Marc Hedrick - President and CEO Tiago Girão - CFO.

Jason Kolbert - H.C. Wainwright Yale Jen - Laidlaw and Company.

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics Second Quarter 2018 Earnings Results Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

[Operator Instructions] Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding events, trends, business prospects and financial performance, which may affect Cytori’s future operating results and financial position.

All such statements are subject to risks and uncertainties, including the risks and uncertainties described under the Risk Factors section included in Cytori’s annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission from time to time.

Cytori advises you to review these risk factors in considering such statements. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect events, trends or circumstances after the date they are made. It is now my pleasure to turn the floor over to Dr. Marc Hedrick, Cytori’s President and Chief Executive Officer.

Sir, you may begin..

Good afternoon. Thank you, Ian. Welcome to our second quarter 2018 earnings call. My name is Marc Hedrick, President and CEO of Cytori. And joining me on today’s call is our CFO, Mr. Tiago Girão. On the call today, I will provide an update on the company’s oncology and cell therapy programs, then Tiago will update on financial performance.

After which, I will update on forthcoming milestones. Then, we will have time for Q&A. To begin with, regarding our Cytori nanomedicine platform. Cytori is developing and manufacturing chemotherapy drug, ATI-0918, a generic pegylated liposomal doxorubicin hydrochloride to be bioequivalent to the European reference drug.

We intend to position this as a high quality US made product with maximal clinical effectiveness. Our nanomedicine team in San Antonio, Texas continues to complete manufacturing and non-clinical related activities that will support a marketing authorization application or MAA to be filed with the EMA next year.

Our goal is to be either the first or second generic on the market in Europe. The company also continues to engage and evaluate potential commercial partners for ATI-0918 in Europe, the Middle East, North Africa, North America and Asia Pacific regions.

As mentioned before, the global market for this drug is estimated to be approximately $400 million to $750 million annually and in Europe, we estimated an annual market opportunity at approximately $120 million to $300 million.

Furthermore, regarding Cytori’s ATI-1123 chemotherapy drug product candidate, this is a phase 2 ready albumin-stabilized and pegylated liposomal docetaxel. First the stabilization enhances the integration of the liposolic API docetaxel. It provides liposomal stability.

The peg on the liposome surface extends blood circulation time while reducing mononuclear [indiscernible]. Regarding this drug, Cytori is continuing to develop it to address the shortcomings of docetaxel which has been a workhorse chemotherapeutic drug which generated a maximum 2.7 billion in worldwide sales at its peak.

A rational for developing ATI-1123 is to improve safety by removing the need for unwanted solvents, reduce morbidity by eliminating the requirement for standard pretreatment medication, providing better patient convenience and comfort, the less time spent in the treatment, decreasing the cost of therapy and enhancing the systemic docetaxel exposure which may add up added benefits.

The company has requested an orphan drug designation from FDA for small cell lung cancer and is evaluating the FDA’s 505(b)(2) new drug application pathway in the US, which may offer an accelerated development timeline and lower development costs. Now turning to our cell therapy program.

Our Cell Therapy team is awaiting data readouts from clinical trials in scleroderma and also in urinary incontinence and is actively conducting a clinical trial in thermal burns. 6 month data from the 40 patient, French scleroderma trial called SCLERADEC II is expected this year.

Positive EU data coupled with star trial data may be sufficient to file for conditional EU approval. There are approximately 115 scleroderma patients in EU and approximately 30% of those are in our target group with moderate to severe disease.

Additionally, one year data from the 45 patient Japanese ADRESU clinical trial for SUI or urinary incontinence is expected in early 2019.

It’s a 12-month ADRESU clinical trial data confirms the safety and efficacy shown with the ECCI safety cell therapeutic, which is similar to the group noted in the published pilot trial, positive data approval in reimbursement for this indication.

As to the market size for SUI, according to the Japan National Cancer Center, over 86,000 men are diagnosed with prostate cancer each year. Up to 42% of patients on the growing radical prostatectomy subsequently developed stress urinary incontinence, which may profoundly compromise quality of life.

As previously mentioned, the same ECCI 50 safety cell therapeutic has also demonstrated promising clinical results with stress urinary incontinence. And there are approximately 2.9 million potential patients for this indication in Japan.

Finally, US FDA has approved a protocol amendment for the RELIEF thermal burn BARDA funded trial, which is intended to facilitate enrolment. In June, Cytori completed a successful in process review meeting with BARDA. Cytori continues to screen patients for the RELIEF trial and it’s working on an ongoing basis to add clinical trial sites.

As it relates to additional investigator trials, in the US, Cytori continues to support the Mayo Clinic’s FDA approved investigator initiated trial of Cytori cell therapy for bilateral osteonecrosis of the hip, which is a rare disease, affecting approximately 10,000 to 20,000 new patients each year in the US.

Eight patients of a target 25 total patients have been treated to date. In June, where we are most commercially active, Cytori continues to see favorable growth trends in the US of its commercially available and approved cell therapy product in the aesthetic and orthopedic markets.

The company remains on track to see continued double digit year over year growth in consumable utilization. Tiago will discuss these data and trends more specifically in his remarks. There are a couple of other related items I would like to also point out at this time.

A substantial upgrade in our core solutions system called CCS-1 is currently being used in US RELIEF trial and will be made available commercially based on the outcome of the planned up classification of our solutions technology from class 1 to class 2 registration, which is currently under valuation by MHLW in Japan.

Recently, we announced the termination of the existing supply agreement for Cytori’s proprietary Celase and Intravase enzymes.

We currently have sufficient inventory to adequately supply our customer base for the next few years, while we either renegotiate a new agreement or identify a supplier for the long term supply and negotiating agreement with them.

Also we are in the process of transferring solution consumable manufacturing to Coastal Life Technologies in San Antonio, Texas. This move will reduce costs, and improve gross margins. The first realized consumables will be available for distribution from Coastal to Japan and Europe in Q4.

Finally, as a note, we successfully completed two audits this past quarter, one by the US FDA and one by our notified body. Now, I’d like to hand the ball off to Tiago..

Thank you, Marc and good afternoon, everyone. Our primary focus remains unchanged, the development of our late stage clinical pipeline and related commercial preparatory activities that we believe can translate into shareholder value.

In parallel, we are carefully managing our resources as tightly as possible while continuing to improve our operating performance. Despite the additional new investment in our recently acquired oncology assets, operating cash burn was managed down to 2.7 million in Q2, 2018 as compared to 5 million in Q2, 2017.

The reduction in cash burn was mostly related to reductions in net losses, adjusted toward non-cash items of approximately 2.1 million coupled with working capital improvement of approximately 200,000. For the six month period ending June 30, 2018, operating cash burn reduced to 6.8 million compared to 9.9 million for the same period last year.

The reduction again driven primarily by reductions in net losses, adjusted for non-cash items of 3.4 million. Net losses totaled 3.7 million in 2Q 2018 or $0.59 per share as compared to 6 million or $1.94 per share in Q2, 2017.

For the year to date period, net losses totaled 8.1 million or $1.32 a share compared to 13.6 million or $5.04 a share for the same period in 2017. Most of that net losses in 2017 included a non-cash charge of 1.7 million recorded, associated with in-process R&D charge, part of the oncology asset acquisition.

Our research and development expenses, in Q2, our research and development expenses excluding share based compensation were 1.9 million compared to 3 million in expense in Q2 a year ago. On the same basis, for the year to date period, our research and development expenses were 4.4 million compared to 6.2 million in 2017.

The decrease in R&D spending during both periods are attributed to the decrease in headcount from the restructuring activities implemented in September 2017 and the completion of the Star clinical trial activity.

These reductions are offset by our investments in to ATI-0918 and the ongoing manufacturing activities in San Antonio as well as our investments into the RELIEF clinical trial funded by BARDA.

As a percentage of overall spend, and when excluding share based compensation, our R&D for Q2 2018 and year-to-date period was 50% and 48% of total operating expenses respectively. This is in line with our plans and indicative of our focus on late stage programs. Now, onto sales and marketing.

Our sales and marketing activities and related expenses decreased this quarter to approximately 511,000 as compared to approximately 1.2 million in Q2, 2017. [Technical Difficulty] for the year to date period, our sales and marketing expenses were 1.2 million versus 2.1 million in 2017.

The decrease in expenses during the period are related to the decrease in headcount as well as lower professional services related to the decreased efforts in pre-commercial activities mostly in the US. G&A expense, excluding share based compensation, was 1.4 million this quarter as compared to 2 million in Q2 2017.

And 3 million in the six month period ending June 30, 2018 compared to 4 million for the same period last year. Approximately $600,000 in charges related to one time lease from fees were paid in February and those charges are included in the 2018 fiscal numbers.

The continued tightening of our G&A expenses was related principally to decrease in headcount resulting from the September 2017 restructuring as well as discretionary spend. Now, with respect to our revenues. Q2 total revenues were 1.6 million as compared to 1.5 million in the second quarter of last year.

Year to date, our total revenues were 3.2 million compared to 3.1 million for the same period last year. Product revenue decreased by approximately 300,000 in Q2 versus 2017 and was largely related to fewer devices sales in Japan. This was offset by an increase of over 70% in consumable utilization in that region.

Year to date, consumable utilization is up by over 60%. Such growth is primarily driven by the aesthetics and the orthopedic markets, which we will believe represents a meaningful revenue opportunity for the company today.

As per our guidance, we once again achieved double digit consumable growth for the quarter in Japan, where we have regulatory approval. Note that Japan consumable revenues represent now over 90% and 85% of total product revenues for the Q2 and year to date periods respectively.

Our government contract revenues related to our activity supported by Barda, such activities increased by approximately 360,000 this quarter as compared to Q2 of last year. This is indicative of the beginning of the kickoff phase for the RELIEF clinical trial under the newly awarded Barda contracts.

Turning to the balance sheet, as of June 30, we had 3.1 million in cash on hand, $13 million in debt and last month, we closed on our rights offering finance that resulted in additional 5.7 million in net proceeds to the company.

We plan to balance our ongoing capital requirements with several targeted activities that include revenue growth, business development opportunities, operational efficiency measures and working capital management, in addition to accessing the capital markets. Now, I will turn it back to Marc..

Thank you, Tiago. Let me just update on major forthcoming milestones and we’ll have a time for Q&A. First of all, our major goal is to complete the ATI-0918 development program and the manufacturing related obligations that are absolutely required to prepared and file for NAA with the European Medicines Agency.

Number two, we tend to receive orphan drug designation feedback from the FDA and 505(b)(2) pathways feedback also from the FDA regarding our ATI-1123 product. We intend to continue to ramp size up and hopefully enroll patients soon in the Barda funded US RELIEF clinical trial.

And then from a clinical perspective, in terms of reporting data, we plan to report three and six-month EU SCLERADEC II clinical trial data for scleroderma hand dysfunction and then also report six month and one year Japanese ADRESU clinical trial data for post-surgical male stress urinary incontinence.

And with that, I will turn it over to you Ian and we’ll open up the floor for Q&A..

[Operator Instructions] And our first question is from the line of Jason Kolbert from H.C. Wainwright..

Congratulations on getting the rays done. Can you talk a little bit about the financing plans going forward and the emphasis around 9/18 and the BD activities, because while I'm glad to see that cash balance rise, I was hoping to see more cash on the balance sheet.

Can you also talk just a little bit about what the pathway might look like to file and scleroderma in Europe and to file for SUI in Japan, so that we can understand kind of the magnitude of those opportunities as you work to kind of, elongate the cash one way into those two catalysts while looking at how to use 9/18 as a tool to elongate that runway as well?.

We did supplement the balance sheet in the recent capital raise. As you mentioned, we were hoping to raise additional capital to provide enough run way to get the 0918 drug to approval which we didn’t do. So as Tiago mentioned, the plan is to use a variety of methodologies including business development to prolong the pathway.

In addition, they’ve done a great job in trying to keep a lid on excess burn and staying focused on key programs that add value which we intend to do. So on the BD side and partnering side, as mentioned, there are a number of things that are ongoing, engaged with multiple parties.

The challenge there is just predicting the timing, which is very difficult to do and to provide concrete guidance at this point, which we can’t, but we’ll continue to move the ball forward in all those different levers that Tiago mentioned with the hope that leveraging most of all those is definitely the opportunities, which we’re engaged with multiple parties.

So regarding the second two questions, in terms of what’s it going to take and what’s your plan to seek potential approval for scleroderma and for SUI. Let’s take SUI first, because that’s, I think a more clear pathway. Regarding SUI, the plan is to try to expedite the readout on that trial.

We’ve said that it will likely take data by early ‘19 and maybe an opportunity to get data in early 2018 which then, sorry late 2018, that now would allow us to go ahead and file for approval, which takes about a year, so about a year from data.

We should be hearing back as to whether we have approval in another 6 months as to whether there is reimbursement. So that takes the process to launch with reimbursement to about 18 months. There may be some opportunities as I mentioned to expedite that, but we are already having those discussion with PMDA in Japan.

As it relates to Scleroderma, it’s a little bit more of a merchant process. So our plan is to evaluate the data. It’s a smaller clinical trial.

There is a clear path to provide these conditional approvals with the idea that you come back with additional clinical data later for full approval and then we’ll just have to, we’ll guide to that after we see that data and that will likely be, if the data is positive 2019 event..

And we’re really looking forward to seeing some good things happen in that remaining or part of this year..

[Operator Instructions] Our next question is from the line of Yale Jen from Laidlaw and Company..

My question is regarding 0918. As I recall that last -- during the last earning calls, you have talked about one of the competitors may extend their application in Europe, for their liposomal doxorubicin. So, where you see things are in that competitive space and I have another follow-up..

Yes. On the last call, I mentioned Taiwanese companies have had open submissions. That’s been opened for approximately well over a year and the EMA has been active on that. So as far as we know, that’s still active, but within the public disposition in that.

We do think that there are other potential competitors in that market, although we don’t have any specific information about those other competitors, but we do anticipate other competitors in that market and I think from our perspective, the goal is to get that get the drug manufactured and on stability testing, so we can file next year and do that as soon as possible.

It really is – it is much a timing issue as it is anything else. And so that is number one priority. So the goal again is to get that product made and with stability testing and filed from EMA approval, next year, with the goal being the first or second generic to market. But what we think is a market of approximately $120 million to $300 million..

At this time, I'm showing that there are no further questions over the phone lines. I'd like to turn it back to you Dr. Hedrick for any closing or additional remarks..

Just like to conclude by thanking everyone that participated either with questions or by listening on the call. Thank you of course to our employees and I wish you a good evening. Thank you..

Ladies and gentleman, thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day..