Cytosorbents Corporation (CTSO) Q1 2017 Earnings Report, Transcript and Summary

Good day everyone and welcome to the CytoSorbents First Quarter 2017 Operating and 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, Amy Phillips, Please go ahead ma'am.

Thank you and good afternoon. Welcome to CytoSorbents first quarter 2017 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'd like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the Company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today. And therefore, we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. Any projections as to the Company's future performance represented by management include estimates as of today May 8, 2017, and we assume no obligation to update these projections in the future as market conditions change. During today's call, we will have an overview presentation covering the financial and operating highlights for third quarter 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 Amy and thank you everyone for joining the call today. After going over a quick overview on the Company, Kathy will discuss financial highlights for the quarter after which I will cover exerted slides from the REFRESH 1 clinical trial presentation at the American Association for Thoracic Surgery Conference last Monday, and then will conclude with major initiatives for the remainder of 2017. On Slide 4, CytoSorbents is a leader in critical care immunotherapy leading the prevention or treatment of life threatening inflammation in the ICU in cardiac surgery using CytoSorb Blood Purification. Unfortunately, millions of people die every year of uncontrolled deadly inflammation from things like sepsis, trauma, burn injury, cytokine release syndrome from cancer immunotherapy, liver failure, surgical complications, pancreatitis, liver failure, influenza, and many other illnesses where inflammation plays a deadly role, for which there are no effective therapies that can control both these deadly inflammation while keeping the immune system intact. And that's where CytoSorb comes in. CytoSorb removes the fuel to the fire of inflammation, targeting a $20 billion opportunity in critical care in cardiac surgery. CytoSorb is approved in the European Union as the only specifically approved extracorporeal cytokine filter approved for any situation where cytokines are elevated. CytoSorb also removes many other different inflammatory mediators such as free hemoglobin, bacterial toxins, myoglobin, activated complement and many other inflammatory mediators in a typically 10 to 60 kilodalton molecular weight range. And CytoSorb works with standard dialysis in heart and lung machines as we will talk about later also works with standard extracorporeal membrane oxygenation or ECMO machines as well as now being patient well tolerated and now more than 23,000 human treatments up from 20,000 in the last quarter. And our goal of CytoSorb is to try to control this deadly inflammation in order to try to prevent or treat organ failure, which is a direct cause or result of this deadly inflammation that is the cause of nearly half of all deaths in the ICU today. In doing so, we hope to be able to improve patient outcomes and survival while decreasing the cost of ICU in patient care. With that, I'd like to turn it over to Kathy to talk about our financial highlights. Kathy?

Thank you, Phil, and good afternoon everyone. For today's call, I will be providing an update regarding CytoSorbents March 31, 2017 financial results including product sales progress and an update around our recent equity raise and cash runway. Turning to our quarterly financial results, CytoSorbents product sales for first quarter of 2017 were approximately $2.6 million, which is an increase of 63% over first quarter of 2016 product sales of approximately $1.6 million. Grant and other income grew a 143% from $212,000 in Q1 2016 to $517,000 million in Q1 2017, and total revenues which includes product sales and grant income increased by 72% to $3.1 million in Q1 2017 as compared to $1.8 million in Q1 of 2016. Now, let's take a look at our quarter-over-quarter product sales. Our first quarter product sales for 2017 were approximately $2.6 million which were just slightly and near $17,000 below our Q4 2016 product sales. This is coming off a very robust quarter of growth in Q4 2016. And one factor that impacted our Q1 2017 sales was that in Germany, hospitals have begun to receive notification about the reimbursement amount to which they were entitled under our new dedicated reimbursement code. Many hospitals have now received this information and a new reimbursement benefit is higher for hospitals because in most cases it now includes not only the cost of the device but also the other cost associated with the procedure. And now that the actual reimbursement rate it's being established at many hospitals, it is expected to benefit future sales growth. Most importantly, the underlying drivers of revenue growth remained unchanged and management continues to be optimistic about continuing sales growth particularly with regard to the second half of 2017. So, looking at our trailing 12 months product sales, you will recall at December 31, 2016, our trailing 12 months product sales was 8.2 million, now it is climbed to 9.2 million for the 12 months ended March 31, 2017 as depicted in this chart. Overall, we believe our annual product sales exhibits a very strong growth trajectory and we expect continuation of this trend in the future. And why, well we are seeing a healthy market with continued strong interest in CytoSorb and to revisit the catalyst of future sales growth, we've had good organic growth across the Board in critical care and cardiac surgery amongst those direct sales and distributors. Secondly, as we've already discussed, the finalization of reimbursement rates in Germany is expected to be a very significant driver for direct sales in the future. Third, we expect continued growth from our strategic partners and distributors. Four, we are looking forward to the ramp up as a result of the co-marketing agreement that we have in place with Fresenius Medical Care. Fifth, we continue to discover new indications where our therapy is being used successfully for example in ECMO and so we'll talk more about that later. And finally, of course as we generate more and more clinical data. Lastly, let's turn our working capital position. As of March 31, 2017, we had approximately $3.24 million in cash, and in April 2017 as a result of our 11.5 million equity financing we added another 10.3 million in net proceeds, bringing our cash on hand to 13.5 million. We additionally have 5 million available to us or in our debt facility with Bridge Bank, which is available to further extend our operating runway into the second half of 2018 at which time we expect to be at or very close to operating breakeven. As of March 31, 2017, we have approximately 30.3 million common shares on a fully diluted basis. As a result of the April equity financing, total outstanding shares on a fully diluted basis are currently 32.9 million. And now, I'd like to turn the call back to Phil. Phil?

Thank you, Kathy. There have been many requests to review the REFRESH 1 data from both analyst as well as shareholders and so we thought that we would try to do that on today's call. So, this was a study that was presented by Dr. Tom Gleason, who is the Chair of Cardiac Surgery at the University of Pittsburgh Medical Center on behalf of the three fresh one investigators. This is entitled to use of novel hemoabsorption technology to reduce plasma free hemoglobin during complex cardiac surgery throughout results of the safety and feasibility REFRESH 1 study. Now, it's been known for a long time that cardiopulmonary bypass causes inflammation. What is cardiopulmonary bypass, it is when you are trying to operate on the heart so crack hope in the chest and you expose the heart, but the heart is beating. In order to operate on the heart, you usually need to stop the heart from beating and thereby then, in order to operate on the heart, but when you do so, you need to put someone cardiopulmonary bypass that oxygenates and pumps blood the rest of the body while you do your operation. Unfortunately, this cardiopulmonary bypass despite many advances in the past still continues to generate a high degree of inflammatory mediators to specifically free hemoglobin from the hemolysis of red blood cells caused by cardiotomy suction, blood share and blood transfusions. The activation of compliment particularly C3A and C5A, which are caused by blood contact with air and artificial surfaces, the last but not least cytokines which are caused by surgery -- the trauma of the surgery ischemia reperfusion injury as well as endotoxin generation. Now, one of these inflammatory mediators, plasma free hemoglobin has long been known as a direct contributor to cellular injury, tissue injury as well as death in many cases. For some of you who've been in investors for a long time, they'd be familiar with blood substitutes where they actually try to use plasma free hemoglobin as a blood substitute in the past, but it actually increased mortality. And the reason why it does so is because of many different factors. One, it is a very potent scavenger of nitric oxide one of your most potent vasodilators in your body, and when you don’t have these vasodilators capable of increasing blood flow pure by organs, they can create problems including pulmonary hypertension, acute kidney injury as well as decreased blood flow to vital organs like the intestines, the kidneys, the brain and other organs. There is also a very potent generator of oxygen free radicals due to the highly reactive iron species found in the hemoglobin that can cause blood vessel injury. Last but not least, hemoglobin is a pigment, this is what gives blood its characteristic red color and when it is -- when hemoglobin is in the red blood cell, it is nontoxic, but when its released into the blood stream because of hemolysis of these red blood cells that hemoglobin can wind up in the kidneys causing renal tubular injury thereby causing kidney failure in some cases. And so, plasma free hemoglobin of all the organs that it can potentially damage is most highly correlated with the development of acute kidney injury in these cardiac surgeon patients. This is a table taken from the paper by a cardiothoracic surgeon name, [Indiscernible] who has done a lot of research on free hemoglobin and the risk of developing acute kidney injury, but what you can see from this graph is that those patients with very low free hemoglobin levels less than typically 60 milligrams per deciliter do not typically get acute kidney injury while those with acute plasma free hemoglobin levels greater than 120 milligrams per deciliter are at risk of developing acute kidney injury. So on with this knowledge and other related literature from the field, we went about looking at modeling this in vitro and on the bottom of the slide you can see the in vitro set up where a bag of bovine whole blood is put into a circuit using a circulation pump as well as the CytoSorb filters and post-filters you see an infusion pumps that is injecting free hemoglobin directly into the blood system at a constant level for a total of the 180 minutes. This is designed to stimulate the ongoing hemolysis that happens during open heart surgery where blood is continuously hemolyzing due to blood shear forces as well as cardiotomy suction. And when you look at the graph above, you can see that in the red in the control that does not benefit from CytoSorb, the levels of free hemoglobin rise very linearly with these, this infusion of free hemoglobin, but with the institution of CytoSorb therapy and opening up this value and letting blood flow through the cartridges at one hour into these experiments, CytoSorb is capable of reducing through hemoglobin very efficiently in these in vitro system. And that lead to the REFRESH 1 study which was a perspective open labeled, randomized controlled trial where the controls received standard of care and the treatment group received standard of care plus dual 300 CytoSorb cartridges in the cardiopulmonary bypass circuit. The inclusion criteria were patients seeking to 80 years of age, undergoing elective non-emerging complex cardiac surgery with cardiopulmonary bypass with that cardiopulmonary bypass was expected to last longer than three hours meaning that these patients were getting roughly two at least two hours of CytoSorb treatment. The exclusion criteria try to exclude patients undergoing very simple procedures that were typically not associated with long CPB pump times and we're not associated with high levels of free hemoglobin as well as also excluding those that are extremely evolved such as heart lung transplant, left ventricular assist device plantation and other condition such as endocarditis and also try to exclude patients that were -- that have end stage organ failure or had near term death or were expected to have your term death. The schematic of this diagram is on this next slide here where blood was pumped with the CPB machine to the oxygenator, which oxygenates blood and roughly a tenth of blood flow was diverted back to the venous reservoir through dual CytoSorb cartridges in parallel while the remainder of the blood flow going to the rest of the body. The enrollment of these patients and patient population statistics were that 52 patients were enrolled, 49 were randomized and three withdrawing consent prior to survey, and all 46 patients that remained were part of the safety population divided equally in at 23 patients in the control and 23 patients in the CytoSorb treatment group while those with valid plasma free hemoglobin levels totaled 38 patients and they were in the plasma free hemoglobin reduction group. In terms of the demographics of these acute patient populations that there were slight tendency for CytoSorb patients to be older to have more females in the treatment group as well as having more current smokers which is the risk factor for adverse outcomes compare to the control. What was interesting about the study is that it kind of highlights current practice during the cardiac surgery typically when patients go in for open heart surgery procedures, they typically don’t go in just for one procedure. Cardiac surgeon typically is trying to do multiple procedures at the same time because what happens is that once they undergo one procedure, they develop a tremendous amount of scarring that is very difficult to clean when you go in there for a second time. So, there is a very strong trend to do multiple procedures at the same time and it was no different in this complex cardiac surgery patient population where roughly 75% in the control and 89% in the CytoSorb group underwent multiple procedures. But it turns that not all procedures are equal in terms of generating plasma free hemoglobin and it turns out that those involving valve replacement through either multiple valve replacement or valve replacement plus another procedure like CABG or aorta reconstruction et cetera, these are the ones that have a highest levels of plasma free hemoglobin compared to non-valve replacement surgeries. And that is despite the length of the bypass being typically shorter in the valve cases versus the non-valve cases. On the next slide, you see what the data looks like from these patients, these valve replacement patients undergoing plasma free hemoglobin reduction. And what you can see here is that amongst cases where the cardiopulmonary bypass time is less than five hours, there were significant reductions in the plasma free hemoglobin achieved by CytoSorb and now was statically significant after the pre-specified three hour CPB-linked time particularly at 3.5 and 4 hours of surgery. And it's very interesting that when you look at this graph and the slopes of these two graphs that it is very similar to what we saw in our in vitro system, and here you see the levels of the 120 and 60 milligrams per deciliter. These were very similar to those associated or not associated with acute kidney injury in some of the previous studies that have been reported in the literature. So this is very encouraging data and I think that we also demonstrated the activated compliment, which again is also associated with mortality in a wide range of extracorporeal blood purification technologies including dialysis and other things that we were able to reduce activate compliments C3A and C5A, both during a surgery and then the case of C5A post-surgery as well. In terms of adverse events, there were roughly equal number of adverse events in both the control and CytoSorb treatment group as well as a comparable number of serious adverse events as well. The mortality was not significantly different with one death out of 23 in the treatment, in the controlled group in queue had the 23 in the treatment group and there were no unanticipated device related effects as well as no device related adverse events -- as well as only two device related adverse events and those were both related to lower platelets. And when we looked to the platelets, what you can see here and what we reported on Friday in our press release is that few things to note. First, it's very important to note that patients undergoing cardiopulmonary bypass and cardiac surgery are heavily anti-coagulated during surgery. In fact, their levels they are not expected to clot at all during surgery because they are dealing with the arterial blood supply and any clots in the arterial blood supply can than lead to a stroke. Clots going to the brain causing a stroke, clots going to intestine causing an intestinal infarction, clots going to the kidneys to the heart et cetera, these are unwanted. So, patients undergoing cardiothoracic surgery are very anti-coagulated, and so the other thing to note is that cardiopulmonary bypass which is an extracorporeal therapy decreases platelets and you see this from the pre-procedure platelet level in this graph to one hour of cardiopulmonary bypass when CytoSorb therapy has not even been started. You see a separation between these two curves were not exactly sure why it could be because of differences in the patient population, but then with CytoSorb therapy that there is a transient drop in platelets during surgery and this drop is stable with the return of platelet levels back to baseline by the time that they reach the intensive care unit. In the postoperative period, there were no significant differences in coagulation parameters or bleeding complications and there were no significant differences in medium transfusions from the time of surgery throughout the entire ICU stay with packed red blood cells requiring one unit versus one in the control, key value [0.15], platelets two versus one control and plasma one versus zero control. And so as we move forward in future studies, this is obviously something that will continue to look at, but in this trial it was not associated with any serious device related events. So in terms of our summary and next steps plasma free hemoglobin was related to cardiopulmonary bypass way, but also surprisingly to procedure type that plasma free hemoglobin was highest in the in high cardiotomy suction and complex cases like valve replacement where CytoSorb significantly reduced plasma free hemoglobin and activated compliment. There are no similar differences in the rates of AEs or SAEs between the groups and treatment cause of transient thrombocytopenia during cardiopulmonary bypass of unknown significance. Again, these patients are highly anti-coagulated during the surgery. So, in terms of REFRESH 2, the goals is to compare CytoSorb versus control in the larger study enrich for high hemolysis patients that have high plasma free hemoglobin just like the valve replacement patients. So, this provides an equally way of potentially enriching the next trial with those at highest risk of plasma free hemoglobin levels that by correlation also a high risk of developing acute kidney injury and other organ injury, and we look to correlate this reduction in plasma free hemoglobin and activated compliment with reduced organize dysfunction like acute kidney injury, reduced stroke risk, reduced incidence of respiratory dysfunction as well as others. Last but not least, we looked to confirm the safety and risk benefit of the treatment in this larger study. So with that, let me transition now to initially itself we have in place for the second half of the year, for the remainder part of the year, and these include financing in investor relations. So as Kathy mentioned, we completed an $11.5 million equity financing with Cowen and Company, one of the leading mid-tier healthcare investment banks in the United States as well as our existing investment banking syndicate, which you can see below in the figure. We've strengthened this accomplish many things including strengthening our balance sheet, enabling us to fund our commercial expansion in clinical trials strategy. We also gain the support from Cowen and interest from other leading mid-tier healthcare investment banks as well. We met with a large number of fundamental investors that formed a base from which we plan to grow institutional sponsorship and drive liquidity of the stock which is one of the things that this currently lacking in our current stock action. And we also represents another example of our growth in standing in the investment community by being able to attract these high quality investors as well as these leading mid-tier banks as well. And last but not least, we are finalizing the evaluation of well-known investor relations firms with the goal of starting a new program very soon targeting both institutional and retail investors and will have more detail on that in our future press release. The second thing that we're doing is gearing up our clinical infrastructure as we've mentioned before we plan to initiate the U.S. REFRESH 2 trial later this year, pending FDA approval, we're also planning other smaller company sponsors RCTs in different areas including sepsis at a relatively modest cost. And we are currently in process of bringing in key hires that are expected by the summer to help build out our clinical infrastructure. One of the things that you see at the bottom here just a picture from this year's 4th International CytoSorb Users' Meeting, I think that it was the 120 participants from 22 countries very exciting number of presentations that were given. This is really migrated from what was initially key support studies to now a lot of key series and even smaller randomized controlled trials, so the level and the quality of this data is growing and the numbers of people here continue to grow worldwide. The reason why this was only at 120 participants is that this is an auditorium in a hotel and it was maxed out at capacity, and so if we had more room, we definitely would have more people. Another major initiative is that we have numerous clinical studies being published. So, this just represents a sampling of a lot of the clinical activity that is ongoing. But in terms of expected publications, a breakthrough publication on 22 patients and refractory septic shock has been accepted where this unexpectedly high shock reversal rate and much improved survival compared to historical controls. We also are announcing that one of the biggest endocarditis case series to-date in cardiac has been completed involving 39 patients with endocarditis. Endocarditis is an infection of the heart valve often caused by either poor dentition and the feeding from the mouth of bacterial to the bloodstream of these valves, but it also plays very heavily on the growing drug epidemic particularly the heroin and opioid epidemics where IV drug use has led to contamination of the blood with skin bacteria that can feed heart valves and destroy them within days. These patients act very similarly to septic patients where the heart valve has often been destroyed. These patients are very unstable going into surgery and in now many centers we have seen something very similar to what this study has concluded where patients are very stable going through surgery require very little in the way of hemodynamic support following the surgery and have had typically very good outcomes. And last but not least, there is our first review article on CytoSorb in septic shock has been written, it summarizes the positive clinical results so far while confirming safety that is a third-party written article. We also have a lot of published cases as well including a case series on septic shock patients describing that really intervention is very important for survival. This is how CytoSorb has been used predominantly in the market place today, but it also includes many different cases including one of the largest animal sepsis studies to-date that demonstrated increased survival and improved cardiac function in septic wrath. But we also have many pending publications including publication was submitted for the REFRESH 1 trial that has currently been submitted. There is also an interim analysis of our international CytoSorb drug history involving about 200 patients that has been also submitted. There is a 20-patient case series in septic shock and many case reports on a wide variety of topics like anti-depression intoxication, toxic shock syndrome and many others. As I've mentioned in the past, I would urge you to visit our cytosorb.com website. This is the product website for the case of the week for basically breaking news on how CytoSorb is being helped, is being used to help patients across the world and places like Sweden, Russia, Italy, Chile, Germany and many, many other countries. Another major initiative that we have is the launch of a new therapeutic ECMO kit. Now, I just wanted to explain this a little bit. So, respiratory failure or failure of the lungs is often caused by excessive inflammation that causes the blood vessels of the lung to become leaky allowing fluid and cells to go from the blood into the air sacs of the lung essentially drowning a patient from the inside out. Now, this is often supported by mechanical ventilation which is the primary treatment modality today, but mechanical ventilation is very dangerous. The oxygen that you place into the lungs that can cause oxygen toxicity, the pressure in volume trauma on the lungs causes continued ongoing damage to the lungs. And when patients are on mechanical ventilation for long periods of time, they can develop complications like ventilator-acquired ammonia, pneumothoraces as well as become ventilator dependent because of the weakness of their diaphragm because they are not working to breathe, they are having machine doing for them. So, extracorporeal membrane oxygenation or ECMO is a supportive care therapy that was pioneered by our Chief Medical Officer, Dr. Robert Bartlett, and it has been increasing in popularity as an alternative to mechanical ventilation as a way to provide gas exchange and some [Indiscernible] dynamic support in critically old patients. ECMO is typically used -- has been reserved as a rescue therapy for those failing mechanical ventilation, but there has been a trend to maybe use ECMO earlier as a lung preservation strategy. The problem with standard mechanical ventilation and ECMO however is that they are used just to keep a patient alive, but they do not do anything to directly address the underlying cause of why the lungs are so diseased in the first place, which is often caused by uncontrolled inflammation, and that is really where this new concept of therapeutic ECMO comes in or the combination of ECMO with CytoSorb, and it is we call that new but in fact it's been now used in an estimated more than estimated 1,000 treatments as a lung preservation strategy for gas exchange in the intensive care unit, and we are now just ready to launch a specific ECMO kit that will enable the safe and rapid connection of CytoSorb to the ECMO pump system that is found in many intensive care units around the world, and we think that this is going to be a significant driver of our volume given that typical ECMO patient will use multiple cartridges during their intensive care units thing. Last but not least one of our major initiatives is manufacturing. So, as we mentioned previously, our original goal was to recycle entire manufacturing facility to a new business facility, but instead of doing that we've now secured new space at our current complex allowing us to extend our scaled up manufacturing at a fraction of the cost estimated less than 20% of what we had initially budgeted of and bringing this new facility online with by 2018. This new facility will -- is expected to quadruple our production capability in two phases to approximately $80 million in revenue, and we have already begun build out of the space and have placed orders from much of the capital equipment, and we expect this site to be validated and operational by early 2018. So with that, I thank you for your attention and that ends our formal remarks, and we -- moderator, we can open it up to Q&A period.

Thank you. [Operator Instructions] And our first question will come from Gabrielle Zhou with Maxim Group.

So, Phil, can you walk us through your clinical plan on the REFRESH 2s trial? What the size and timeline as well as the endpoint for the study? Thank you.

Thank you, Gabrielle. So, currently we are anticipating a 300-to 500-patient trial in a patient population that is enriched for those are undergoing valve replacement surgery or again the levels of positive plasma free hemoglobin are high and the risk of developing organ injury and acute kidney injury are high as well. This is pending discussions with the FDA, but we believe that the ultimate endpoint will be a clinical endpoint such as acute kidney injury or composite endpoint, and we will have more clarification on that soon, and we will back to you with more detail.

Next, we move to the [Indiscernible] with Aegis Capital.

Phil, would you walk us through the IP strategy and what happens when the -- how the competitive landscape will evolve as some of the patents expire?

We recently announced the issuance of the 32 -- of our 32nd issued U.S. patent that is expected to -- it is a composition of matter patent that is expected to comp CytoSorb in the United States. It was also issued in Russia, in Japan, China as well as Australia and New Zealand and is pending in other countries around the world. This is key patent that extends the worldwide protection of Cytosorb through 2031 and then the United States maintains it as 2026. So, we have a very broad range of patents covering both compositions of matter, methods in manufacturing, device configurations as well as clinical applications. And we believe that, this is a very formidable patent portfolio that is intended to protect our technology in many countries going forward. I think the other thing that we announced last year was the development of CytoSorb-XL, which is the next generation product to Cytosorb. And this again is a new composition of matter, material that has patent pending worldwide. And this is a particular formulation that not only removes a broad range of cytokines and inflammatory mediators and bacterial toxins, but also removes bacterial endotoxin as well which is an important inflammatory mediator in sepsis particularly gram-negative sepsis, and this is anticipated to potentially add on up to 20 additional years of patent protection. So, the competitive landscape for sepsis therapies continues to be relatively limited in terms of dose targeting blood purification, we are one of the leaders in particularly the European Union and our goal is to continue to file key patterns, but also to run faster and innovate faster as well to be able to stay ahead.

Yes, thank you for the additional color. So, I am changing subject to the immuno-oncology, so mostly the CAR-T and one of the known side effects is the cytokine storm. So, would you walk us through how you think about potentially to from partnership with these drug companies? Or how do you think about these things? How do you insert CytoSorb into the process of immuno-oncology?

Thank you. So, this despite directly to one of our major announcements for in the last quarter of the joining of the Dr. Carl June, who is the pioneer of CAR T-cell immunotherapy at the University of Pennsylvania Medical Center, and they were one of the first to demonstrate that taking someone's T-cells out of the body, putting a chimeric antigen receptor into them that makes them cancer homing killer cells, hunter killer cells and putting them back into the body can actually lead to potential cures in refractory leukemia and lymphoma patients. It's one of the -- as we've discussed previously, one of the major innovations in cancer immunotherapy in the past. And it's not just CAR-T-cell immunotherapy that causes cytokine release syndrome, which is a subset of the cytokine storm that CytoSorb is intended to treat, but there are many other cancer immunotherapies that can lead to this unwanted excessive inflammatory response. I think the joining of Dr. Carl June to our Scientific Advisory Board is tremendous validation of our technology in the cancer field. The goal of his involvement is to really help us really reach out into many different areas of cancer immunotherapy where CytoSorb has the potential ability to modify the immune system to fight cancer in a number of different ways, not just control cytokine release syndrome, but potentially actually help tune the immune system to fight cancer. So, I think that it is a part of an ongoing strategy that is underdevelopment and there are many potential strategic partners in this space. I think one of the major goals of our what we're trying to do is to get CytoSorb approved in the United States so that they can be used on label for the treatment of things like cytokine-released syndrome, and one of the other press releases that we put out last quarter was the similarity of the successful treatment cases of CytoSorb in hemophagocytic lymphohistiocytosis or HLH. It has similarities to Cytokine release syndrome and why we believe that Cytosorb could potentially help patient with Cytokine released syndrome and trick that complication of cancer immunotherapy. So, I think that this is developing story and Dr. Carl June's involvement has just been very recent and we would look to update everyone in the near future.

Thanks Phil. If I could flip you one last question on the U.S. commercial strategy. So do you -- how do you think about partnership? Or do you plan to go alone in the case of partnership? What would be an ideal profile for the partner for CytoSorbents? Thanks.

Sure, well, in the United States, we are not yet approved, but we are on the path of potentially U.S. approval by 2020 with this REFRESH trials, refresh key trial in complex cardiac surgery should everything go well. So, if we do achieve U.S. approval in cardiac surgery, our goal would be potentially to go to this market ourselves with our own direct sales force. We certainly have a lot of experience in building new markets such as what we have done in Europe and the rest of worlds. And the next thing about the cardiac surgery market is that, it is very easily targeted by relatively small sales force since most of the major cardiac surgery centers are in the major universities or public hospitals within the major cities. So that being said, it is also a market that could potentially be partnered with the major strategic player in the area of cardiac surgery. We're already working with one of the largest cardiac surgery companies in the world Terumo Cardiovascular, and we also have a lot of interest from the other major players as well. So, there is a lot of options opened, I think we are focused on trying to assure a successful REFRESH 2 trial first, but we will certainly have more detail in the future should we be able to achieve U.S. approval in cardiac surgery.

And we will move next to Andrew D'Silva with B. Riley.

Just got a few quick ones here also with a couple of bookkeeping ones. First of were there any unusual stocking orders or lack of stocking orders during the last quarter may because of the dedicated reimbursement code or otherwise? And then maybe also provide small update how things are going in Belgium and Luxembourg?

Kathy, if you want to take that?

Yes, Andrew, you've always asked that question about whether there were any unusual reorders or no orders, and I would say that the answer is no. We did have a very minor decline in direct sales in Germany, which we believe is directly correlated to that reimbursement code just sort of revealing itself during the quarter. So, we expect that should resolve going forward.

And maybe Christian, if you could comment on sales in Belgium and Luxembourg?

As you know, the directive process covering not just in Germany, but also Australia and Switzerland, and we have started in Belgium and Luxembourg, and we will very soon start in Singapore. And for the most of them of the markets outside of Germany is Australia and Switzerland, I think we see a similar development as we have seen in Germany. This is a number of months delay, but as the markets also close together and many doctors are also visiting the congresses inside enter Germany and there is miles to miles growth spreading, we think that the development and also in Switzerland that it goes same way as in Germany. In Belgium and in Luxembourg, we have started much later so we need some more time to prepare the market and then I think it could go to same way.

Great. Thank you very much. And then, Kathy, just a quick follow-up question, R&D was substantially lower sequentially and year-over-year for the first quarter, should we expect that to be the run rate until our REFRESH 2 starts?

Yes, I think you can we are in fact seeing increased activity from the government grant program and that should continue through the remainder of this year.

But below the line as just OpEx not cost of goods the actual R&D spend decline substantially, so that…

So, there are actually two reasons for that. Part of it is the increased grand activity does absorb R&D cost, but the second factor that we won't see during fluid as we start REFRESH 2 is the fact that we had pretty much completed REFRESH 1 and so there were not significant cost related to our REFRESH trail activities in Q1 in 2017.

Do you have an anticipation when that should ramp back up for REFRESH 2?

I think we would starting to ramp although it will be gradual in Q3 and then into Q4 it will build?

Okay, perfect. And then just touching on the co-marketing relationship that you established with Fresenius, it's obviously you've highlighted that is the second half of the year catalyst or event that we should we looking for? Maybe give me some inferential data point as to how the distributor base that you have in place currently is welcoming or looking at this co-marketing deal with Fresenius is obviously many several different hands in the pods when you start looking at your footprint globally?

Yes, I'll turn it over to Chris for some more commentary, but I think that it is very important part of about the co-marketing agreement is that we meaning either CytoSorbents and its direct territories or our strategic partners as well as distributors in other countries will be the sole seller of CytoSorb in these countries. Fresenius sales force will ring in the sales for ancillary products like blood sets that are in fluids and other dialysis hemofilters that are often used with our therapy, but there is definitely a very sharp division between who sell CytoSorb which is us and who sells the other things which is them. So, the feedback that we've gotten from many of our distributors has been that this can only help drive sales of CytoSorb in their territories and I think that is actually positive. So, Chris maybe if you wanted to have a little bit more color commentary.

Sure, thanks Phil. Hi, Andy, this is Chris. I think it still describes that it hits a nail in the head here is that the way we set this up is that FMC is really providing the introduction to their customer base and generating leads. So, the really the door open or I would for this new customer base that either our direct sale team or the distributors will continue to own. So, in terms of the control of the product and therapy and the strategic decisions about how to market and sale it that hasn’t change really what's happening is that they are getting this kind of lead generation support coming from FMC. So far we haven’t heard anything negative about that, hoping we can continue that. But just while you've asked the question I just wanted to answer and give a little bit more color commentary about where we are at with this. Right now, as we've talked about this is a second half 2017 expected launch and right now the program development is underway and they are making their progress. I would estimate that we are around 75% to the way through the design set up, and we have been very actively involved with FMC and the design of this, we're typically on a weekly call just in working through a lot of the detail things like clarifying the sales and marketing profits to make sure as Phil had mentioned, there is no confusion about who owns what coming up with joint marketing material and planning out the training and rollout strategy. So, I think it's moving in the right direction again we are still targeting a second half of 2017 rollout to the market but overall it's moving in the right direction I would say.

Chris thanks that was very helpful. Phil, you have a lot of great detail about this highly trial in you prepared remarks. Now, we are just wondering, if you could refresh my memory, activated complements were not actually an endpoint that you are looking at in the REFRESH 1 trial. This wasn’t additional data point that was positive above and beyond the endpoint that you are looking for, is that correct?

That’s correct. It was one of the exploratory endpoint but compliment has been long known as a contributor to mortality. In fact in the dialysis field, there was a cellulosic dialyzing membrane called cuprophane that actually increased activated complement that was associated with increased risk of death, and so it was actually taken off the market for that region. And activated complement is normal part of your immune system, but when it's activated unintentionally as it often in cardiac surgery, it can cause whole host of problem such as causing server tissue damage and basically compromise of your immune system and a wide variety of other complications.

[Operator Instructions] We will move to Brian Marckx with Zacks Investment Research.

On the reimbursement in Germany, can you just kind of talk about when the new reimbursement rate became effective? I understand that it's most likely somewhat region-to-region specific, but maybe you can kind of then lighten us a little bit when it became effective? And then when you think it may be effective throughout in Germany?

Yes, so the reimbursement, the new reimbursement code and the negotiated rates around that code, all go back to January 1, 2017. So even though that these hospitals are negotiating with your operating budgets, which includes the CytoSorb procedures like the CytoSorb therapy during the first quarter any decisions made on reimbursement rates across the Board are typically go back to January 1. And so, I think that it's just one of those things where there is a is that a little bit of uncertainty causes people just to wait a little bit in terms of ordering. But I think that what we're seeing now is that having gone through the first quarter that many hospitals have established those reimbursement rates, and as Kathy mentioned that those will be contributing now to what we believe will be accelerated orders going forward. Just to remind you in the past what we had seen is that hospital administrators have been really urging their clinicians to be very selective of CytoSorb use because the reimbursement that they are getting at that time typically only was 60% to 100% of the cost of the cartridge, but did not cover the cost of the procedure. And without looking at any of the cost benefit issues related to CytoSorb treatment and potential decreases in hospitals stay and decreased ICU stay and other things and just looking at it as a in cost and then out cost, what they have to pay for their therapy versus what they are getting reimbursed for, it was in some cases in hospitals were not achieving full reimbursements that is the value of this new reimbursement code is that now it is a much more robust reimbursement for the hospital. And we've heard from many hospital administrators that this is what they need it to be able to open up the gates to more CytoSorb usage, and I think what a lot of clinicians in hospitals around Germany have been waiting for. So, I think that it on one hand it's when we look back at it we do see an impact a little bit of an impact on waiting for this rates to be finalized and orders, but on the whole it's a very good thing because it is really removing one of the major bottlenecks, I think in economic bottlenecks in terms of more robust usage, and this is one of the major reasons why we think that particularly in the second half of the year we are going to see significant increases in direct sales and that continuation of our direct sales growth.

Okay, that's helpful. Phil. If you can talk about REFRESH 1 and then how it can relates to REFRESH 2? What are your thoughts in terms of valve replacement surgery? And how that affects plasma free hemoglobin? Is it specifically related to the time relation how long the actual procedure is? Or is there something else regarding that increases free hemoglobin?

Yes, valve replacement surgery is one of the most common complex cardiac surgeries that are performed in United States, roughly counting for more than half of all complex cardiac surgery cases. And so, valve replacement surgery is more or less a surrogate for those surgery that require a long cardiopulmonary bypass times, but more importantly a lot of cardiotomy suction because when they go into these surgical procedures, there is a lot of blood in the field. And in order to cut out a heart valve and repair the ring that holds the valve in place and make sure there are no leaks et cetera, you are constantly sucking blood away from the field so that you can visualize the heart valves and see where there any leaks happening. And so, this is a -- because of that high amount of cardiotomy suction, we actually see that even though the cardiopulmonary bypass times are relatively shorter than non-valve procedures, it produced much higher levels of free hemoglobin because this negative pressure suction is causing the red blood cells to explode and release the free hemoglobin inside into the blood stream. And so on one hand, what it says is that in terms of our market, it really is much larger than valve replacement surgery. It really involved those complex cardiac surgery procedures where you are sucking blood from the field a lot and where you are expected to be on bypass more than three hours or more. But it's very convenient to have identified the subpopulation for our trial because again we in the inclusion criteria of our study, we can specifically say patients under -- included patients are those undergoing multiple valve replacement or valve replacement in conjunction with another procedure. And again in the REFRESH 1 trial, it predicts those that have the highest levels of free hemoglobin and therefore are at higher highest risk of developing organ injury particularly kidney injury.

So, it is so unclear in REFRESH 2, it would or would not -- the inclusion criteria would or would not include specifically valve replacement surgery?

It will include specifically valve replacement surgery.

So in terms of REFRESH 1 and acute kidney injury, do you have that or expect to have the data or where there be data on specifically on acute kidney injury?

So, these data are included in the paper that was submitted for publication because data of data embargoes, I can't really discuss these data here today publically. But the thing of that is that, that is the goal of the REFRESH 2 study. The REFRESH 1 study was powered to look at safety and feasibility of CytoSorb therapy, but the goal of REFRESH 2 is really to look at the efficacy on reduction in acute kidney injury and other things like stroke, respiratory failure, need for vasopressor support, days in the intensive care unit and other types of clinical and cost economic and economic outcomes in a much larger study, powered specifically to look at these points. So, I think that moving forward, we feel comfortable that looking at organ injury is something that is very doable.

Okay and as a primary end point acute kidney injury?

Yes, so as we've said before that right now the discussion has been around the acute kidney injury versus a composite endpoint. There is some debate amongst our advisors that, if single endpoint like acute kidney injury would be the cleanest endpoint in terms of being able to say that, it reduces the risk of acute kidney injury for example. Others on our other investigators and advisors have said that a composite end point maybe the better endpoint because it enables you to power study with fewer patients, but still yet achieve statistical significance in a composite endpoint that includes many different adverse events including acute kidney injury, stroke and other endpoints. And that composite endpoint is in fact what is most meaningful to patients because when you -- when a doctor goes to a payment form consent for this therapy, I think what we've heard from a number of physicians is that the patients want to know well, does this reduce my risk of bad thing happening to me, and that's where the composite endpoint would tell you. So, I think that this is a matter of active debate right now and something that we look to finalize before very shortly.

And gentlemen, we have time one more question that will be from Swayampakula Ramakanth with H.C. Wainwright.

This is RK from HCW. Most of my questions have been answered, but however I was just wondering regarding some of these collaborations unfold core distributorships that you have the term and for seniors. Once, they get going, how do we think about our current, is this going to be at quarter in earlier so how does that work? Are they accounted part in the same quarter that we shift product out?

So, we book to sell of our product when it leaves our dock, right. And so when they take the possession of the devices which is typically during transit from our facilities to theirs, that is when we book to sell. Now, we knew we are selling two different products, so the CytoSorb is the core of both products. But in for cardiac surgery, we are selling the cardiopulmonary bypass kit which includes both the cartridges the CytoSorb cartridge as well as a number of other accessory products within the kit that allows easy hook up to a cardiopulmonary bypass machine in the operating room. In the ICU, we are selling pretty much the CytoSorb cartridge itself as a second SKU and that fits right into the blood set that typically the dialysis that Fresenius sells in the intensive care unit. The third product that we have is our ECMO kit and that is yet a third product that we feel -- we will have actually a -- will be a significant driver of growth going forward given the 1,000 plus usages that we have already had.

My last question is in that, if we start thinking about the German situation now. How does -- how should we think about of their -- how they can have a growth of revenue especially now as you know [Indiscernible] can certainly cross the $10 million in revenue for this year. What could be the contribution of Germany assets? You did state that you just see an increased revenue rate from the constitution from third quarter, but if there is anything that's been talked about [Indiscernible] with respect to those are produced?

Sure, last year we disclosed Germany accounted for roughly 60% of our overall product sales for 2016. But even at these levels, it really scratches the surface of the really massive opportunity in Germany alone. We have stated previously that each of the major 400 hospitals in Germany could be a 1 million to 3 million account and we disclosed last year that actually one of our customers have now exceeded that $1 million in sales in 2016. So, we estimate that the German market is $1 billion to billion and $1.5 market alone. Right, there is about 154,000 cases of severe sepsis and septic shock in Germany alone, 10s of 1,000s of cases open heart surgery and many, many case of other critical analysis like trauma and other things. So, these are very large markets that we are just scratching a surface of. If shareholders think that we have plateaued here in what we believe is breath that refreshes no pun intended, but if they think that this is a plateauing of our sales, I would be very pressed argue that point because we believe that we are just getting started and this reimbursement is really the key to much broader usage in job to of sales through Germany moving forward.

Thank you Philip, I may have one last question. On the PR, you had introduction of VetResQ products for the animal health industry. Could you kindly elaborate a little bit more about this product?

So, that rescue is a product that has similar underlying technology to our CytoSorb technology. It is designed to actively remove a wide range of inflammatory mediators that are present in animals particularly domesticated animals like cats and dogs, but also for high value animals like horses and foals to reduce these inflammatory mediators and toxins that our present in a wide variety of illnesses such as sepsis, pancreatitis, trauma and other things just like humans in fact. And so, it was because of demand from or request really and from existing veterinarians that we bring this product to the market for that market in the United States. This is not the core market for us -- this is the core market that we're focusing on. Clearly, it is the human clinical market for CytoSorb, but I think that it is a very important market to many people particularly to those who have pets, and we have made the products now available in those centers that provide dialysis and blood purification services.

That concludes our question-and-answer session at this time everyone. For those of you having questions that we weren’t able to address today, we apologize and we ask that you please contact amyvogel@investorrelations with these questions. And at this time, I would like to turn the call back to management for any additional or closing remarks.

Thank you very much. And thank you everyone for taking the time today to participate on the call. We certainly appreciate your continued interest and support, and if you do have any other questions as the moderator mentioned, please contact Amy Vogel at avogel@cytosorbents.com and we'll try to get you to answers to your questions where if possible. In the mean time hopefully will have an opportunity to meet with many of you at our Annual Meeting June 6, 2017 in New York City and look forward to the next update in the quarterly call. Thank you very much.

Everyone that concludes our conference for today, I'd like to thank everyone for their participation. You may now disconnect your line.