Cytosorbents Corporation (CTSO) Q1 2015 Earnings Report, Transcript and Summary

Please standby. Good day, everyone. And welcome to the CytoSorbents’ First Quarter 2015 Financial Results Conference Call. [Operator Instructions] Today’s call is being recorded. And at this time, I’d like to turn the conference over to our moderator, Lee Roth. Please go ahead.

Thanks very much, Mickey, and good afternoon, everyone. And welcome to CytoSorbents' first quarter 2015 operating and financial results conference call. Joining me today from the company are Dr. Phillip Chan, Chief Executive Officer and President; Vincent Capponi, Chief Operating Officer; Kathleen Bloch, Chief Financial Officer; Dr. Christian Steiner, VP of Sales and Marketing from Germany; and Chris Cramer, VP of Business Development. Before I turn the call over to Dr. Chan, I would like to remind listeners that during the call management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties and that management may also make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ from the results discussed today and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filing with the U.S. Securities and Exchange Commission. Any projections as to future performance represented by management, including estimates, sorry, include estimates as of today, May 11, 2015, and we assume no obligation to update these projections in the future as market conditions may change. During today's call, we will have an overview presentation covering the financial and operational highlights for the first quarter by Dr. Chan and Ms. Bloch. Following that presentation, we will open the line to your questions during the live Q&A session with the rest of the management team. At this time, it’s now my pleasure to turn the call over to Dr. Phillip Chan. Dr. Chan, go ahead, please.

Thank you very much, Lee, and thank you everyone for joining the call today. It's a pleasure to be here and welcome. For today’s call for the benefit of new shareholders and perspective investors, I will first start with the brief introduction of our company, then Kathy will go over financial results for the quarter and then we will discuss the factors that we believe will drive our growth in 2015. Then we will open up to a live Q&A period. An official transcript of today’s call will be available in the next few days on our website at www.cytosorbents.com. Cytosorbents is an emerging leader in critical care immunotherapy. We are leading the prevention or treatment of life-threatening inflammation in the ICU using CytoSorb blood purification. What we are targeting is a $20 billion opportunity in critical care. Every year millions of people are admitted to the intensive care unit in hospitals around the world for deadly inflammation -- inflammatory condition such sepsis, severe lung injury, burn injury, trauma, pancreatitis, influenza, complications of surgery, particularly cardiac surgery and many others. And in these conditions massive inflammation is often driven by a cytokine storm that cause cell death and organ failure, and nearly half of all deaths in the ICU are due to organ failure with no effective therapies, because of the lack of effective therapies approximately one out of every three patient dies and the cost can be staggering. The lack of active therapy leads to patients lingering days to weeks at a time at a cost of $2,000 to $3,000 a day on average in the intensive care unit and it's not surprising that we spend nearly 1% of our gross invested product or $80 billion to $90 billion on critical care medicines every year here in United States. What CytoSorb does is that it removes the fuel to the fire of inflammation and represents a powerful immunotherapy approach to control inflammation. It is approved in the European Union as the only specifically approved cytokine filter and its clinically proven to remove key cytokines in the blood of critically ill patients and it is approved for any situation where cytokines are elevated it is now being used in more than 5,500 human treatments safely and it has been well-tolerated by patients. The heart of our technology is a highly porous, very biocompatible polymer bead, roughly the size of a grain of salt that act like tiny sponge to remove harmful substances from blood. This is a technology that is protected by 32 issued U.S. patents and multiple applications pending, we manufacture these beads from raw chemicals at our ISO 13485 certified facility in New Jersey and it is in fact one of the highest grade medical sorbents on the medical device market today. The goal of our therapy is to prevent or treat organ failure. Again, one of the biggest unmet medical need in critical care medicine today rather than let patients spile down into this black hole of organ failure, where at the bottom we need to support them with life-support machines like mechanical ventilation and dialysis. Our goal is instead when they come into the ICU, stabilize these patients, prevent them from developing organ failure, get them out of the ICU faster, thereby helping improve their chances of survival, as well as significantly decreasing the cost of ICU and patient care, and because of this, we believe that CytoSorb is well-positioned to revolutionize critical care medicine. Just the highlight how CytoSorb is being used currently, this is a recent case report study on drug-resistant pneumonia. This is a 46-year-old man who was hospitalized initially with fatigue, cough and breathing difficulty to a small northern hospital in Germany. He was subsequently diagnosed with pneumonia and severe sepsis, and he was placed on broad-spectrum antibiotics and his blood cultures eventually grew out multi-drug resistant Acinetobacter baumannii. This is a bacteria that is often -- the cause of infection of many soldiers in the Gulf region and this is very difficult bacteria to treat. This patient develop complications of rhabdomyolysis, a destruction of his muscle tissue that led to the release of myoglobin, which then lead to kidney failure and no urine output. This is a very dangerous situation particularly for someone with sepsis. In the meantime he rapidly developed acute respiratory distress syndrome, requiring mechanical ventilation and speed him grew out both staph aureus, as well as strept pyogenes the cause of strep throat. And very aggressive management in five days of dialysis, the patient had little improvement in myoglobin levels and little improvement in kidney function, and was transferred to a major outside hospital. And within the first day he underwent his first CytoSorb treatment, which reduces plasma levels of myoglobin by 50% and after three treatments his organ failure had stabilize, his myoglobin levels were significantly reduced and very importantly, his renal function and urine production returned. So this was really a case where the kidneys were so overburdened by this myoglobin that they shutdown and by removing myoglobin with CytoSorb we were actually able to improve kidney function and this we believe help this patient go on to survive. Eventually the control of the infection was also achieved and the patient was discharged from the ICU on day 10th. But we talk about these case reports studies because they highlight how CytoSorb is being used in real-world activities every single day around the world and these are case reports that motivate us greatly. So, with that, I'd like to turn it over to Kathy to talk about our operating and financial highlights. Kathy?

Well, thank you, Phil, and good afternoon, everyone. For today's call I will be providing an update regarding CytoSorbents’ first quarter 2015 financial results, including product sales, as well as an update around our working capital and cash runway. Turning to our financial results, the first quarter of 2015 product sales were approximately $704,000, which is a 24% increase over first quarter 2014 product sales of approximately $569,000. One factor negatively influencing first quarter product sales was the drop in the euro relative to the dollar. In the first quarter of 2015, the value of the euro averaged $1.13 as compared to the first quarter of 2014, when the euro value averaged $1.38. And this decrease in the value of the euro effectively reduced our first quarter 2015 sales by approximately $112,000 or 16% of total product sales. Grant income was insignificant for the first quarter of 2015 at approximately $19,000 as we are winding down several major grants. And then finally, we want to note that we were able to achieve growth product profit margin of approximately 59% in the first quarter of 2015 as compared to 61% for the first quarter of 2014, this despite the drop in the euro. Next, we’ll turn to our chart of products sales by quarter, which shows the decrease in sales in Q4 2014 and then again in Q1 2015. And this decrease in Q1 2015 sales is really attributable to three factors. The first is the decline in the value of the euro which I’ve just discussed. The second is the fact that there are no initial orders from new distributors in the first quarter of 2015, which is simply a matter of the timing of bringing new distributors on board. And third, it’s the impact of the restructuring and rebuilding of the sales force. So given these three factors and looking forward to the future, there's really nothing we can do about the movement of the euro relative to the dollar. Although we do note that it has stabilized and it hasn’t declined further from Q1. Regarding the second factor, we are in active discussions with new distributors with the intention of opening up new territories. And we continue to work with many of our existing distributors to attain regulatory approval or reimbursement in our territories at which time we will see initial orders from these territories. In fact, of the 34 countries, in which we currently have distributors and/or strategic partners, we do not yet have approval to sell CytoSorb in a majority of these countries. When these countries obtain the necessary approvals, they will also contribute to increased sales. And third, as Phil will explain in some more detail later, the rebuilding of our sales force, we may have sacrificed some short term results that we believe this rebuilding will provide long-term benefits to our revenue stream and the effort is well underway already. So we've often advised our shareholders that quarterly results can be lumpy at these early stages of commercialization but that the overall trajectory remains strong. Since speaking of the overall trajectory, on the next slide, we’ll take a look at our trailing 12 months of product sales. And while Q1 2015 is not increasing at a rate as great as the previous three measurement points, you can see from the trend line that the overall growth in sales is expected to remain strong going into the future. And then finally, some notes on our working capital position and cash runway. In January of 2015, we completed a $10.3 million common stock offering, providing net proceeds to the company of $9.4 million and with these funds in hand as of March 31, 2015, we have approximately $13.4 million in cash and short-term investments. Our working capital excluding the warrant liability which is a non-cash item was approximately $13.7 million at the end of March. We believe we have adequate funding to meet our objectives into 2016. And turning to our capital structure, I just want to mention that on a fully diluted basis, we currently have 28.4 million common shares outstanding. And now I'd like to turn the call back to Phil. Phil?

Thanks very much Kathy. Right now, I'd like to just cover our catalyst for growth. And as we’ve talked about in the past, one of the major catalysts is our core focus on CytoSorb sales. These are six of the most -- these are six of the very important factors that will hopefully lead to our success in the marketplace. One is that we are working with major key opinion leaders worldwide. We've been fortunate to have the sponsorship and leadership for many key opinion leaders not just in our direct territories of Germany, Austria and Switzerland, but also in many countries around the world that are supporting the use of CytoSorb. Now, this is very important because we look to not only sell to the key opinion leader, which is typically the Head of the Department but also to get junior and senior physicians who are in the department to use the therapy. So this could have dramatic impacts on our growth rate going forward. So if you just take the first and the second picture here, if you just take the first six doctors sitting in the front row here and if they use, CytoSorb every week on one patient, just each of them used it on one patient for every week, that would result in revenue -- a revenue opportunity for this ICU alone of approximately $1 million to $1.5 million. Now, when you coupled that with the fact that there are many ICUs in the hospital, not just a medical ICU but a surgical ICU, a cardiac ICU, a trauma ICU and others, the revenue opportunity here becomes very significant. Now to us, $1.5 million sounds like a lot of money, but when you think about what the operating budgets are for these hospitals, they are often hundreds of millions of dollars to more than a $1 billion every year and critical care often accounts for anywhere from 10% to 20% of their operating budget, that becomes to hundreds of millions of dollars and the amount of money that they would be spending here is really a drop in the bucket. But when we talk about the value-add that our therapy could have, it is really a win-win-win situation for hospitals, patients, and clearly our company. So clearly, gaining these revenues would be great for our company. But importantly, our therapy is designed to try to improve the clinical outcomes of patients, decreasing the risk of death and improving their clinical outcomes. That would be a major win. The third major win, of course is that we could potentially reduce the massive costs of healthcare by shaving days off out of the ICU, decreasing the acuity and severity of illness, et cetera. So another area in order to become standard of care in this field, we need data. And this is exactly what we've been going after and so we now have 50 plus company-sponsored and post-market studies where we are actively investigating the use of CytoSorb in many different applications. We believe that data coming from these studies will help support CytoSorb as standard of care medicine in these ICUs around the world. We will also talk about our direct sales team and about the importance of having the right people on board and the last part of the puzzle is reimbursement and the expansion of the distributor network. And we'll talk a lot little more about that in just a minute. So what we said before is that, we believe that all of these factors will provide a multiplying effect on sales in the 2015 period and beyond. So this is a picture of our current sales, direct sales infrastructure. This is led by Dr. Christian Steiner, our Vice President of Sales and Marketing, who is also Managing Director along with myself, of the CytoSorbents Europe, GmbH office. And here you see the people that we have here. We spend a great deal of time trying to cultivate the people in our company and basically make sure that we have the best people trying to sell CytoSorb in the marketplace. International Sales Director is Stefan Baudis. Our Business Manager is Alex Bojan. Our European Medical Director is Doctor Joerg Scheier, who many of you've heard about recently in our recent press release. Head of Scientific Marketing is Doctor Rainer Kosanke, Head of Product Management is Dominik Gutzler. Our Application Specialist is Eva Weschler. Our Sales Assistant and Customer Support people are Ilona Otto and Petra Hoffman. And on the right-hand side are our sales people and as you can see here, we have four existing sales people that are in the marketplace today. We’ve made significant progress in terms of rebuilding our sales force. We now have signed two sales people. One which will start -- both of them will start in early Q3. One of them will take place in a Northeast Germany and the other one will take sharp in North Western Germany and we are currently now screening for two additional representatives, as well as a medical science liaison, who will help our sales people out there in the marketplace. So, I think it's very important to note that we’ve gone a tremendous way in terms of rebuilding our sales force and we think that the addition of the people that we just added will add significantly to our growth starting in the third quarter and going forward. Now in terms of our progress on registration. We are actively selling the product in the EU in Germany, Italy, the UK, Austria, Switzerland, Romania, the Netherlands, as well as outside the EU in countries like Turkey and India. And I am pleased to say that we are now registered in France, the second largest medical device market in the European Union and this paves the way for both Fresenius as well as our cardiac surgery partner to begin sales in France. We currently registered in Saudi Arabia and we’re waiting for Saudi FDA approval that can hopefully delivered rapidly across all seven countries around the Gulf Cooperation Council nations and this includes the UAE, Kuwait, Qatar and others. We are also registered in Australia through the Therapeutic Goods Administration, the TGA as well as New Zealand and we are now in the final stages of negotiation with our distribution partner there. We are also in the final stages of registration in Russia and we expect that to occur in Q1 2016, if not sooner. We’ve also met the requirements to add Canadian registration to our ISO 13485 certification and this will allow CytoSorb to be registered in Canada once all Health Canada requirements have been met. Last but not least we continue to work on establishing distribution in many other countries around the world and we will hopefully have more to announce on that in the months to come. But I think all of these things that we've talked about really get to this figure here in slide 20. Our growth is basically being driven by three major drivers, that is direct sales, distributor sales as well as partner sales. And what you can see here in this graph is the theoretical revenue growth based on layering of all of these different stakeholders. So on direct sales, which is the primary goal in Germany, Austria and Switzerland is the very bottom followed by current distributors, followed by our three partners, then followed by the Middle East, Australia, Asia, North America, South America, as well as Africa, and part of the inflections here take into account also the development of clinical data that may help accelerate the adoption and usage of CytoSorb in these various markets. But I think what you can see here however is that a lot of these are -- a lot of these things have been put into place already, but that are expected to turn on either in 2015 or 2016, I think which will dramatically -- has the potential to dramatically increase our sales growth in these -- for the company. So this graph just to note does not represent revenue guidance or forecast, but it's really just to demonstrate the concept of this revenue layering concept and how we anticipate to grow our sales moving forward. So second major catalysts is targeting U.S. FDA approval and we’ve talked about this in the past. But in terms of cardiac surgery, as you know we are pursuing the REFRESH cardiac surgery trial here in the United States where we are looking to reduce a number of inflammatory mediators during surgery in order to try to prevent postoperative complications. And on the subsiding critical illness side, this is the area where most of our sales are being generated today and we are looking to also develop the pivotal studies designed to make CytoSorb a standard of care in these various applications. Now an update on the REFRESH study. As we had mentioned last time, the FDA has approved our IDE for our REFRESH feasibility study in cardiac surgery. So this reduction in free hemoglobin trial is a 20-patient multicenter feasibility study evaluating the safety of CytoSorb when used intraoperatively in a bypass circuit in a heart-lung machine during complex cardiac surgery. And the goal here again is to try to reduce levels of free hemoglobin and other inflammatory mediators that if left unabated can cause postoperative complications. The trial is on target to commence midyear and is expected to be completed before year end. It's very important to note that this is a much different trial than a critical care trial or an ICU trial. The only intervention is using CytoSorb in a bypass circuit during the three to five hours of the cardiac surgery. Its one and done. After the surgery all that is required of the study nurse and the clinical team just take blood -- blood draws every day and to evaluate the patient clinically, until the patient leaves the intensive care unit. This is a study that can be done very rapidly and is the reason why we have nearly 300 -- actually more than 300 intraoperative cardiac surgery treatments already in Germany and in Austria. And so, we believe that we can complete this trial very expeditiously and then following discussions with the FDA, we plan to file a pivotal trial IDE, shortly thereafter designed to support U.S. regulatory approval. Switching gears slightly to critical illnesses in sepsis. One of the things I wanted to discuss today on this call is the Expedited Access Pathway. I mentioned this in our shareholder letter, but it was something that I though we should cover in this call today and answer questions if needed. The FDA has issued formal guidance on the Expedited Access Halfway or EAP program that will facilitate the approval of medical devices that treat life-threatening conditions that meet the following criteria. One is that you have to treat the life-threatening or irreversibly debilitating disease that is something that we do. The second is that it has to meet one of the following, that there one or no approved alternative treatments that exist for that particular disease and this we also meet, given that there are no approved treatment for any of the -- for most of the diseases that we treated in the ICU today. And third, the sponsor need to submit, the sponsor which would be us would need to submit an acceptable data development plan that would outline the pre-market and post-market data collection that would be needed to get this product approved. So as we’ve said multiple times, CytoSorb targets the treatment of many life-threatening conditions such as sepsis, acute respiratory distress syndrome, severe acute pancreatitis, trauma and many others that did not have viable treatment alternatives. Now, what are the advantages of being in EAP designated product. Well, our first step is to submit an application to the FDA to request EAP designation, and if it is successful, it has a number of the advantages. So, first of all, CytoSorb would be given priority status and we would be assigned a manager from the FDA who would facilitate all of our future discussions with the FDA. We've essentially the on a fast-track with the FDA, that the process, the designation is good for both, the PMA or Pre-Market Approval or De Novo 510(k) regulatory approval path for medical devices. And importantly, based on associated guidance, it would shift the pre-market data collection to the post-market setting with the appropriate safeguards for safety. What does that mean? Right now if CytoSorb was going to be entered into a clinical trial for the treatment of sepsis, the facto endpoint would be 20-day all-cause mortality. But this is been a very difficult endpoint for most companies to meet, that's why there are no approved therapies, because all companies and their therapies have failed to demonstrate 28-day all-cause mortality. Now we believe that we can ultimately show that. But to make that a requisite for approval, could potentially be a very high bar, making a trial very expensive to conduct with many meditation. Now if the FDA would allow us to view a approval trial with less stringent -- with the less stringent endpoint, that could allow the trial to be much smaller. It would allow us to potentially have less risk in achieving the endpoint and it would potentially allow us to get to market faster and get to try to help patients in need faster. What we would be required to do, however, is in the post-market setting, we would need to demonstrate a benefit on 28-day all-cause mortality to stay in the marketplace. But that is a trade-off that we are more than willing to accept. So this -- once we submit for EAP designation, it is a 30-day review of the application and then we hope to hear from the FDA about having CytoSorb being labeled as an EAP designated product. That is the same as having a biotechnology drug or a drug designated with breakthroughs status. It does not mean approval but it now puts us on the fast track so that we can do a clinical trial that will enable us to get approval more quickly. So again this program is designed to facilitate earlier and faster U.S. regulatory approval of potentially life saving devices. And we believe that this squarely applies to the core of our critical care strategy at CytoSorbents. And as we move forward with our cardiac surgery trial, we plan to pursue this EAP opportunity aggressively for critical care applications and faster open discussion and collaboration with the FDA. Now a third major catalyst is a generation of clinical data. One of the things that we are -- with the funds that we've raised in the past 12 months, we are not only looking to get into the U.S. market for the area of cardiac surgery, but we are looking to support our number one application for the company which is the area of sepsis. And what we will be doing is actually launching a number of sepsis studies both here in the United States as well as in Europe in addition to the large number of other studies that we are actually conducting or helping to supervise or support. So in the United States, we are running our cardiac surgery REFRESH trial that will hopefully lead to U.S. approval. We’ll be running a small sepsis study here that is currently undergoing the planning phase. And we are also running a U.S. Air Force Funded Trauma, 30 patient randomized controlled trial to treat patients with trauma and rhabdomyolysis. And in Europe, we have 50 plus investigator initiated studies, our European registry, many case reports, studies ongoing in sepsis and additional ones being planned. Now fourth major catalysts is strategic partnerships, and this is a slide that many of you have seen before but this really outlines just part of the universe of companies that could potentially be partners for us in the marketplace either in cardiac surgery, renal dialysis, blood transfusion, biotech and immunotherapy or other areas. As a quick strategic partner update, Biocon has been a fantastic partner to date. And they are now moving forward with the design and funding a four investigator initiated for proof-of-concept studies and a focused effort to collect and publish clinical data from the field. Biocon is also planning to expand at Sri Lanka, a country of 20 million people. They have developed their own sales force. They are targeting now 15 people to cover India as well as a medical director as well. So they remain extremely committed and remain a very good customer of ours and partner of ours. Fresenius is also working to complete the necessary start-up activities in training needed to launch CytoSorb in France, Norway, Sweden, Finland, Denmark and Poland. And as I mentioned before we have now achieved registration in France and we are very close to a launch and hope to have more information about this soon. And in terms of our cardiac surgery partner, we are currently in the process of the market evaluation with our cardiac surgery partner and a leading cardiac surgery centre in France. They have also included -- they have also made an initial order of Cytosurb devices to help support this process. And again just like our own clinical trial in the United States, we expect this market evaluation process to go quickly. We spent past many months building up to this clinical valuation and hopefully a successful outcome here will pave the way for a much broader partnership. Now in terms of other catalysts, we believe that new opportunities represent also a major driver. Many of you who follow the biotech space know about cancer immunotherapies or heard about companies pursuing either activated T-cell therapies or core T-cell therapies. And one of the things I wanted to talk about today is cytokine release syndrome in cancer immunotherapy. Now cancer -- now this area of activated T-cell immunotherapies is one of the most promising and exciting areas of cancer research. Basically you are taking someone's blood cells out of their body their T cells, and then you are putting a gene a chimeric antigen receptor gene into those cells that now enable the T-cell to recognize proliferate and hunt and kill cancer cells. And this is an experimental immunotherapy but it has in clinical studies in many different settings, has led to the remission or cure of refractory leukemias and other cancers and ongoing studies. But one of the problems with this therapy is that it tries to kill cancer by stimulating the immune response and is very potent at stimulating the immune response leading to an expected flu-like syndrome in patients characterized by very high levels of cytokines. And when these cytokines in the production of cytokines gets out of hand, it is called a cytokine release syndrome or CRS. This is essentially the same as the cytokine storm. And the CRS can spiral rapidly out of control despite the use of prophylactic measures like solanezumab leading rapidly to multiple organ failure and death. Now, this whole area of immune cancer immunotherapy has been a really lucrative place for deals as well as market values. On the left hand side is just a chart taken from a recent issue of The Scientist talking about the different companies in this space and the major partnerships that they've collaborated on with major players in the pharmaceutical industry. And on the right hand side, you can see what their market caps look like today. And you can see that this is a very hard area of clinical research. But one of the things that is limiting the excitement in this area is the concern over safety. And again, this was a inset in this article in The Scientist where they talk about the challenges of cytokine release syndrome and how although they're trying many different ways to try to mitigate this effect, there are no highly effective therapies to do so today. And so one of the deals that has just been recently announced was the deal between Juno Therapeutics and Fate Therapeutics. And Juno recently announced the strategic partnership with Fate for the screening and development of small molecules that can modulate the biologic activities of activated T-cells. And the goal of this program is essentially to act as a kill switch. If cytokine release syndrome is starting to occur, they want to try to turn off the T-cell. But this is a preclinical program. This involves small molecules and it is specific to Juno’s CAR T-cell constructs. And it is very unclear whether or not turning off these activated T-cells will help mitigate cytokine release syndrome because what happens in the body is that once the immune system gets going, it is not just the CAR T-cells that are producing cytokines, it is really most of the cells of the immune system and actually the other cells as well forming the cytokines that create this upward spiral cytokine storm. And so we'll see exactly what happens under this development program, but the terms of the deal were very interesting. There was a $5 million upfront payment to Fate. There was a purchase of a million shares at $8 per share at 75% premium to the current share price. It was involved an up to four-year research term with Juno, would pay all costs of development. And for each Juno CAR T-cell program that was developed for Fate, the company would receive -- Fate would receive $50 million in milestones plus low-single-digit royalties on net sales. And also in this deal it was the ability to extend the term by two years with $10 million stock purchase. And the only reason really to talk about this particular deal is to, one, emphasize the immediate need for strategies to control cytokine release syndrome and, two, to talk about what partnership deals look like in this space. Now, we would argue that CytoSorb was specifically designed to control cytokine storm and cytokine release syndrome by reducing a broad range of inflammatory mediators that are driving the systemic inflammatory response syndrome. And we believe that CytoSorb represents a unique and easy way to administer rescue therapy for CAR T-cell immunotherapies but also for other activated T-cell therapies as well. It is agnostic to the CAR T-cell approach and could potentially be used as a broad spectrum solution across the technologies of all companies in this space. And although we are still very early in this space, we currently have multiple initiatives in this area that we are exploring. And again, we are not trying to pursue a tangent area of application for our therapy. We are squarely focused on cytokine release syndrome and cytokine storm every single day and is used all over the world with demonstrated activity in many different cases. So last but not least, our goal is to increase investor awareness of our company. In the very near future, we will be actually meeting with institutional investors in major cities across the country to increase awareness of our company and the technology. Now, although, we are a NASDAQ company, we are still predominantly a retail-owned stock and if you talk to institutional investors outside the metropolitan region here in New York City, very few know our story. But I can tell you that, when we talk to our institutional investors, when we talk to analysts, when we talk to bankers, when we talk to doctors, everyone is extremely excited about our approach, because it just makes sense and we believe that there will be a lot of benefit to increasing the awareness of our technology and our company with investors across the country. We also continue to have positive analyst coverage and investor outreach from six investment banks with number of analysts from other banks also looking to -- also looking at our company and following our progress. And we are working with our PR firm to increase our media coverage and hopefully will have more to talk about there. On our CytoSorb website there and our -- on our Facebook website we actually have videos that have been done recently. One of them actually was at the University of Rostock. It's unfortunately in German. But we will be translating that you soon. And we will hopefully make that available to our shareholders, investors and physician. But this is really an exciting piece for us, because one, we did not sponsor this piece. This is actually done by the equivalent of public television in Germany, a very well-known station. And they highlighted the trials and tribulations of the woman, who almost died from a massive viral infection and how CytoSorb was used to actually stabilize her, so that she could go on to have a life-saving operation and this was really a great piece for us, because that really allowed investors and people to see for the first time, the actual human result, a patient who was saved by our therapy, very exciting for all of us. But we hope to have more of these in the future. So we believe that CytoSorbents has tremendous potential. Again, we believe that we may help revolutionize critical care medicine saving lives and reducing costs, because this is such a massive market, we have a product that is generating revenue with good margins, we continue geographic expansion throughout the world, we are pursuing U.S. approval through either a Cardiac Surgery Pathway or the EAP pathway for critical illnesses here in United States. We are looking to expand our existing strategic partnerships which can be very -- we believe can be very substantial to our overall business and we look to leverage our NASDAQ Capital Market listing with institutional investors and other investors all over the country. So, with that, it really ends our current prepared remarks and now, I'd like to open up for a live Q&A session. Lee?

Operator, we are ready to pull for questions.

Yes. Thank you. [Operator Instructions] And we will take our first question today from Andrew D'Silva with Merriman Capital. Please go ahead.

Good afternoon, guys. Thanks for taking my call. Just a couple quick questions for you, I guess, in your prepared remarks you said something about an initial order with one year strategic partners. Could you elaborate on which partner that was, was it Fresenius or another one? And then, when do you expect their sales teams to actually start pounding the table in France and distributing the product within their network?

Yes. So the initial order was actually by our cardiac surgery partner in France that was to support the initial market evaluation. It was not a big order but it was certainly a good start and we were looking for more sales from this partner in the future. I think in terms of expectation -- setting expectation for sales, this is viewed as a in both the case of cardiac surgery, as well as Fresenius starting in Q3, there may be some upsides to that timing but that would be our expectation.

And that our order that you mentioned, is that going to be a Q2 event or is that -- was that in Q1?

That is a Q2 event.

Okay. And then moving over to your FDA approval process, do you have any sense this time assuming you get to the REFRESH process? Is this going to be a PMA or 510(k) approval or anything else in between there?

So in our discussions with the FDA, the FDA has kept the order open to potential De Novo 510(k) application or a PMA application. There are potential advantages to both, the De Novo 510(k) path would potentially be for a biomarker reduction application, specifically, a reduction in free hemoglobin. And that could potentially be a very small trial, very fast trial and something that would be relatively low cost. The PMA trial would be focused more on clinical outcomes, such as the prevention of acute kidney injury or the reduction in ventilator days. And that would be a larger trial but currently we're waiting for the completion of the REFRESH feasibility study where we are collecting a lot of biomarker data, as well as clinical outcomes data and basically are waiting for our discussion with the FDA, following the completion of that trial in order to determine which path we are going to take.

Is there a substantial cost difference between the two regulatory pathways?

Yes. The De Novo 510(k) path would be much less expensive and the order of millions of dollars less expensive.

Okay. Last question for you. As far as you know revenues that you're generating now and in the first quarter. Could you maybe give us a sense of where they're coming from, are they repeat orders from hospitals and ICU that you had to establish relationships with in Germany and so forth or is it the more related to new distributors and strategic partners filling up their funnel, little bit of context. Obviously all revenue isn’t created equal?

Sure. Yeah. So the vast majority of our orders are reorders from existing customers or distributors. It is where we have been seeing a lot of traction. And I think that has been a very positive thing. Interestingly, however, we are seeing a lot of new orders as well. One of our strategies going to marketplace is really focusing on the largest hospitals, largest university and public hospitals and gaining key opinion leader support from them. But the consequence of doing that is that there's been a lot of excitement, lot of chatter, a lot of discussions with colleagues around the country. And in Germany, there are 2100 acute care hospitals on. There are 400 with more than 400 beds in the hospital. So we’ve been targeting really the top 400. But where we’re seeing a lot of interest is from small hospitals also sharing about the technology and ensuring about the successes from the larger hospitals and them being very receptive to starting their CytoSorb treatment experience with us. So I would say that you need both reorders as well as new orders in order to build the market. And I think that we have a very nice balance currently.

Okay. Got it. Thanks for taking my questions…

Thanks. Thanks a lot, Andy.

And I [indiscernible]

Appreciate it.

And we’re going to a question from R.K. with HC Wainwright. Please go ahead.

Good evening, Phil. Good evening, Kathy.

Hi RK.

Looking at the revenues and COGs, just to start up from the top. I know we can blame the exchange rate for a while but if we do not consider the exchange rate, the Euro exchange rate. How did you do sequentially compare to the fourth quarter ‘14 because I don’t remember the clean number for the fourth quarter ‘14, just for that reason, I’m asking that question. And the second part of that question is it’s nice to see that you are putting in all your efforts to get the sales force get back to the number that increase a little bit. How along would that behave and then, not considering the euro exchange issue when would we start seeing that number and certainly up again?

Kathie, would you like to take me to the first part of that question?

Yeah. Sure, Phil. Hi, R.K. So the real number for the Q1 sales is the $704,000 that we reported and as we stated, the impact of the reduction, the decline in the euro was about $112,000. So, I’d say the comparable number to be working with that quarter is about $816,000. And also I want to just comment a little bit on what you can expect going forward. So another decline -- the euro has sort of stabilized, so we are happy to see that. But surely another decline in the euro would have a further negative impact on our sales. But in fact, this impact is somewhat mitigated by a fact that almost one-half of our sales are in U.S. dollars. So, a say, 10% drop in the euro would have approximately a 5% decline in product sales. And then just the other side of the coin because we are funding our German subsidiary, it's not at breakeven, right. So we are still funding it. The decreases in the euro also to some extent reduced the expenses associated with that operation that are being funded in U.S. dollars. I hope I answered your question.

Yeah. So, I think Q4, we did about $171,000 in product sales and adjusting for the steep drop in the euro at the beginning of Q1 of this year, that number on a comparable basis would've been approximately $816,000. So it's roughly comparable. I would call it flat. But clearly, our goal is to be working on all three cylinders of revenue generation where currently direct sales is a major part. So again, the two other engines of growth are distributor sales as well as potential partner sales as well. So in terms of your second question about the sales force, our goal is to have the team rebuild by the end of Q2. Because of the labor laws in Germany, there's typically a waiting period before they can actually start. But the two that we have already signed with, will start at the beginning of Q3 and the other two may, depending on their ability to get out of their current employment situations would potentially, that timing would be more variable. But I think while we continue to rebuild the sales force, we are not stopping with the effort on distributor sales as well as partner sales and those will continue and we expect that as we mentioned, Q3 is a good conservative timing for the initial Fresenius. The initial launch of the product by Fresenius could be sooner but we are saying Q3 is what we are targeting and then the cardiac surgery company also, as they go through this market evaluation, we expect that to pick up in the remainder of Q2 and hopefully be in a position of a larger partnership in Q3.

Just as a follow-up to those questions, we also saw that the COGS decline was also a factor of euro. So is that also going to be mitigated -- not actually, do manufacturing the products here and selling there, actually that’s not an issue or you have it wrong?

Well, I think of the calculation of gross margins, you're looking at a sale in Europe that is converted into dollar, initially in euros is converted into dollars and then in the United States, the COGS are really dealt around dollars. And so any drop in the ASPs because of the conversion of the euro into dollar will result in a decrease in our gross margins. That being said, our COGS, we actually have a path to continue to drop our cost of goods sold that will culminate ultimately with the expansion of our manufacturing facility and hopefully the economies of scale that we will gain by the larger facility that we’re planning. But that being said, we are not sitting still in terms of our gross margins. We continue to believe that we can drive our gross margins higher as we gain economies of scale and drive the cost of goods sold, and also -- and hopefully that will be helped by stabilization of the euro, if not rebound in the euro.

Okay. Again another question on these German accounts. Are the German accounts normally renegotiated every year or do you have German accounts which run over multiple years? The reason I am asking the question is, because if you don’t have the personnel in place for the direct sales, would that hinder in getting any negotiations or contracts that you planned over the next three to six months, then they are still building the sales force site?

Yes. So our sales are not based on contracts. So in other parts of the world like Middle East, they do work on tenders where they -- or even Turkey for example, they work on large orders, large tender orders are then filled over time. In Germany, it is still a very much quarter-to-quarter sale, direct sale and so there are no long-term contracts in Germany yet. But as we used more, as we start being used as a standard-of-care for different therapeutic indications, the potential for contracts exist, but currently right now it’s a quarter-to-quarter sale basis, direct sale basis.

Okay. A couple more questions. The French cardiac surgery partner, have they started evaluation period? Or because it’s a six month evaluation period and I am not clear from your comments whether it has started or they are not started, I do certainly heard that you’re expecting revenues from Q3.

Yes. So they are just about to start and maybe let me turn this over to Chris and maybe to talk about sort of the activities that have led up to the state, because we certainly have not been standing still with this partnership. I think both sides have been pretty motivated to get this off the ground. But as with all things, there is a process involved. And Chris, maybe if you could comment?

Sure. Thanks, Phil. Hi, RK. So for the cardiac partnership, you can think of this as really two phases to the market evaluation. One is procedural and administrative, and then the second is clinical usage. So the majority of the heavy lifting takes place during the first phase. This is where you’re getting everything setup. It includes matters such as registration, getting setup in the partners purchasing system, trainings and other activities, and typically it takes longer than the clinical evaluation. So I am pleased to say that we are finished with this first phase, really the setup phase. And when Phil talks about the ordering from the partners, so they have ordered, they received the product and we are very close to starting the actual clinical usage. And that part will begin with identifying patients to receive CytoSorb therapy. So once underway the goal would then be to treats 10 to 12 patients and we believe this can be accomplished over the next two to three months. And so ultimately, this evaluation will give us the information needed to potentially expand to additional sites within France and to possibly negotiate a larger partnership with this partner. So that’s where we currently stand. Hopefully that answered your question.

Yes. Thanks. So after the evaluation period, you don’t expect a long-term formalizing this relationship, you expect these things to be done quickly, is that…

I’m hoping that’s the case. We’re assuming that the evaluation goes well and that we can quickly move to formalize something like that.

Got you. Fantastic. Thank you, folks. Thank you for taking all the questions.

Sure, R.K. Thank you very much.

[Operator Instructions] And we’ll now go to Thomas Yip with MLV & Company. Please go ahead.

Hey, guys. Thank you for taking my questions. Rob sends his regard.

Hi, Thomas.

Hey everybody. So just a couple of quick ones. I guess, we’ll go back to your European sales force ramp up and reorganization. What do you see to be the near-term impact of that on the topline for rest of this year in those areas?

It’s hard to quantitate the impact of the sales force. I think, certainly in the first half of the year, particularly in Q1, without having the sales people on the ground, we saw a decrease in direct sales because we just did not have people in the territories, knocking on doors and driving those sales. I think it's really important to note that when it comes to selling. It is not just about getting the key opinion leader or the Head of the Department or your champion to say yes and agree to buy the product. It is really a process of getting everybody on board, the five or six stakeholders in the hospital, the household administrator, the person who handles reimbursement, the formulary person, et cetera, who are really involved in that decision-making process. So, we see actually a tremendous amount of interest and demand from the end-user physician. But sometimes it requires a lot of effort on the part of our salespeople to push through these orders through the hospital administration. So, we expect that to really -- our sales force will be back to full force in the second half of this year. The majority of the sales force will be up and running in early Q3. The people that we've signed for the Northeast and Northwest territories in Germany that will start in early Q3 are well known to our folks in Germany. And we believe that they will be able to start up very quickly. They are ICU salespeople. They have their established network of ICU doctors that overlaps in a good part with our current ICU network plus adding additional contacts, which I think is great. And so I think that they can actually begin to generate revenue relatively quickly. Now, that being said just to set expectations, when someone starts, it does take time, right. You are learning the ropes. You are getting trained. There's a lot of start-up type activities. So, we expect them to be in full force in Q4. In Q3, we certainly expect them to contribute and take up where some of the other salespeople have left off. And then in Q2 again, what we said previously is that the growth will be driven predominantly by distributors and partners. The direct sales force, we expect will continue to be flat but the growth will be driven by the other drivers of our revenue. Does that helps?

Sure. To me, it sounds like 2015 will be important time to set up for the sales force, get all the people on the ground for a more meaningful 2016 I think. So, I guess we can move on to the EAP Expedited Access Pathway in the U.S. that you talked about earlier.

Sure. Maybe before we go there, just a couple other things to note. I mean, in Germany, we’re looking creatively about how do we address two markets in Germany in our direct sales territories. One is clearly the ICU. The other is in cardiac surgery. Those are two different kinds of -- two different kinds of markets. Today we’ve been effective in terms of being able to detail both of those. But there are ways to potentially leverage our current sales force and do so rapidly and that represents a potential upside in the near term, if we are successful in our efforts to do that. And we’ll -- I know that's a little bit vague, but we will most likely detail that in the future when things progress. So sorry, and so you got a question about EAP.

No, it’s okay. Yes. So regarding EAP, it sounds like there are a pretty large number of both regulatory and financial incentives for the EAP. So when do you expect to file that application and when do you expect to get a response from the FDA?

So working backwards, contractually just like the 510(k) process and other processes, it’s a 30-day turnaround from when you submit the application to when you expect to hear back from them. And so our goal is to submit a very well thought out and a very detailed application. The application is not a simple one. It involves not only a determination on why you meet the criteria of being a medical device that addresses a major unmet medical need. But you also have to propose a preliminary data designation plan where you are proposing what you plan to do to get early market approval and then what you plan to do in the post market period. Now once you get EAP designation, then you’re really going to hike your with the FDA and then are really negotiating these points in detail. But that being said, we are aggressively pursuing this and hope to have something to submit in the near future

Sure. That's understood. So I am [indiscernible] application. So you need to prepare it as fast as possible. So I guess we can move on to a little bit to cytokine release syndrome indication that you mentioned earlier that CytoSorb could potentially expand into. You also mentioned some initiatives regarding this CRS indication. Can you expand a little bit more on what these initiatives are?

Well, currently we can’t discuss that right now, but I think that when we make progress in those areas, I think that will be talking to shareholders about that. So I think some of the things that we are working on are very exciting and I think will provide us with the necessary background information to be able to go and demonstrate the potential of our therapy in this space. But again the cytokine release syndrome is -- the cytokine release syndrome is a kin to cytokine storm. And so it is just yet another cause of cytokine storm, that's right in line with things like sepsis and burn injury, trauma, pancreatitis, lung injury and other things. We are not -- don't necessarily have to be connected to clinical studies to be used as a rescue therapy for this or any other complication of cancer immunotherapy, whether or not it would be CAR T-cell therapy or other therapy. I think that's very important. So I think the way that we are thinking about this right now is that there are certainly potential opportunities in the CAR T-cell arena and activated T-cell arena with companies and alliances and that kind of thing and strategic partnerships. But if nothing else, we are firmly embedded in this space already. And we could be used today in fact if these were happening in Europe and they had a complication of CAR T-cell therapy, we could be used on those patients today. So very exciting area for us, and it is very much right up our family so to speak.

Sure. Understood that. Thanks for the clarification. One last question regarding REFRESH, do I -- just want to clarify that and start enrolling in the next couple of months to mid 2015. And can you remind us what some of the future catalysts are?

What was that last part, Thomas?

For the REFRESH study, can you please remind us some of the expected data readout date though or enrollment target date etc cetera?

Sure. Yeah. Well, we are on target to begin the trial midyear. And so -- sometime around summer time and again, we’re looking this is -- should be hopefully relatively short trial based of what my comments were before. In terms of the ability to roll patients very rapidly and really the minimal work that needs to be done, in terms of the intervention because it just happens during surgery. And then the follow-up period is more of a -- is a more way blood draw and clinical evaluation kind of thing. So we expect that the enrollment to occur very rapidly. And we are working with number of major centers in the country well known to our clinical enrollment team. And hopefully we'll have that study done before the end of the year with the goal of meeting with the FDA and look in to file an IDE for a pivotal study hopefully thereafter, once our -- the clinical development plan had -- the clinical development path has been clearly defined.

Okay. Sounds good. Thank you again for taking my question.

Okay, sure. Thanks so much.

And we’ll now go to the Jan Wald with Benchmark Company. Please go ahead.

Good afternoon. And thanks for taking my questions.

Hi.

Hi. I guess, a couple of more clarifications than anything else. I just want to make sure when you were talking about the sales people and bringing them up to let’s called a full productivity. You said it has been taken by the quarter to do that, is that right?

Yeah. I think, what I was saying is that, these are our sales people that are well known to our team. They have -- they are very experienced in the area of IC sales and but whenever you transfer over to a new product, it's getting up speed and making sure that, how to address the questions and how to pitch the product. And, so I think it's a bit of a learning curve, but again these are entities that are well known to the company which I think gives us a lot of confidence that we will be able to get up to speed very quickly. And we do expect them to contribute in Q3.

Okay. And on the Sepsis Trial, in case you don’t get the expedited review. Is the only flow back to the 28-day all-cause mortality endpoint or are there other ways to approach the FDA?

So our original strategy for sepsis in United States is really to pursue a pivotal study that was not -- that where the outcome was not where you are not relying on the outcome for approval. And so that's one of the reasons why we went to a cardiac surgery trial in United States, because it was a much faster trial that the endpoints were not mortality, but they were more either biomarker reduction or a clinical outcomes. And if we do not qualify for the EAP pathway, we would fall back to the original strategy of getting CytoSorb approved initially in the United States for cardiac surgery. And then conducting a pivotal trial what I would say 28-day all-cause mortality endpoint trial in either Europe where we’re already approved or here in the United States, and then using that data to expand the label for CytoSorb here in the United States. So we want -- but if -- so that would be the case, if we did not achieve EAP designation. But -- so we'll see what will happen, but we do believe, based on the analysis of the FDA guidance that CytoSorb is a very good candidate for EAP designation.

I just was wondering what would happen if not expecting that would happen. And I guess, just my last question there is a lot of investigator trials that are going on. And I'm sure that part of your -- it's a great strategy but just a question, how many of them single centered, how many of them randomized? I guess, when I’m looking at is, what are you going to bring to the United States as part of the data package even you -- when you come to the United States your approval from the stuffs that going on in Europe?

Yeah. So we -- the investigated initiated studies are a mix of different types of trial designs. Many of them are randomized controlled studies and some of them are retrospective studies using an active treatment arm against a retrospective control. For example, we have two cardiac surgery trials, one in University of Hamburg and one at Medical University of Vienna, that are actually randomized control trials and they are actually -- have actually completed enrollment. And so we’re hoping to see some data coming out of those studies in the future -- in the near future. And those will help support clinical usage, not only the support our discussions with the FDA, but also support clinical usage around the world. Now the FDA is the reason why we’re doing this feasibility study, this REFRESH feasibility study, is that they are looking specifically for safety data in the United States and hopefully, we'll get that done. And they've indicated that depending on the outcome of this study that they are very open to having a discussion about a potential pivotal study in the United States. So I think it is -- the U.S. regulatory path is not predicated on any kind of studies outside of the U.S. It is very self-contained study. But that being said, we will have hopefully safety data and cytokine and biomarker reduction data and other things that we can bring to the FDA and that would hopefully, help support our case. There is also been some recent guidance from the FDA where they are looking more favorably on ex-U.S. data, clinical data and I think, we’ll hopefully have that -- have a lot of different studies when we approach the FDA for different applications.

Okay. Thank you very much for taking the question.

Sure. Absolutely. Thank you, Jan.

And at this time, I would like to turn it back to management for any additional or closing remarks.

Great. Well, thank you everyone for taking the time today to get on this call. We certainly appreciate your participation. If you do have any other questions, please feel free to reach out to Amy Vogel at avogel@cytosorbents.com and we’ll try to get you answers to some of your questions as needed. In the meantime, we look forward to the next update on the next quarterly call. Thank you very much.

Thank you. And that does conclude our conference for today. I’d like to thank everyone for their participation and have a great day.