Jeremy Feffer - Investor Relations Phillip Chan - Chief Executive Officer and President Kathleen Bloch - Chief Financial Officer Chris Cramer - VP of Business Development Vincent Capponi - Chief Operating Officer Eric Mortensen - Chief Medical Officer Christian Steiner - Vice President of Sales and Marketing, Germany.

Sean Lee - H.C. Wainwright Andrew D’Silva - B. Riley FBR Jason Kolbert - Maxim Brian Marckx - Zacks Investment Research.

Good afternoon and welcome to the CytoSorbents 2017 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 as 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, Sophie, and good afternoon. Welcome to CytoSorbents 2017 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, Vice President of Sales and Marketing from Germany; and Chris 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 March 8, 2018, 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 2017 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 my pleasure to turn the call over to Dr. Phillip Chan.

Phil?.

Thank you, very much Jeremy, and good afternoon everyone and welcome to our earnings call. 2017 was an exceptional year for the company. We recorded record 2017 total revenue of $15.1 million with $13.4 million in CytoSorb sales due to strong reorder rates.

We also had 2017 blended product gross margins that makes higher margin direct sales with lower margin distributor and partner sales of 71%, up from 67% a year ago. We also had 35,000 CytoSorb treatments delivered cumulatively from 25,000 a year ago and ended the year with a healthy cash balance of $17.3 million.

In 2018, we are expecting that it will be a transformational year with key milestones. These were detailed in the press release issued earlier today but in brief they are, achieving operating profitability on a quarterly basis, which excludes non-cash expenses in clinical trial cost; progress towards potential U.S.

regulatory approval for two products; generation of new clinical data; new and expended strategic partnerships and greater market awareness. And certainly in the Q&A period we can cover any of these items in detail. But just to give you an update on key clinical programs. On the U.S.

REFRESH 2 study which is a pivotal 400 patient randomized controlled, PMA multi-centered trial targeting the reduction of post-operative acute kidney injury using CytoSorb during complex cardiac surgery including valve replacement and aortic reconstruction with hypothermic cardiac arrest.

We have obtained FDA IDE approval as we announced in late December. We have obtained central ethics committee approval and now we have CMS approval.

We have also strengthened the clinical team to execute upon the trial and the majority of the REFRESH 1 clinical sites will be participating in this REFRESH 2 trial with several coming online, one of which is already screening patients and we expect the first patient to be enrolled very soon.

In terms of the German REMOVE Endocarditis study, this is a 250 patient randomized controlled trial evaluating the safety and efficacy of CytoSorb used intra-operatively during valve replacement surgery for infective Endocarditis. And the primary endpoint here is a reduction in the SOFA Score.

Importantly, this is study that was being sponsored and is being fully funded by the German federal ministry of education and health and their interest in this particular study is due to the growing numbers of people with infective Endocarditis due to intravenous drug use and opioid addiction.

This study has now enrolled its first patient and is beginning to ramp. The third product that is nearing human clinical trials is our HemoDefend program that we discussed a while ago but in the meantime we have been making very good progress with the support of the National Heart, Lung and Blood Institute as well as U.S.

Special Operations Command or U.S. SOCOM. This is a product that targets 100 million packed red blood cells that are transfused each year worldwide. Now you are familiar with many companies that are targeting decreased infectious blood risk, nucleic acid testing or pathogen reduction like [indiscernible] or Terumo-BCT.

However, HemoDefend is a complementary product to those pathogen reduction products.

HemoDefend packed red blood cells is a point of transfusion inline filter focused on reducing non-infectious contaminants that can cause transfusion reactions ranging from relatively mild fever and allergic reactions to very severe transfusion related acute lung injury which is the leading reported cause of transfusion related deaths that occurs in roughly 1 in 1000 to 1 in 5000 transfusions.

HemoDefend packed red blood cells inline filter reduced antibodies, cytokines, free hemoglobin, bioactive lipids and many other substances that can cause transfusion reactions. And again, this was a product that has been generously supported by NHLBI and U.S. SOCOM.

We have met with the FDA informally and with the support of NHLBI, we expect to initiate a pivotal study within 12 months that is designed to lead to U.S. approval. With that, allow me to turn it over to Kathy to talk about the financial highlights.

Kathy?.

Thank you, Phil, and good afternoon everyone. For today's call, I will be providing an update regarding our December 31, 2017 financial results, product sales progress and around our working capital and cash runway.

CytoSorb product sales for the year 2017 were $13.4 million, which is an increase of $5.2 million or 63% over 2016 product sales of approximately $8.2 million.

Grant and other income grew 34% from $1.3 million in 2016 to $1.8 million in 2017 and total revenues which includes product sales and grant income increased by 59% to $15.1 million for the year 2017, as compared to $9.5 million for 2016. And as Phil mentioned, we are very pleased that our 2017 annual product gross margins grew to 71%.

And this is primarily a result of product cost reductions that were achieved during 2017 and as we look to 2018, we expect product gross margins to further improve as our new manufacturing facility comes on line in the second quarter.

If we look now at our graph of annual product sales growth, we note that our compound annual growth rate or CAGR was 62% over the past three years and we are of course observing a very positive trajectory here. And let's also look at our quarter-over-quarter product sales.

Our fourth quarter 2017 product sales of approximately $4.3 million, represented yet another record product sales quarter. This is an increase of 25% over the previous quarter and we are very pleased with the solid quarter-over-quarter growth that we have been experiencing.

We have guided that at a quarterly product run rate of approximately $5.5 million, we expect to achieve operating breakeven which excludes non-cash expenditures and also clinical trial cost.

With our track record of strong revenue growth and numerous catalysts expected to fuel future sales growth, we remain very confident that we will achieve this important milestone in 2018. And last, we will take a quick look at our working capital position.

At the end of 2017, we had a record $17.3 million in cash, which is expected to provide funding for our operations including clinical trial activities into 2019.

In the fourth quarter of 2017, through our at the market ATM equity facility with Cantor Fitzgerald, we sold approximately 267,000 shares of our common stock at an average price of $6.58 which generated net proceeds of about $1.8 million.

In addition, in December the company received a net cash amount of $677,000 from the sale of the 2016 state NOL and research and development credits under the State of New Jersey technology business tax certificate transfer program. As of December 31, 2017, we have approximately 33.5 million common shares on a fully diluted basis.

And with that I would like to turn the call back over to Phil..

Thank you, Kathy. And in terms of guidance, what we will guide is that we have not historically provided guidance on quarterly results until the quarter has been completed.

We continue to expect that Q1 2018 CytoSorb sales will exceed product sales in the first quarter of 2017 and we remain very optimistic about our growth opportunities and reiterate our guidance on continued growth and achieving operating profitability in 2018 on a quarterly basis, less non-cash expenses and clinical trial cost.

We anticipate expansion and blended gross margins currently at 71% as we scale manufacturing and our new plant comes on line as Kathy mentioned in the second quarter of this year. With that, that concludes our current prepared remarks.

Jeremy, would you like to poll for questions?.

[Operator Instructions] And we will take our first question today from Sean Lee from H.C. Wainwright. Please go ahead..

Congratulations on a good year. Two questions. One is on your projections for 2018. Why the conservatism in the first quarter numbers like your -- if you hit the operational profitability, I would expect your quarterly numbers released by the end of the year to be quite a bit higher than what you achieved in 2017 even.

So what are some of the reasons or concerns given that could cause seasonal fluctuations..

I think that in the past we have historically guided that our results would be improved year-over-year rather than quarter to quarter. So I think that we continue with that guidance with this Q1 2018 guidance..

Okay.

So it's not anything specific you have seen so far that’s causing the conservatism actually?.

Yes. I think that -- no, and I think that you can look at the trends that we have seen in the past quarter to quarter. As I mentioned in the press release this is the 22nd quarter of year-over-year increases in quarterly sales that we have seen. We expect that trend to continue..

Okay. Good to hear. And second, on the German Endocarditis study. Could you provide a little more color on that since I don’t think we have heard much about it previously..

Yes. This is a trial that is being managed by the University of Jena, which is one of the clinical centers of excellence in terms of clinical trials. And it is being -- the PI of that trial is Dr. Frank Brunkhorst.

This is a trial that is looking at the ability of CytoSorb to potentially reduce hemodynamic instability and improve clinical outcomes based on a primary endpoint of an improvement in the SOFA score or Sequential Organ Failure Assessment Score. This is a commonly used endpoint that looks at a composite of organic function over time.

And so this is a 250 patient, randomized controlled trial where CytoSorb will be used during the surgery or not used during the surgery.

And what we have seen in many, various cardiac surgery centers is that endocarditis, infective endocarditis, represents a very difficult disease to manage, particularly in patients with certain types of infections at the heart valve. So endocarditis is an infection of a heart valve.

It is typically caused because bacteria gets into the blood in some fashion.

It used to be that blood got into the blood stream through dental work and so people with heart murmurs were often recommended to take prophylactic antibiotics before they went to the dentist because bacteria on the teeth, when you start disrupting the gums can then get into the blood stream and then seed the heart valve.

The bacteria in the mouth are relatively benign but the bacteria on the skin is predominantly something called staphylococcus aureus. And staphylococcus aureus, and you have heard of a very virulent form of staphylococcus aureus called MRSA, methicillin-resistant staph aureus.

Staph aureus is a very dangerous bacteria and one of the reason why it is so dangerous is because it is a very aggressive bacteria. It forms bio films that are very difficult to get rid of and it forms a lot of toxins that are very destructive.

So who gets staph aureus infected endocarditis, it's typically patients who have an addiction to intra-venous drugs and opioids like heroin.

Typically, the use of dirty needles and not cleaning the skin results in a seeding of the staph aureus bacteria into the blood stream onto the heart valve and that heard valve can be destroyed within days causing not only sepsis and a very serious infection, but it can also cause incompetence of the heart valve, a destruction of the heart valve.

So these patients often show up in very severe heart failure. These patients typically because of the sepsis and the mechanical incompetence of the heart valve, many of them are very unstable during surgery and require a tremendous amount of vasopressor support.

Require often in the post-operative period, a high amount of vasopressor support as well as mechanical blood pressure like ECMO, extracorporeal membrane oxygenation. And these patients typically do poorly with the mortality that far exceeds that seen in regular valve replacement patient population.

So the opioid crisis and the heroin addiction crisis is not just in the United States, it is also in major countries, westernized countries and others.

And the German government I think has recognized that this has the potential to become a major scourge because patients who wind up with infective endocarditis are in the hospital for long period of time. Very difficult to manage, very expense to treat.

And patients who come in with an infected replaced heart valve, a prosthetic valve, are even sicker than those coming in the first time.

So I think that there is a lot of interest at the German government level and amongst cardiac surgery centers, where endocarditis remains one of the most complicated diseases to treat and that’s one of the reasons why they are funding this trial and I think that represents a very good opportunity for CytoSorb..

I see. That sounds like a very promising indication for you. Do you have a rough estimate of the timeline for the study and also would you think that if these study is positive, that it will be sufficient to support an extended indication for CytoSorb..

We believe that this trial will enroll over two years following a similar timeframe to REFRESH 2. So REFRESH 2 is very interesting because REFRESH 2 is dealing with elective non-emergent valve replacement surgery patients as well as aortic reconstruction and hypothermic cardiac arrest patients. So that’s one subset of valve replacement patients.

One of the biggest subsets of valve replacement. Endocarditis is the infected valve version of valve replacement. And so together, they formed a spectrum of patients that are undergoing value replacement surgery. So we expect, again that that trial should enroll relatively quickly and in terms of its impact on a U.S.

additional label indication, this is a randomized controlled study, multicenter study being done in Germany. It is a we believe that it is very well designed and high quality study and if it is positive, we believe that it may lead to an expanded approval of CytoSorb in the United States.

We still need to -- we need to discuss the data with the FDA and whether or not we would need to do a repeat study in the U.S.

But if we can get approved under the REFRESH 2 study for valve replacement and we present good quality randomized controlled data from an endocarditis trial in Germany, it may enable the FDA to perhaps fast track that particular indication..

Just to clarify on that a little bit.

In Germany, would this support an additional indication or reimbursement approval, for example?.

So in Germany this actually falls under the current reimbursement, the dedicated reimbursement that we were awarded in late December 2016.

So in fact most the applications that are being done in Germany are on label as CytoSorb -- with the current indication for use of CytoSorb as a extracorporeal cytokine filter that can be used in diseases where cytokines are elevated..

And next we will go to Andrew D’Silva with B. Riley FBR..

First, just a couple on the P&L. Back of the envelope, am I correct in assuming that gross margins for the fourth quarter for products were close to 80% and on the R&D line, I am getting about $2.6 million.

Is that accurate and should that kind of be where we assume R&D to be at going forward?.

Yes, I will take that Andy. So, yes, the grant income was about $1.768 million for the year. And the gross margin was approaching 80%, yes, in Q4..

And next we will go to Jason Kolbert with Maxim..

Couple of questions. Can you talk about what it's going to take to start seeing revenues really breakout independent of a launch in the U.S. And can we talk a little bit about what's going on with the REFRESH study and what have to happen for that to get underway. Thanks..

Sure. You know couple of years ago we talked about approaching the inflection point and when you look at product sales on an S shape curve, we believe that we are in fact beyond that point and actually entering into a potential phase of rapid growth. Now, in the quarter-to-quarter, year to year, that’s all variable.

But we do believe that enough catalysts exit that will lead to very strong growth in the near future potentially exceeding the pace of growth that we have seen to date. And so in terms of REFRESH 2, let me have Eric Mortensen, our Chief Medical Officer comment on his thought there.

Eric?.

Sure. Phil. I think we are actually very encouraged with where we are. I think that at the end of 2017, we were optimistic that perhaps because of the very positive engagement we would have with the FDA and one cycle we view in approval of the protocol that we might be able to accelerate the next step of study startup.

But the reality of requiring CMS approval of the protocol prior to being able to then do the serial steps of them going through contract review and IRB review, just basically imposed the standard time to review as opposed to an accelerated period.

So then, and these tend to be the standard one month review and finally received CMS approval letter at the beginning of February. And the reality is these days that one cannot do a hospital study, cannot go through the process of contract review and IRB review these days until you have that letter.

Hospitals simply now have an absolute requirement we found of an SOP that they demand having that before they will do the next steps. We have had great enthusiasm, that should be when we follow this kind of process. So at this point we now have one center that is already up and running, as Phil said, in terms of screening patients.

That was one set that was actually willing to go a little bit faster and going parallel with CMS review.

The other side, and as Phil noted, the majority of the REFRESH 1 centers are coming on board and intentionally because it [indiscernible] study in view because what I had found over my history is that when you have a large number of centers, what you really want to do is make sure that you are running smoothly.

You want to shake down crews of the initial sites to make sure that you really have things going well and then rapidly expanding the initial site.

So we already starting our protocol feasibility and contracting with additional centers and basically planning to have those come on board after the way of one sites have basically gone through the initial startup. So we are very enthusiastic.

As Phil said, we are hoping to have first patient enrolled shortly and then to continue on those factors we have got to the two year time period..

And next we will go to Josh Jennings with Cowen and Co..

This is [Brian] [ph] here for Josh. Thanks for taking the question. Can you provide an update on where you are in Germany just in terms of establishing awareness of the favorable reimbursement terms you received there as of December 2016. Are most of your existing hospital customers aware of this now and has it been a driver of new accounts for you..

Yes. This has been a key point that our sales reps are making on their sales visits that this new reimbursement is established and that hospital can leverage this new reimbursement code. So I think that this is definitely within the marketing message that we are providing.

Christian, may be if you could comment on what you are seeing in Germany and how you think things are going..

Thank you, Phil. So I just can confirm what you just said that the sales rep have to, beside visiting the doctors and departments who are performing the treatments, they of course have to also visit the authorities and the administration in the hospitals.

This includes controlling and procurement and so all the customers we have and also the potential customers we are visiting, they are aware of the reimbursement codes.

But as Phil described during the last earnings call, it is such that the hospitals have to negotiate the reimbursement once a year for the whole year and this can be even after the year has through or has finished.

So that means sometimes hospitals need to start to treat this [indiscernible] exactly what the reimbursement would be, and they can collect data from their own patients which supports the negotiations but they still don’t know exactly what they get in terms of reimbursement.

On the other hand, they also sometimes use these specific reimbursement for this to negotiate for other budgets. So it's like negotiation tool for them. So sometimes they accept lower reimbursement for this therapy. All together we have to say that the new reimbursement code helps a lot.

So the users and the hospitals they see that the therapy, at least for the time being is accepted by the payers and there is no, the problems we had in the past was the old code. They have kind of disappeared so that hospitals can be sure that they get their money..

Okay. Great. That’s helpful. And I wanted to ask about the manufacturing facility.

So what are the remaining operational steps needed to get the facility online next quarter? And specifically, is there anything to do from a regulatory perspective?.

All right. This is Vince Capponi. I will answer that question for you. So basically what's remaining is actually qualification of the plant. We have loaded all the equipment in there and we have actually started to do all the test batches that are required for qualification of the facility.

We expect it will be fully operational by Q2, again shaking out each of the individual processes. But we have already scheduled for the end of March a regulatory review with our notified body.

So it is required that our notified body would come in and essentially evaluate the manufacturing facility as well as all the system, support systems, documentation etcetera, and confirm that we are meeting all the requirements of the ISO 1345 quality system requirements.

So we are actually well into that process which obviously will lead to the increased capacity and then what we believe will be significantly higher gross margins yet once that capacity is brought online..

[Operator Instructions] And we will go next to Brian Marckx with Zacks Investment Research..

Congrats on another great quarter and another great year. I know you guys get this just about every quarter. But I think this warrants the same question. Given the fact that product sales were so strong, was their anything in product sales in Q4 that was, I guess, kind of unusual stocking order or anything else that’s noteworthy, I guess..

Nothing out of the ordinary, Brian. This is typical organic growth for us. We do see at the end of the year strong ordering typically as hospitals use up some of the extra money in their budget. But I think that in general the order patterns that we have seen are very typical of what we have seen in the past..

Okay. And then, Phil, relative to REFRESH 2 and the design of the study and enrollment, inclusion and exclusion criteria. Can you give us kind of a ballpark in terms of what the size of the patient, the overall U.S. patient population would be that would fit that enrollment criteria.

I am just trying to get a sense of the opportunity for a related indication here in the U.S.?.

Eric, do you want to answer that and I can follow up with that if necessary?.

Yes. So the part of the question that I will answer is in terms of the study design. I think [indiscernible] will then be discussing the U.S. opportunity in terms of market size. The study is designed to enroll up to approximately 400 patients, evenly randomized between active and control populations.

We are using a design which has been proven effective in recent studies, examining treatment effects in the AKI, which essentially enriches for a patient population undergoing cardiovascular surgery, requiring a valve replacement or without hypothermic cardiac arrest, or hypothermic cardiac arrest from the setting of aortic surgery.

And those populations when assess for cofactors associated with AKI, have been shown to significantly increase the risk for those patients. Which therefore means that we therefore have a high frequency of the outcome.

Therefore a higher study pallor to be able to detect a treatment effect and we believe after our discussion with the FDA that this will represent a very clinically meaningful improvement if we are able to demonstrate a treatment in fact and reduce some of the instance of AKI.

Does that answer the question that you have with regard to the study design? I was going to then let Phil speak to the commercial opportunity..

Yes. It does. I appreciate that..

Yes. There is an estimated about 100,000 to 150,000 valve replacement surgeries a year broken off primarily between aortic and micro valve, but other valve replacements as well.

I think that when we look at the enrichment criteria that we are using, I believe that in our -- when we look back at our REFRESH 1 trial and look at the valve replacement patients, we are talking about roughly 20% of those that we had screened, potentially meeting those criteria.

And so it is a more selective patient population and one of the reasons why we are being more selective in the enrichment criteria is to enrich for the risk of the developing acute kidney injury in the first place.

So enriching for patients with previous history of diabetes of hypertension, hyperlipidemia or other risk factors that would predispose them to having chronic kidney injury, some level of chronic kidney injury going into the trial, such that even a small hit would result in the development of acute kidney injury.

So I think given that valve replacement surgery is one of the most common complex cardiac surgeries that are done in the United States. Aortic valve replacement is growing, sclerosis of the heart valve is very common in elderly people and with the aging baby boomer generation, those number just continue to increase.

And so I think those patients that have those risk factors and also have the need for aortic value replacement are fairly common..

Thanks, Phil. It sounds like you enrich to make sure that this is going to be successful. I don’t expect an answer from that but I think that’s good too. So I appreciate that. Thanks a lot..

And next we will come back to Andrew D’Silva with B. Riley FBR..

My apologies. I am not sure if we got cut off originally or not. But I had kind of a two part question on the P&L. As far as R&D goes, it was meaningfully higher sequentially than the third quarter.

I was wondering if that was the new run rate we would expect going forward and if you are potentially looking at any new indications that would have resulted in that. And then I have one more question after you answer that. Thank you..

Yes. So, Andy for your modeling, I think that, yes, the higher cost observed in Q4 are to be expected and that that’s really now, are actually on board and we are adding staff and we are gearing up our clinical programs throughout the world. So that’s primarily that part..

Wonderful, thank you for that. And then you previously noted that in Germany you had a hospital running at about $1 million a year which for your run rate is quite meaningful. Has there been any other health systems that have approached that number at this point or any color that you have on that data point would be very valuable..

I think that the data that we provided in the 10-K basically says that there is no reliance on any one customer.

What I would say is that that customer that we disclosed in 2016 continues to grow and others continue to grow along the same trajectory as that particular site as the usage increases in both cardiac surgery as well as intensive care medicine.

So although we haven't publicly disclosed those data, we believe that the $1 million revenue number per hospital is a very realistic number..

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 listen in on this earnings call. We greatly appreciate your participation. If you do 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.

Thank you very much everyone and have a good evening..

Thank you. That does conclude our conference for today. I would like to thank everyone for their participation. Have a great evening..