrease in other general and administrative expenses of approximately $29,000.

Interest Expense, Net:

For the year ended December 31, 2021, interest income, net was approximately $28,000, as compared to interest expense, net of approximately $1,201,000 for the year ended December 31, 2020.

This decrease in net interest expense of approximately $1,229,000 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 year ended December 31, 2021, the loss on foreign currency transactions was approximately $2,578,000, as compared to a gain on foreign currency transactions of approximately $2,607,000 for the year ended December 31, 2020.

The 2021 loss is directly related to the decrease of the exchange rate of the Euro at 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.

The 2020 gain is directly related to the increase in 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, 2019 as compared to $1.12 per Euro at December 31, 2019.

Benefit from Income Taxes:

Our benefit from income taxes was approximately $736,000 and $1,127,000 for the years ended December 31, 2021 and 2020, respectively.

Liquidity and Capital Resources

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

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.

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.

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.

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

As of December 31, 2023, we had current assets of approximately $25.7 million and current liabilities of approximately $14.5 million.

As of December 31, 2023, $25 million of our total shelf amount was allocated to our ATM facility, of which approximately $20.3 million remained available.

During the year ended December 31, 2023, the Company sold 2,656,464 shares pursuant to the Sale Agreement, at an average selling price of $1.76 per share, generating net proceeds of approximately $4,532,000.

In April of 2023, we received approximately $1,000,000 in cash from the approved sale of our net operating losses and research and development credits from the State of New Jersey.

In March of 2024, we received approximately $880,000 in cash from the approved sale of our net operating losses and research and development credits from the State of New Jersey.

On December 13, 2023, the Company closed on a registered direct offering for the sale, directly to investors, of 7,733,090 registered shares of common stock and warrants to purchase up to 2,706,561 shares of common stock (the “Offering”).

Each share of common stock and accompanying warrant to purchase up to 0.35 shares of common stock, were sold together for a combined purchase price of $1.33, for an aggregate purchase price of approximately $10,285,000.

After deducting transaction fees and expenses payable by the Company in connection with the Offering, the Company received net proceeds of approximately $9,785,000, excluding any proceeds that may be received upon the exercise of the warrants.

Each warrant is immediately cash exercisable at an exercise price of $2.00 per share and will expire on the fifth anniversary of the issue date.

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.

pivotal STAR-T trial, which includes the detailed analysis of trial data and the preparation of our application for marketing approval to the U.S.

We have also instituted and continue to maintain tight control over expenditures.

As of December 31, 2023, 2023, we have approximately $15.6 million in cash, including approximately $14.1 million and $1.5 million in unrestricted and restricted cash, respectively.

We believe this is sufficient to fund the Company’s operations into the fourth quarter of 2024.

We will need to raise additional capital to support our ongoing operations in the future, and the Company is actively pursuing financing sources, including less or non-dilutive debt financing, royalty financing, strategic or direct investments, equity financing, and/or combinations thereof.

There can be no assurance that management will be successful in these endeavors.

Loan and Security Agreement

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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.

The Fifth Amendment extended 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.

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

Therefore, no further draws are available as of the date of this filing.

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

Critical Accounting Policies and Estimates

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Revenue Recognition

Revenue is recognized when the Company ships its products to its direct customers and distributors/strategic partners.

Revenue is recognized on its grant awards with agencies of U.S.

government in accordance with the terms of the award contract.

See Note 3 to our consolidated financial statements for a description of the types of government contracts.

The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for the products shipped or the services provided under their grant contracts.

To achieve this core principle, the Company applies the following five steps:

Identify Contracts with Customers - The Company’s contracts with its direct customers are generally in the form of a purchase order.

The Company has formal written contracts with each of its distributors/strategic partners that define their respective territories and minimum purchase commitments which must be met in order to maintain exclusivity in their territory.

Distributors/strategic partner customers also submit purchase orders with each order that define the terms of shipment and transaction price.

The Company has a contract for each grant award with various agencies of the U.S.

Identify Performance Obligations - The performance obligations in contracts with direct customers and distributors/strategic partners are for the shipment of the CytoSorb device and related accessory parts.

The performance obligations for government contracts are dependent on the contract type, however, these are generally based on the costs incurred related to each government contract.

Determine Transaction Price - The price charged is based on the Company’s price list for the CytoSorb device and related accessory parts for both direct customers and distributor/strategic partners.

The Company does not permit returns for product sales.

The Company also provides for certain rebates and discounts to direct customers for sales of its product that are earned based upon sales volume.

These amounts, which are earned based on calendar year sales volume, are recorded as a reduction of sales as earned.

The transaction prices for government contracts are dependent on the type of contract and are outlined in each contract.

Allocate Transaction Price to Performance Obligations - The transaction price for the performance obligation is based on the purchase orders received for both direct customers and on the type of contract and are outlined in each contract.

The transaction prices for government contract performance obligations are dependent on the type of contract and are generally based on costs incurred.

Recognize Revenue as Performance Obligations are Satisfied - The Company satisfies its performance obligation to direct customers and distributors/strategic partners generally upon shipment of the products.

The Company satisfies its performance obligations on government contracts generally upon incurring costs on each contract.

The Company records deferred revenue related to fixed price government contracts to the extent that billings exceed costs incurred.

Research and Development

All research and development costs, payments to laboratories, research consultants and costs related to clinical trials and studies are expensed when incurred.

Stock Based-Compensation

We account for our stock-based compensation under the recognition requirements of accounting standards for accounting for stock-based compensation for employees and directors whereby each option granted is valued at fair market value on the date of grant.

Under these accounting standards, the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.

We also follow the guidance of accounting standards for accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services for equity instruments issued to consultants.

Lease Commitments

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.

The lease commenced in April 2021 and expires in March 2037.

As of February 2024, our monthly base rent is approximately $117,000.

● 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.

In addition, the Company is obligated to monthly operating expenses of approximately $3,000 per month.

Both leases have a five-year option to renew that would extend the lease term to August 31, 2031.

● Our warehouse facility lease in Berlin, Germany commenced on April 1, 2021 and requires monthly payments of base rent of approximately $7,800 and other costs of approximately $240 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

We believe the following critical accounting policies and estimates have significant effect in the preparation of our consolidated financial statements.

Legal costs incurred to establish patents are capitalized.

When patents are issued, capitalized costs are amortized on the straight-line method over the related patent term.

In the event a patent is abandoned, the net book value of the patent is written off.

Revenue Recognition

Product Sales:

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The lease commenced in April 2021 and expires in March 2037.

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

As of March 2024, our monthly base rent is approximately $117,000.

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

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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