Good afternoon, and welcome to the CytoSorbents' First Quarter 2019 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open the call for your questions. Please be advised that the call will be recorded at the company's request. At this time, I'd like to turn the call over to our moderator, Jeremy Feffer. Please go ahead, Mr. Feffer.

Thank you, Jerry, and good afternoon. Welcome to CytoSorbents' first quarter 2019 financial and operating 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. Eric Mortensen, Chief Medical Officer; Dr. Christian Steiner, Senior Vice President of Sales and Marketing from Germany; and Christopher Cramer, Vice President 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 today as of May 7th, 2019. 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 operating and financial highlights for the first quarter by Dr. Chan and Ms. Bloch. Following the presentation, we will open the line to your questions during a live Q&A session with the rest of the management team. At this time, it's my pleasure to turn the call over to Dr. Phillip Chan. Phil?

Thank you very much, Jeremy, and good afternoon everyone. In the first quarter of 2019, 61,000 CytoSorb treatments were delivered up from 40,000 a year ago. Trailing 12-month total revenue includes product sales, and grant income increased to $22.8 million versus $17 million a year ago. The company remains well-capitalized with a healthy cash balance of $19.6 million at the end of the first quarter. Q1 2019 product sales were $4.6 million compared to $4.4 million a year ago. Adjusted Q1 2019 sales would have been approximately $4.9 million after reflecting a decrease in the average exchange rate of the euro to the dollar, which is $1.14 per euro in Q1 of 2019 versus a $1.23 for Q1 of 2018. Direct sales achieved new highs reflecting 18% quarterly growth year-over-year and 4% sequential growth compared to Q4 of 2018. Distributor sales were affected by what we anticipate to be short-term issues from three distributors. Fresenius medical care is transitioning to new exclusive sales territories in Mexico, South Korea, and the Czech Republic and did not order in Q1 of 2019 as it sells through non-transferable European inventory. Once we achieve registration of CytoSorb in Mexico and South Korea and once European inventories are sold through, we expect new CytoSorb orders. Few other distributors temporarily paused from ordering to rebalance inventory, but have strong and growing end user demand for CytoSorb. We believe the factors impacting distributor sales in the first quarter of 2019 are short term and specific to these three distributors and expect a resumption of ordering from all three over the next several quarters. Each of these distributors or partners has increased their commitment to selling CytoSorb which is a good sign. They are aggressively pursuing new indications, increasing resource allocation, and collaborating with us on a number…

Thank you, Phil, and good afternoon, everyone. For today's call, I will be providing an update regarding our first quarter financial results, and additionally some color around our working capital and cash runway. So our product sales for the first quarter of 2019 were $4.6 million which is an increase of 3.2% over the first quarter 2018 product sales of $4.4 million. And as Phil had mentioned, first quarter product sales would have been approximately $4.9 million if the euro to dollar exchange rate had remained unchanged in the first quarter period. Grant and other income was $615,000 in Q1 2019 compared to $491,000 in Q1 2018, and our total revenues, which include product sales and grant income, increased 5.4% to $5.2 million for first quarter of 2019 as compared to $4.9 million for 2018. Our product gross margins were 74% in Q1 2019, which is the same product gross margin as in Q1 2018. And as we look forward to the rest of 2019, we expect that product gross margins will further improve especially in the second half of the year as we ramp up our manufacturing to a larger number of units produced per quarter. So let's take a look at our quarter-over-quarter product sales chart. Q1 2019 revenues declined over Q4 2019 revenues. As Phil has already discussed, this was due to certain short-term factors related to three distributors which are not expected to continue to have an impact on future quarterly sales growth, which we anticipate will return to our historical growth trajectory. So we have consistently said that our year-over-year revenue growth is the best gauge of our overall sales progress. And as you see on our graph of trailing 12 months product sales, our growth continues to translate into strong year-over-year comparables, to lastly taking a look at our working capital position. As of March 31, 2019, we had $19.6 million in cash, a healthy cash balance which provides a solid foundation for the company. Our current working capital is expected to fund our operations into 2020. In addition, as of March 31, 2019, we had approximately $36 million common shares on a fully diluted basis. And with that, I would like to turn the call back to Phil. Phil?

Thanks, Kathy. CytoSorbents has not historically given specific financial guidance on quarterly results until the quarter has been completed. However, we expect second quarter 2019 product sales to return to our historical growth trajectory, and are anticipated to be the highest quarterly product sales reported in our history. We also reiterate our guidance that we expect to achieve blended product gross margins that makes higher higher margin direct sales with lower margin distributor and partner sales of 80% on a quarterly basis this year. That concludes our current prepared remarks. I would now like to open it up for a live Q and A session. Operator?

Thank you, we'll now begin the question-and-answer session. [Operator Instructions] We'll take the first question from Mr. Andrew D'Silva, B. Riley FBR. Please go ahead.

Hey, good afternoon, thanks for taking my questions. Just a couple of quick ones from me, so as far as product sales go and the distributor partnerships, I was looking through your 10-Q and comparing it to the last quarter and last year. Those three partnerships, are they the majority of distributor sales effectively or is there something else going on in distributor revenue? I know you got partnerships and distributor relationships across dozens of countries at this point. So those three not placing any orders, you know, on a average basis wouldn't seem like it should move the needle that much, so just any color on that would be useful.

Yes, I think these three distributors are large distributors. As you can see the shortfall compared to Q4 of last year was approximately a little more than $800,000 accounting for those three distributors. So they are large distributors, important ones to us, but the good part, again, is I think they are facing what we believe are short-term issues and should be back on track and ordering later this year [indiscernible] you have any other -- I'm sorry, Andy.

Oh, go ahead.

Kathy, I don't know if you had any other comments on that.

No, I think that's absolutely right. So there's three distributors that kind of declined in orders in Q1 versus Q4 of $800,000. So there's significant distributors.

Okay. Okay, that makes sense. And how about with the rest of the distributor partnerships that you have, are they kind of trending as you would expect at this point or are there things that we should think that they will be implementing to increase their growth, because removing those three, all other countries are doing about $2 million, $2.5 million a year?

Yes, I think we have a lot of initiatives in place to help support our distributor and partner network across the world. Certainly, they represented a minority -- taken as a whole, distributor sales and partner sales have represented a minority of our sales. Historically, direct sales have been roughly three quarters of our overall product sales with distributors being about a quarter, but that being said, our goal is to continue to nurture these accounts, and help drive user demand in many, many different markets by helping drive reimbursement by providing support and materials and training and other things to these distributors. And we are very optimistic that they will become increasingly more important as revenue contributions across the board as a class.

Okay. Okay, perfect. And if we kind of revert back to the direct sales initiatives -- I know that last quarter you implemented new initiatives in five new countries, is there any color you can provide on how that's going and maybe a little bit about -- what they contributed during the quarter, and what the expenses were related to that would be useful?

Yes, I think that in terms of their contribution, as I mentioned that for example, Poland did not start till April 1st and that's when the sales team came onboard. So Poland is a large, important country -- did not have any impact on Q1 results. That being said, we have small amounts of revenue coming in from the other direct territories of the Netherlands and Scandinavia, however, those markets, again, just started under our guidance in the first quarter and are expected to have more of an impact on second half results rather than first half results. It just takes some time for everything to get rolling in these new countries. That being said, Christian, did you want to comment, maybe on some of the activity that we're seeing in some of these direct territories?

Yes, thank you. [Indiscernible] I think you have said this already, so the direct sales is the backbone of our business in general. And that's why we also have strengthened and expanded the direct sales territories as we have taken over the direct sales in -- or the direct approach in the Nordics and in Poland. We of course, have to set up the whole team, and prepare everything for the staff. So we started in January, and put together the team in Poland and Scandinavia until April. And now the normal work starts and [indiscernible] appointments and starting the business as normal [indiscernible] Andrew -- so in general, I think the response we have in these countries is very good and I think this building the whole sales team in those countries, we will have the effect as expected.

Okay, great. And I'm sorry for all the questions. I'll lump my last two into one. It's related to HemoDefend. Should we still expect a pivotal start in the second half of this year? And then as it relates to CAR-T, obviously, Kymriah and Yescarta are now being introduced into the European market. I was wondering if you had any additional information on whether CytoSorb has been utilized for CRS?

So Vincent, if you would like to comment on the HemoDefend trial?

Sure, I'll do that. Hi, Andy. So I think as you heard from Phil's discussion we've brought the tooling back on track and have now started to get into the assembly of the devices. We're on schedule to submit the IDE for the second half here. That could lead to starting a clinic, but that all is going to depend on the IDE review by the FDA. But we've been able to pull things back in line, not quite where we were originally, but really we're pretty comfortable that we're going to be submitting the IDE in the second half here for sure. Okay.

Thank you.

And in terms of CAR-T cell immunotherapy studies, it's very interesting, we have now been hearing about the first treatments of CAR-T cell immunotherapies in Germany. In fact, one of the first treatments was associated with cytokine release syndrome, but that was a relatively mild case and resolved with standard therapy. But I think that we are well-positioned to begin to generate data. In cytokine release syndrome, we are working with some of the major players in the field in Germany, and some outside of Germany, and hope to drive some additional driver first usage in CRS soon.

Okay, great, great. Thanks for the color, and good luck going forward.

Great, thank you, Andy.

The next question is from Josh Jennings, Cowen and Company. Please go ahead, sir.

Thank you, this is Brian here for Josh, thanks for taking my questions.

Hi, Brian.

Do you have a dollar estimate of the distributor impact in the first quarter or another way to frame that impact?

Yes, so Kathy, I think that -- I think, Brian, as we said the impact was a little more than $800,000 from those three distributors.

Okay, thanks, and maybe for the second quarter, you're facing a consensus revenue estimate of about $6.7 million, do you reference receiving the $5.5 million in record product sales in the second quarter suggests that a total revenue amount closer to $6 million is probably more appropriate?

I think that we are not mentioning any specific numbers except to say that we expect to be back on our historical growth trajectory for product revenue. I think that clearly, we started out of the gate a little slow here and -- but I think that overall 2019 revenue should show a significant increase over 2018.

Okay, thank you.

The next question is from Jason McCarthy, Maxim Group. Please go ahead.

Hey guys, thanks for taking the question.

Hi, Jason.

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Before turning it over to Eric, to maybe comment on this, you know, the goal of REFRESH 2 is to demonstrate in a selected population of high-risk valve replacement surgery patients as well as high-risk aortic reconstructive surgery patients undergoing hypothermic cardiac arrest that has been further enriched to get even higher risk of developing acute kidney injury following cardiac surgery, because they have long-standing diabetes, or hypertension or other reasons for losing renal reserve. Our goal is to demonstrate that we can reduce acute kidney injury, either the severity or incidence of acute kidney injury following surgery. Now, these representations who are very high risk, and that would be the initial indication in this particular population. However, we expect that we should be able to broaden the label the label as there's more usage on this therapy to a not enriched patient population in these same subgroups. And then with hopefully with the REMOVE Endocarditis trial that is positive, that would add infected heart valves to the indication, and that might be something that the FDA may -- they look at the REMOVE trial data, which is being done under good clinical practice standards as real-world data that's potentially expand that label for CytoSorb in cardiac surgery. But Eric, would you like to comment perhaps further on that?

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Kathy, did you want to take that or I can do that?

Why don't you take that one, Phil?

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All right. Thank you, and then just one more if you don't mind. Like to see if you could actually just discuss some of the strategies that you're planning to employ in order to drive margin expansion and meet that 80% blended gross margin projection for 2019?

Yes, Vince, would you like to take that?

Sure, thanks, Phillip. So there's a couple of fronts on that, Kathy alluded to it before and that is as we increased the volume that's going to be generating greater efficiency in our manufacturing operation. So, along with a number of costs downs that we're continually working on, I think, just the growth of the business related to the increased sales in the second half that Phil alluded to is going to add to the improved gross margin. I think we're -- from the engineering standpoint, we think that we're on track to drive those improvements. Again, depending on also volume as well as exchange rate, all those things and product mix effect, overall the gross margin, but we think from the engineering standpoint we certainly have a good trajectory to get there.

All right. Thank you very much for taking my questions.

Yes, yes.

Thanks, Jason.

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Thank you, this is [indiscernible] from H.C. Wainwright. Most of my questions have been answered, but I have got a couple of them here. You were saying about the second quarter sales growth and you're expecting it to be one of the highest so far. So what are the potential pushes and pulls for that to happen?

The quarter is just a little over a third complete, however, when we look at our accounts both direct and distributors, we have fairly good visibility on what different accounts are going to do. I think that our sales people are in constant contact with their customers both on the international distributor and partner's side as well as on the direct side, and so, because of that and because -- I think that notwithstanding the three distributors that impacted Q1 results, direct sales continue to march forward. We expect to see a benefit from the investments that we've made in terms of headcount, in terms of expanding to new direct territories, in terms of our reimbursement, in terms of the strong market development that we've done and the strong key opinion leadership support that we have and the greater focus that our direct sales team will have as we narrow our sales territories. And so, I think that from a direct sales standpoint, we feel very encouraged by what we are seeing and expect to really begin to drive growth faster on the direct sales side. From an international distributor side, I think that we -- as we mentioned last year, we had undergone a reorganization of our approach to international sales and distributors, and I think that that will be delivering dividends soon, because it is a -- distributor sales are a unique type of sale, where we do not have direct contact with end user, and we are working through our distributors to help drive that end user demand, and I think that we have taken a very collaborative approach with our partners. And we believe that is one of the important aspects of how we are going to grow that international sales component. Christian, maybe -- I don't know if you would want to comment on why you have confidence that we expect that Q2 will be a strong quarter for us?

Yes. Thank you, Phil, and [indiscernible]. I think we had [technical difficulty] goals in the last year in Q3 and Q4 in direct sales, and the second-half of Q4 went back to normal order presence and so did the Q1. I think we had a very solid Q1 in direct sales, and this development has continued to improve in [technical difficulty].

Christian, I think we lost you.

Hello?

All right, okay, you are back again. Thank you.

Okay, sorry. Yes, I think additional efforts next to the continuous efforts in ICU, which includes septic shock patients and so on, we have increased our growth in cardiac surgery beginning from last year and this starts to kick in. We have -- last quarter in Q1 we had number of significant publications, which we can much better use not for sales, we had the first [indiscernible] meeting for cardiac surgery, and we were also able to present the first two health economic analyzer in cardiac surgery which has both shown cost savings in cardiac surgery indications. And all this together I think will lead to an accelerated growth in direct sales as we can already.

Thank you, both. Then I feel one of things that you have been talking about and you certainly alluded to that in the [indiscernible] that you are giving us regarding direct sales, but at the same time you are also saying that at least in the press release you have that though you expect sales to be high in the second quarter, the real impact of the addition of the sales infrastructure and the direct sales in certain geographies have not yet -- will not really reflect in the second quarter. So how much of a time do you think it would take for us to see some of that as direct and in terms of becoming meaningful? And what kind of metrics are you folks using so that you keep track of the additions that you are putting in now?

Yes. I think that it clearly takes to time develop new territories. I think the good part is that we are not necessarily starting from scratch in the Netherlands and in the Scandinavian countries. There was some activity there before although we think that a focused effort from our own direct sales force an unlock potential faster and more effectively. In Poland, we were putting a significant amount of resources there given the size of the country, and again think that is also a good country for us as well. I think that what we have seen is you know, it really depends on what you consider material, and what you consider significant, we certainly expect that the new direct sales territories to come online and in over the course of the next six to 12 months begin to have a meaningful impact to direct sales, but to have a really powerful impact to sales probably is a year to two. And we will still be relying on sales in our original countries of Germany, Austria, and Switzerland to drive our direct sales results. Christian, maybe you would like to comment on the timing of the impact of the new territories on our sales?

Yes, thanks. I think you already explained it quite in detail. So, starting this new territory is always of course requires a number of preparations, but we started internally fast, especially for the Nordics and for Poland as we set in Holland and Belgium, we already had a little bit of head start, but in those -- in my opinion more relevant countries like for example, Poland, the time to relevant sales is roughly, like you said, six to 12 months. Nevertheless, I think it is different compared to when we start in other territories like years ago, because now obviously the background of data and also the awareness of the people -- has increased dramatically, and this of course helps versus the whole development.

Thank you. Thank you both for answering my questions. I appreciate it.

Thanks, [indiscernible].

[Operator Instructions] We have a question from Brian Marckx, Zacks Investment Research. Please go ahead.

Hi, Phil.

Hi, Brian.

Relative to Fresenius, can you remind me what their exclusive territories are, did they include the initial fix that they had, and then incremental was the three new territories?

Yes. I have Chris comment on that. Chris?

Yes. Hi, Brian. We reconfigured SMC Europe early this year. So, we took back some countries to go direct, and that was Poland, Sweden, Norway, and Denmark, and then in Europe we have Finland, France, and Czech Republic. And then on top of that we also added South Korea and Mexico at the beginning of this year.

Okay. And then the reduction in distributor sales this quarter, was that -- it sounds like based on language in the earnings release that perhaps the restructuring with Fresenius having inventory in Europe, was that -- that was a portion of it they're just burning through that inventory relative to the territories that they gave up?

Yes, that's correct, Brian. So, the inventory that we have in Europe in non-transferable outside of Europe, and we don't yet have South Korea and Mexico online yet, but we're getting very close to submission of the registration dossier, but to answer your question, that is one of the reasons, yes.

Okay. Relative to Switzerland, I think you got a dedicated code in there that began on January 1st, have you seen meaningful adoption in Switzerland following the implementation of the code?

So, just to be clear, we have a procedural code now for CytoSorb, but it is not yet been assigned official reimbursement, right, so there is a dollar value that needs to be assigned to that procedural code and that has not happened yet, although we expect that to happen sometime in the next three to six months, typically year following the assignment of -- getting the code that it has reimbursement assigned to it. So, that is something that we believe will likely come online in this year.

Okay. And then in terms of Israel, there is a press release that you got regulatory approval there. Does that -- can you talk about the reimbursement environment there, and what the status is of the launch, anything else that's relevant?

Well, in Israel, there is an ability to use our product the best way to get reimbursement is to be included in what they call the Health Basket. And we are not quite there yet, but that being said, the Gad Medical, our distributor in Israel is a very experienced distributor of medical device products, and they're very confident in being able to drive usage of CytoSorb, and across many different applications they have both critical care as well as cardiac surgery in applications and distribution rates in Israel. So, we'll see how that develops, and when we have an update on that we'll let you know.

Okay. Okay, all right. Thanks, Phil.

Sure.

There are no further questions. At this time, I would like to turn the call back over to management for any additional closing remarks.

Thank you everyone for taking the time today to participate on today's call. If you have any other questions, please feel free to reach out to Jeremy Feffer at jeremy@lifesciadvisors.com, and we will try to reply to your questions where possible. In the meantime, hopefully we'll have the opportunity to meet many of you at our annual meeting on June 4 at 10:00 AM at NASDAQ'S market site in Times Square, in New York City. Thank you very much.

Thank you. That concludes our conference for today. I'd like to thank everyone for the participation. Have a great evening.