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CTSO > SEC Filings for CTSO > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for CYTOSORBENTS CORP


3-Apr-2013

Annual Report


Item 7. 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, 2012 and 2011 and should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Report.

Overview

We are a development stage company with early revenue and expect to remain so for at least the next several quarters. CytoSorbents is a development stage critical care focused company using blood purification to treat life-threatening illnesses. The technology is based upon biocompatible, highly porous polymer sorbent beads that are capable of extracting unwanted substances from blood and other bodily fluids. The technology is protected by 32 issued U.S. patents with multiple applications pending.

There are three major components of our business. The first is the manufacturing and sale of our flagship product, CytoSorb, now approved and available for commercial sale throughout the entire European Union (E.U.). The second is the research and development of new products and technologies, partially funded through government contracts. The third is business development and out-licensing of our product pipeline and technology portfolio.

Commercialization of CytoSorb®

In March 2011, we received E.U. regulatory approval under the CE Mark and Medical Devices Directive for our flagship product, CytoSorb®, as an extracorporeal cytokine filter indicated for use in clinical situations where cytokines are elevated. The goal of the CytoSorb® is to prevent or treat organ failure by reducing cytokine storm and the potentially deadly systemic inflammatory response syndrome in diseases such as sepsis, trauma, burn injury, acute respiratory distress syndrome, pancreatitis, liver failure, and many others. Organ failure is the leading cause of death in the intensive care unit, and remains a major unmet medical need, with little more than supportive care therapy (e.g. mechanical ventilation, dialysis, vasopressors, fluid support, etc) as treatment options. By potentially preventing or treating organ failure, CytoSorb® may improve clinical outcome, including survival, while reducing the need for costly intensive care unit treatment, thereby potentially saving significant healthcare costs.

Our CE Mark enables CytoSorb® to be sold throughout the entire European Union. Many countries outside the E.U. accept CE Mark approval for medical devices, but may also require registration with or without additional clinical studies. The broad approved indication enables CytoSorb® to be used "on-label" in diseases where cytokines are elevated including, but not limited to, critical illnesses such as those mentioned above, autoimmune disease flares, and many other conditions where cytokine-induced inflammation plays a detrimental role.

As part of the CE Mark approval process, we completed our randomized, controlled, European Sepsis Trial amongst fourteen trial sites in Germany in 2011, with enrollment of one hundred (100) patients with sepsis and respiratory failure. The trial established that CytoSorb® was safe in this critically-ill population, and that it was able to control cytokine storm,and broadly reduce key cytokines. In a post-hoc subgroup analysis, CytoSorb® was associated with a statistically significant reduction in mortality in patients at high risk of death in sepsis, specifically in patients with:

· Very high cytokine levels (IL-6 ? 1,000 pg/mL and/or IL-1ra ? 16,000 pg/mL) where 28-day mortality was 0% treated vs 63% control, p=0.03, n=14, and

· Age ? 65 (14-day mortality: 0% treated vs 36% control, p=0.04, n=21).

The Company plans to do larger, prospective studies in septic patients in the future to confirm these findings.

In addition to CE Mark approval, CytoSorbents also achieved ISO 13485:2003 Full Quality Systems certification, an internationally recognized quality standard designed to ensure that medical device manufacturers have the necessary comprehensive management systems in place to safely design, develop, manufacture and distribute medical devices in the European Union. CytoSorbents manufactures CytoSorb® at its manufacturing facilities in New Jersey for sale in the E.U. and for additional clinical studies. The Company also established a reimbursement path for CytoSorb® in Germany and Austria.

From September 2011 through June 2012, the Company began a controlled market release of CytoSorb® in select geographic territories in Germany with the primary goal of preparing for commercialization of CytoSorb in Germany in terms of manufacturing, reimbursement, logistics, infrastructure, marketing, contacts, and other key issues.

In late June 2012, following the establishment of our European subsidiary, CytoSorbents Europe GmbH, CytoSorbents began the commercial launch of CytoSorb® for the treatment of critical care illnesses such as sepsis, burn injury, trauma, acute respiratory distress syndrome, pancreatitis and other conditions where inflammation plays a detrimental role, such as cardiac surgery. We hired Dr. Christian Steiner as Vice President of Sales and Marketing and three additional sales representatives who joined the Company and completed their sales training in Q3 2012. Q4 2012 represented the first quarter of direct sales with the full sales team in place. During this period, we expanded our direct sales efforts to include both Austria and Switzerland and have established reimbursement in Austria. At the end of fiscal 2012, we had more than 60 key opinion leaders (KOLs) in critical care and blood purification who were either using CytoSorb® or committed to using CytoSorb® in the near future. We seek to complement our direct sales efforts with sales to distributors or corporate partners. We are currently evaluating potential distributor networks in other major countries where we are approved to market the device.

We are currently conducting a dose ranging trial in Germany amongst seven clinical trial sites to evaluate the safety and efficacy of CytoSorb® when used for longer periods of time. Data from this dosing study are intended to help clinicians with additional treatment options for CytoSorb®, help support the positive clinical data from the Company's first European Sepsis Trial, and help shape the trial protocol for a U.S. based pivotal study.

In the event we are able to successfully commercialize our products in the European market, we will review our plans for the United States to determine whether to conduct clinical trials in support of 510(k) or PMA registration. No assurance can be given that our CytoSorb®product will work as intended or that we will be able to obtain FDA approval to sell CytoSorb® in the United States.

Research and Development of New Products and Technologies

The Company's proprietary hemocompatible porous polymer bead technology forms the basis of a broad technology portfolio. Some of our products include:

· CytoSorb® - an extracorporeal hemoperfusion cartridge approved in the E.U. for cytokine removal, with the goal of reducing SIRS and preventing or treating organ failure.

· HemoDefend - a development-stage blood purification technology designed to remove contaminants in blood transfusion products. Goal is to reduce transfusion reactions and improve the safety of older blood

· ContrastSorb - a development-stage extracorporeal hemoperfusion cartridge designed to remove IV contrast from the blood of high risk patients undergoing CT imaging with contrast, or interventional radiology procedures such as cardiac catheterization. The goal is to prevent contrast-induced nephropathy

· DrugSorb - a development-stage extracorporeal hemoperfusion cartridge designed to remove toxic chemicals from the blood (e.g. drug overdose, high dose regional chemotherapy, etc)

· BetaSorb - a development-stage extracorporeal hemoperfusion cartridge designed to remove mid-molecular weight toxins, such as b2-microglobulin, that standard high-flux dialysis cannot remove effectively. The goal is to improve the efficacy of dialysis or hemofiltration

The Company has been successful in obtaining technology development contracts from agencies in the U.S. Department of Defense, including DARPA and the U.S. Army. In August 2012, DARPA awarded CytoSorbents a five-year technology development contract valued at $3.8 million as part of its "Dialysis-Like Therapeutics" (DLT) program to treat sepsis. DARPA is funding CytoSorbents to further develop its technologies to remove both cytokines and a variety of toxins. In 2012, CytoSorbents recognized approximately $1.1 million in grant income following the successful completion of milestones under its contract.

In December 2011 and September 2012, The US Army Medical Research and Materiel Command awarded CytoSorbents a $100,000 Phase I SBIR (Small Business Innovation Research), and a $1 million Phase II SBIR contract, respectively, to develop our technologies for the treatment of trauma and burn injury. During 2012, we received the full amount of the Phase I SBIR contract and are in the process of finalizing the Phase II SBIR contract with the granting agency.

Because of the limited studies we have conducted, we are subject to substantial risk that our technology will have little or no effect on the treatment of any indications that we have targeted.

Business Development

We seek strategic partnerships or distributorships to help further develop or commercialize our technology portfolio. Because of the breadth of clinical applications that we attempt to address, the types of corporate partners are many. Examples of potential partners include companies focused on: medical devices, renal/dialysis, pharmaceuticals and biotechnology, critical-care, blood purification, advanced biomaterials, and others. No assurance can be given that we will be successful in our business development activities.

Results of Operations

Our financial statements have been presented on the basis that it is a going concern, which contemplates the realization of revenues from our subscriber base and the satisfaction of liabilities in the normal course of business. We have incurred losses from inception. These factors raise substantial doubt about our ability to continue as a going concern.

Comparison of the year ended December 31, 2012 and 2011

Revenues

CytoSorbents generated revenues of approximately $1,343,000 and $36,000 for the years ended December 31, 2012 and 2011 respectively. Product revenues of approximately $152,000 and $36,000 for the years ending December 31, 2012 and 2011 respectively were part of an initial test market phase of CytoSorb in Germany, a direct sales effort to hospitals in Germany, Austria and Switzerland with a four person sales force in place only since August 2012, and an exploration of sales to distributor networks in other parts of Europe. The device was not available or approved for sale during the first nine months of 2011. Additionally, CytoSorbents received grant revenue of approximately $1,191,000 and $-0- for the years ended December 31, 2012 and 2011 respectively.

Research and Development Expenses

Our research and development costs were, approximately $2,532,000 and $2,888,000, for the years ended December 31, 2012 and 2011 respectively. This represents a decrease of approximately 12.3% or approximately $356,000 for the year ended December 31, 2012 compared to the same time period in 2011. This decrease is primarily due to net decreases in expenditures related to our completed sepsis study and clinical and research programs of approximately $393,000, lab supplies of approximately $180,000 and non-cash stock option expense of approximately $425,000, that were partially offset by increases in patent related expenses of approximately $84,000, salaries of approximately $198,000, rent of approximately $84,000, lab tests of approximately $97,000 and R&D costs of approximately $136,000.

Legal, Financial and Other Consulting Expenses

Our legal, financial and other consulting costs were, approximately $627,000 and $343,000, for the years ended December 31, 2012 and 2011 respectively. This represents an increase of approximately 83.1%, or approximately $285,000 for the year ended December 31, 2012 compared to the same time period in 2011. This is primarily comprised of an increase in legal fees of approximately $137,000 associated with patent review related costs, contract related legal fees of approximately $43,000, approximately $46,000 in accounting fees which were associated with annual audit and S-1 registration related fees and approximately $57,000 in employment related fees.

General and Administrative Expenses

Our general and administrative costs were $1,355,000 and $1,230,000, for the years ended December 31, 2012 and 2011 respectively. This represents an increase of approximately 10.1%, or approximately $125,000 for the year ended December 31, 2012 compared to the same time period in 2011. This is primarily due to a decrease in non-cash stock option expense of approximately $370,000 which was primarily offset by increases in sales and marketing expenses of approximately $80,000, an increase in salaries and payroll taxes of approximately $290,000 and increases in insurance, travel and rent totaling approximately $137,000.

Interest Expenses

Our net interest expenses were $564,000 and $1,045,000 for the years ended December 31, 2012 and 2011 respectively. This represents a decrease of approximately 46.0% or $481,000 for the year ended December 31, 2012 compared to the same time period in 2011. The decrease is primarily due to a decrease of approximately $540,000 in non-cash related charges associated with the amortization of debt discount, which is presented in the net interest expenses category of our statement of operations.

Benefit from Income Taxes

Our benefit from income taxes was approximately $392,000 and $-0- for the years ended December 31, 2012 and 2011, respectively. This increase of approximately $392,000 is primarily due to the sale of net operating losses to the State of NJ during 2012.

We have experienced substantial operating losses since inception. As of December 31, 2012, we had a deficit accumulated during the development stage of $98,732,460, which included losses of $3,664,000 and $5,482,000 for years ended December 31, 2012 and 2011 respectively. Historically, our losses have resulted principally from costs incurred in the research and development of our polymer technology, and general and administrative expenses, which together were $3,555,000 and $4,118,000 for the years ended December 31, 2012 and 2011 respectively.

Liquidity and Capital Resources

Since inception, our operations have been financed through the private placement of our debt and equity securities. At December 31, 2012, we had cash on hand of $1,729,000 and current liabilities of $2,077,000. In the first quarter of 2013 we received approximately $450,000 as proceeds from the sale of 4,154,435 shares of Common Stock per the Purchase Agreement with LPC (See Note 11 of the consolidated financial statements) at an average price of approximately $0.108 per share of Common.

We believe that we have sufficient cash to fund our operations into the third quarter of 2013, following which we will need additional funding before we can complete additional clinical studies and commercialize our products. The Company has received SEC approval for a registration statement filed for the funding agreement with Lincoln Park Capital Fund LLC. Subject to minimum pricing restrictions per the terms of the funding agreement, Management believes that the Company will be able to receive ongoing funding per the terms of this purchase agreement (See Note 9 of Financial Statements) The agreement with Lincoln Park has the potential to significantly extend the time that we may be able to fund our operations. We will continue to seek funding for the long term needs of the Company. There can be no assurance that financing will be available on acceptable terms or at all. If adequate funds are unavailable, we may have to suspend, delay or eliminate one or more of our research and development programs or product launches or marketing efforts or cease operations.

This Annual Report has been prepared assuming we will continue as a going concern, and the auditors' report on the financial statements expresses substantial doubt about our ability to continue as a going concern.

Effects of Recent Accounting Pronouncements

There have been no recently issued accounting standards which would have an impact on the Company's financial statements.

Critical Accounting Policies

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 have significant effect in the preparation of our consolidated financial statements.

Development Stage Corporation

The Company's consolidated financial statements have been prepared in accordance with the provisions of accounting and reporting by development stage enterprises.

Patents

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

The Company recognizes revenue when it is earned. Delivery of the goods generally completes the criteria for revenue recognition.

Research and Development

All research and development costs, payments to laboratories and research consultants are expensed when incurred.

Stock Based-Compensation

The Company accounts for its 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.

The Company also follows 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.

Determination of Fair Value for Stock Dividend and Stock Based Compensation

Effective January 1, 2010 the Company has changed its basis for estimating the fair value of the preferred stock dividends from the underlying conversion prices of the Series A and Series B Preferred Stock, to a five day volume weighted average price of actual closing market prices for the Company's common stock. The Company believes that there has been relative improvement in stock trading volumes of its Common Stock and that this new market based methodology is a better proxy for fair valuation of its preferred stock dividends.

Conversion of Redeemable Series B Convertible Preferred Stock

Upon conversions of the Company's Redeemable Series B Convertible Preferred Stock into shares of common stock, the Company reduces the Series B Preferred Stock carrying value based on the original issuance price of approximately $103 per shares on a first-in first-out basis and reclassifies the amount into additional paid-in capital.

Off-Balance Sheet Arrangements

None.

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