Cytosorbents Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

Key Takeaways

  • Product sales increased 10% year-over-year in Q2 to $8.8 M, contributing to a 5% rise in total revenue to $9.9 M and maintaining a 75% gross margin.
  • Operating loss declined by 48% to $3.4 M compared to Q2 2023, reflecting efficiency gains and prior cost-cutting actions.
  • Secured a $20 M credit facility and raised $10.3 M in equity, ending Q2 with $14.9 M in cash (including $8.5 M unrestricted), enough to fund operations through Q2 2025.
  • On track for Q3 submissions of DrugSorb ATR de novo applications to the FDA and Health Canada, with Breakthrough Device designation targeting a potential decision within 6–12 months.
  • Real-world data from the STAR registry was presented at EuroPCR 2024 and named a top-5 finalist in the best scientific abstract competition, bolstering the regulatory case.
AI Generated. May Contain Errors.
Earnings Conference Call
Cytosorbents Q2 2024
00:00 / 00:00

Transcript Sections

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Phillip Chan
Phillip Chan
CEO at CytoSorbents

Great. Thank you.

Operator

Ladies and gentlemen, good afternoon, and welcome to the CytoSorbents second quarter 2024 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, Eric Ribner. Please go ahead, Mr. Ribner.

Eric Ribner
Managing Director at LifeSci Advisors

Thank you and good afternoon. Welcome to CytoSorbents' second quarter 2024 financial and operating results conference call. Joining me today from the company are Dr. Phillip Chan, Chief Executive Officer; Vincent Capponi, President and Chief Operating Officer; Kathleen Bloch, Chief Financial Officer; Dr. Makis Deliargyris, Chief Medical Officer; Dr. Christian Steiner, Executive Vice President of Sales and Marketing and Managing Director of CytoSorbents Europe; and Christopher Cramer, Senior 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 the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Eric Ribner
Managing Director at LifeSci Advisors

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 August 13, 2024, 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 of 2024 by Dr. Chan, Ms. Bloch, Mr. Capponi, and Dr. Deliargyris. Following the presentation, we will open the line to your questions during the live Q&A session with the rest of the management team. And now it's my pleasure to turn the call over to Dr. Phillip Chan.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Well, thank you very much, Eric, and good afternoon, everyone, to the Q2 2024 earnings call. First, I'd like to go over our operating highlights for the quarter. First, more than 250,000 CytoSorb devices have been cumulatively delivered to date, helping to save many lives around the world. Second, in the second quarter, total revenue increased 5% to $9.9 million, while product sales increased by 10% to $8.8 million, and gross product margins were a solid 75%. Importantly, our second quarter operating loss decreased 48% to $3.4 million, from $6.6 million a year ago. Following our $10.3 million equity raise in December 2023, we secured an additional $20 million credit facility with Avenue Capital Group, strengthening our balance sheet.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Following the quarter, we completed additional cutbacks, expected to save an additional annualized $5 million in expenses going forward. Over the past five months, we have decreased our workforce by 17%. Finally, our cash balance at the end of the second quarter was $14.9 million, including $8.5 million in unrestricted cash and $6.5 million in restricted cash. Today, we are pleased to announce the start of our new Chief Financial Officer, Peter J. Mariani, starting tomorrow, and unfortunately, the retirement of our existing CFO, Kathleen Bloch, as of the end of business today. You'll hear more from both people at the end of this meeting. We're also on track to submit marketing applications in parallel for the investigational drug, DrugSorb-ATR, to FDA as a De Novo application in Health Canada in this third quarter of this year.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

You'll hear more about that from both, Makis Deliargyris as well as Vincent Capponi. In addition, we completed our MDSAP audit, which is a key requisite to Canadian commercialization. Data from our STAR Registry was presented at the EuroPCR 2024 conference, where it was selected as a top 5 finalist in the Best Scientific Abstract Competition. Importantly, we launched a new redesigned, modern, consolidated corporate and product website.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Lastly, we also launched our CytoSorb, our PuriFi, MDR-certified PuriFi hemoperfusion pump, placing, in fact, all 30 pumps from our original order with our OEM and are expecting delivery on the next order from our OEM very shortly. Importantly, that the pump itself has received extremely well, good reviews from users, citing it as very easy to use and easy to set up and easy to implement our therapies. With that, let me turn it over to Kathleen Bloch, our current Chief Financial Officer. Kathy?

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Thank you, Phill, and hello to everyone on the call. Today, I will discuss our second quarter 2024 financial results, including revenues and gross margins. Additionally, I will provide an update on our working capital and cash runway. CytoSorb product revenue was approximately $8.8 million in the second quarter of 2024, compared to $8.1 million in the second quarter of 2023, an increase of approximately $800,000 or 10%. Second quarter 2024 grant revenue was approximately $1.1 million, compared to approximately $1.3 million in 2023, and this decrease was due to the conclusion of several grants during 2023. Total second quarter 2024 revenue, which includes both product sales and grant revenue, was approximately $9.9 million, as compared to $9.4 million in 2023.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Product gross margins on devices and device accessories was 75% in the second quarter of 2024, compared to product gross margins of 74% in 2023. Next slide, please. For the first half of 2024, CytoSorb product revenue was approximately $17.8 million, compared to approximately $16 million for the first half of 2023, which is an increase of approximately $1.8 million, or 12%. First half 2024 grant revenue was $1.8 million, as compared to $2.9 million, again, due to the conclusion of several grants in 2023. Product gross margins on devices and accessories were 74% in the first half of 2024, compared to 71% in the first half of 2023.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

As we continue to realize more operating efficiencies at our new manufacturing plant in Princeton, New Jersey. Next slide, please. The blue bars on this chart represent our annual product sales for the trailing 12-month periods ending June 30th, for each year, 2018 to 2024. We know that for the years 2020, 2021, and 2022, sales were very favorably impacted because CytoSorb was used to treat COVID-19 patients. Of course, this usage ceased following the containment of the pandemic in the years ending June 30th, 2023 and 2024. If we take a look at the orange trend arrow, which tracks along core non-COVID-19 revenue, what we see is that the post-COVID-19 12-month periods ended June 30th, 2023 and 2024, continue to show positive growth in our core non-COVID-19 product sales.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Our year-over-year trailing 12-month sales for the period ending June 30th, 2024, increased by 9.5% compared to the trailing 12-month sales for the period ended June 30th, 2023. Additionally, excluding the impact of the COVID-19 sales in 2020, 2021, and 2022, our overall CAGR for the six years ended June 30th, 2024, is a respectable 11.2%. I also want to point out for a moment that the green line, which tracks our year-over-year gross margins, indicates a decline in 2022, while we transitioned manufacturing operations to our new facility. Our second quarter 2024 gross margins continue to show improvement at 75%, and these margins are approaching the levels that we had prior to our move to the new facility.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

With greater volumes, we expect to show further improvements in product gross margins as we continue to realize additional manufacturing efficiencies. Next slide, please. As of June 30th, 2024, we have $14.9 million in cash, which includes $6.5 million of restricted cash and $8.5 million in unrestricted cash. We believe that unrestricted cash on hand is sufficient to fund the company's operations through the second quarter of 2025. We have been successful in our efforts to strengthen our balance sheet and reduce operating expenses. On our last call, we indicated that the company was actively pursuing alternative sources of capital, and in June 2024, we entered into a loan and security agreement with Avenue Capital Group to provide a total of $20 million in debt financing.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

$10 million was immediately available under the facility, and $5 million, which is included in our restricted cash, is subject to release by March 31st, 2025, provided that the FDA has accepted the company's application for review with respect to DrugSorb-ATR, and that the company has received a minimum of $3 million in net proceeds from the sale of its equity securities after the closing date. The restricted cash will be released on a dollar-for-dollar basis for equity raised between $3 million and $5 million. And then there's another tranche of $5 million, which may be disbursed at the company's request between July 1st, 2025, and December 31st, 2025, provided that the company receives, receives FDA marketing approval of its DrugSorb-ATR application. Conservation of cash remains a top corporate priority.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

We have reduced our headcount, adjusted our spending, and taken other measures to reduce our quarterly cash burn in 2024. Cost cuts taken previously have reduced our loss from operations from $6.6 million in the second quarter of 2023 to $3.4 million in the second quarter of 2024, a 48% decrease. In July of 2024, we enacted another round of cost cuts, which are designed to reduce the company's annual cash burn by an additional $5 million. That will conclude my remarks for today. At this time, I'm delighted to turn the call over to our President and Chief Operating Officer, Vincent Capponi. Go ahead, Vince.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Thank you, Kathy. So, I'd like to cover the clinical. Yeah, I think Makis is on the call. Makis, would you like to take the first part of this?

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

Sure. Sure. Thanks, Phill, and thanks, Vince. As you heard, and welcome to everybody on our call this afternoon. As you heard from Phill previously, the regulatory submissions for our investigational DrugSorb-ATR system is a top priority for the company, and we are happy to report that we're on track according to previously stated timelines. The STAR-T clinical data were presented earlier this year. The top-line results and the final data analysis has been completed, and in fact, the clinical study report that contains all this information is in the final stages of development and publishing. This will represent the main source for the probable benefit to risk analysis that will be at the crux of our De Novo submission to the FDA.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

We also intend to include in the submission, supportive supplementary data with the real-world evidence of ticagrelor removal during CABG that was presented from the STAR Registry in a recent European conference. I'm gonna spend the next slide giving you a little bit more visibility on that data. The completion of the technical files is leveraging the electronic eSTAR platform, and as already stated, we are on track for the FDA De Novo submission in September, with the Health Canada submission leveraging the same platform to follow soon thereafter. Just as a reminder to our listeners, DrugSorb-ATR is an FDA Breakthrough Designated Device, which means that each submission will be associated with a priority review. A recent analysis suggested that De Novo applications of Breakthrough Designated Devices have an estimated 25% faster review timelines compared to regular applications.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

And as such, pending the FDA agreement of the De Novo pathway submissions and the associated priority review of the breakthrough status of the DrugSorb-ATR device, this means that we could have a potential FDA decision within 6-12 months following submission. Next slide, please. Earlier this year, we had the privilege of being present and presenting at one of the largest cardiovascular conferences in the world, the EuroPCR meeting that is held annually in Paris. During this meeting, with over 12,000 attendees, data from our STAR Registry was selected for an oral presentation. And at the end of the conference, as Phill has already alluded to, the scientific committee awarded the STAR Registry data a top five spot in their finalist, as a finalist in their Best Scientific Abstract competition.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

So what did we show in within the STAR Registry that we believe is gonna be a supportive piece to our regulatory submissions? As you know, removal of ticagrelor during cardiac surgery with cardiopulmonary bypass is an approved indication with CytoSorb since 2020, and is increasingly being used as standard of care in many heart centers in Europe. In the STAR Registry, we're collecting high-fidelity data of this everyday real-world use of a device for removal of ticagrelor. In the current analysis, we had data from 5 different countries, 23 investigative sites, totaling at 102 isolated CABG patients. This is a population that we have discussed previously will be the target intended population for our submissions. These patients were operated very soon since the last dose of ticagrelor on the mean of 22.8 hours.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

Just as a reminder, guidelines recommend that these patients should wait for at least 72 hours, but in everyday practice, many times this is not feasible. So these patients were operated with a much shorter window compared to what the guidelines recommend. The device was used for an average of an hour and a half during the CPB run of the operation, which is almost identical to the time we saw in STAR-T. Again, very, very comparable population and device use in these two datasets. What we did present at in Paris was the fact that in the STAR Registry, we observed bleeding rates that were substantially lower than those reported in the European CABG registry among patients on ticagrelor being operated either very early within 24 hours or later on within 24 to 72 hours, but always not having completed the recommended washout.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

You can see the rates presented on the slide, and in fact, among patients who waited for at least a day before being operated, you will see a substantial reduction of severe bleeding to very, very low rates, equivalent to those seen in patients not operated or not on ticagrelor, having a CABG operation. Importantly, none of these sites or investigators reported any device-related adverse events. The data from the E-CABG registry represent a very good benchmark for us to compare the rates from the STAR Registry, and as such, as noted previously, this was very well received at the scientific conference, and we're very pleased to receive the designation of the top five finalists for Best Scientific Abstract. And with that, I would like to turn the call over to Vince to give you a regulatory update.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Thank you, Makis. This is Vincent Capponi, and good day to everybody. As Makis mentioned, the De Novo timeline, we're in the final stages of assembling the technical file that will be submitted through the eSTAR program. At this point, I'm happy to say, we're 75% complete with that file. We've concluded most of the engineering documentation, and now starting to complete the clinical documentation for that submission. Along with the submission in parallel, we are also working on preparing the Canadian submission, which we hope to have filed shortly after the eSTAR for FDA. It's very similar, so we believe we can do it in a relatively timely manner.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Hopefully, also through the Canadian submission, generally speaking, Canadian approvals have generally, in the past, been a bit faster than U.S. FDA approvals. But, of course, we can't predict that with 100% certainty, but we're hopeful that we will be able to get a quick approval through Canada. Next slide, please. Global, from a global regulatory standpoint, as part of the preparation for the Canadian submission, we have completed the MDSAP audit, which is required for a Canadian submission. I'm happy to say that the audit went very well. It's currently under review by DEKRA, but we feel very confident that we will be approved for submission to Canada through the MDSAP program.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

With respect to MDR, which affects obviously our European operations and rest of world, we are targeting a December 2024 submission to our notified body and have already requested the MDR audit for June of 2025. We're very confident, based on our continual successful audits throughout the product lifecycle of CytoSorb, that we will be able to achieve the MDR audit. Again, meeting all the requirements, which are more extensive than the MDD, but we are very confident that we'll be able to achieve approval. As Phill mentioned, the PuriFi Pump Registration was received in June.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Working with our partner, Medica, we were able to get that completed and able to receive the first 30 pumps, and we have the second order that will be coming in shortly here. We are looking forward to again expanding that into the market, and as Phill mentioned, has received very, very good reception in the marketplace. On top of that, we've also received, after over a year and a half worth of effort, a registration in Taiwan, and we're looking forward to now opening up with that market. With that, I'll turn it back to you, Phill.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Great. Well, thanks, Vince. This year, we have worked diligently to execute upon a broad turnaround strategy that is dependent on attaining a number of key objectives. You've heard today that, one, our guidance, that we continue to expect to submit our marketing applications to U.S. FDA and Health Canada for DrugSorb-ATR this quarter and have made excellent progress in parallel programs like MDSAP that are critical to commercialization, for example, in Canada. Secondly, we have strengthened our balance sheet with the addition of a new debt facility from Avenue Capital and believe that if we can hit our milestones, the $20 million in capital will get us to both Health Canada and FDA regulatory decisions. Third, we remain extremely committed to cutting costs to drive efficiency and be self-sustaining.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Importantly, you heard that we have made excellent progress in reducing our operating loss and expect to see additional benefit from our most recently completed cost cuts. Fourth, our gross margins continue to be strong and are expected to expand as we grow the markets in Europe, and certainly are expected to expand further if we are able to drive U.S. FDA and Health Canada approval, where the gross margins for DrugSorb-ATR are expected to be significantly higher than for CytoSorb. And lastly, we have done a lot of work to try to increase our core CytoSorb sales growth beyond the 250,000 devices that we've delivered to date. Finally, as you are aware, we have been positioning CytoSorbents for the next stage of growth, both our existing international franchise as well as the potential to open the U.S. and Canadian markets.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

This is why it has taken us so long to find the right CFO candidate to replace our esteemed retiring CFO, Kathleen Bloch. Kathleen has gone above and beyond the call of duty, selflessly coming back from retirement last August to resume her former full-time CFO role, and in the intervening 12 months, helping to secure the future of the company with two key financings and orchestrating our cash conservation strategy. With her retirement announced today, she caps an outstanding CFO career and will continue as a consultant to help manage the smooth transition to our newly appointed CFO, Peter Mariani.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

On behalf of everyone at CytoSorbents, we thank Kathy for her more than 11 years of dedication and leadership at the company as a trusted colleague and friend with so many contributions that have helped us achieve the success we have today, and wish her an enjoyable, relaxing, and well-deserved retirement. With that, I'd like to turn the call over back to Kathy to have some final words. Kathy?

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Oh, thank you so much, Phill. I would like to take this opportunity to thank the board of directors, my colleagues on the management team, and really all the employees of CytoSorbents for their support and collaboration, which have made my 11-year tenure as CFO so very enjoyable. I especially want to thank the finance and accounting team members who have supported me in the U.S. and in the E.U. I would like to thank you for your extraordinary dedication, talent, and contributions to the company. And I wish everyone, including our new CFO, Pete Mariani, the best of success as we head towards the exciting upcoming job of commercialization of DrugSorb-ATR in the United States. So thank you all so much.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thank you, Kathy. And with that, I'd like to welcome Pete Mariani to the CytoSorbents team. Pete is a seasoned and accomplished medical device CFO, whose many successes at high-growth, publicly traded companies such as AxoGen, Hansen Medical, and Guidant Corporation speak for themselves. He has consistently demonstrated a disciplined and rigorous approach to financial management, operational excellence, and strategic development, both domestically and internationally, that aligns perfectly with our next phase of expected rapid growth. Importantly, CytoSorbents today shares many similarities to AxoGen when Pete joined as CFO in 2016, including with respect to its size, revenue base, U.S. market opportunity, and high margin business model. He has proven his ability to fund, scale, and manage impressive growth.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

As we pursue U.S. and Canadian marketing approval for DrugSorb-ATR and drive our OUS business with CytoSorb, we believe Pete will be an outstanding fit, where his deep global experience and insight is expected to be vital to our success. We are thrilled to have Pete join CytoSorbents and be a key member of the management team. And in the coming months, we hope to reach out to many of you to introduce you firsthand to Pete. With that, let me have Pete say a few words here as we wind up this call. Pete?

Peter J. Mariani
Peter J. Mariani
Incoming CFO at CytoSorbents

Thank you, Phill. I appreciate the warm welcome. I appreciate the trust of, you and the board in, in, in creating this opportunity for me. It is great to be out with all of you as investors today as well. I am excited to join CytoSorbents at this pivotal time in its history. You know, I've had the great privilege to be part of some of the most significant advancements in medical technology over the years, including advancements in cardiac stents, cardiac rhythm management, medical robotics, laser cataract therapies, and of course, nerve repair. CytoSorbents' blood purification therapies is a natural extension of this, and I am looking forward, to partnering to further develop, execute, and scale our long-term growth strategy and bring improved [outcomes to] hospitals. And of course, I look forward to meeting with many of you in the near future. Thanks again, Phill.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks very much, Pete. That concludes our prepared remarks. Operator, please open the call up for the Q&A session. Just let me remind you, as Pete has not officially started until tomorrow, he will not be participating in the Q&A session. Operator?

Operator

Thank you. At this time, if you have a question, please press star one on your touch tone phone. If you would like to withdraw your question, press star one a second time. Please make sure that your mute button is turned off to allow your signal to reach our equipment. And again, it is star one if you would like to ask a question. And your first question comes from the line of Michael Sarcone with Jefferies. Your line is open.

Michael Sarcone
Michael Sarcone
Analyst at Jefferies

Hey, good afternoon, and thanks for taking the questions. Just to start, congrats to both Kathy and Pete. Kathy, it's been great working with you. I hope you have a great retirement, and Pete, looking forward to working with you again. So, all right. So I guess the first one for, I guess, for either Phill or Makis is, you know, you're on track for the FDA and Health Canada submission for DrugSorb. Can you just give us an update on how you're feeling about approval? Maybe can you give us an update on any conversations you've had with the regulators, particularly the FDA, more recently?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks very much, Michael. Makis, would you like to take that?

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

Sure. And thanks, thanks, Michael, for the question. As we have discussed, previously, we feel that the STAR-T clinical trial does provide the necessary information to be able to execute the necessary benefit to risk analysis. And I think as we have highlighted in previous calls and stated in during our own corporate webinars, is that the STAR-T data has helped us identify more specifically, the intended target population. And as we discussed before, we have identified that to be those patients undergoing a coronary artery bypass operation and also the intended potential benefit associated with the use of the device. So in that regard, we believe that the study itself, as a standalone, can support a robust benefit risk analysis.

Efthymios Deliargyris
Efthymios Deliargyris
Chief Medical Officer at CytoSorbents

In addition, as I shared today on the call, the accumulating real-world evidence that is now captured systematically in a high-quality registry such as the STAR Registry, we believe will be an important supplement in our conversations with the agency. Having said that, you know, any, anytime you submit an application, you have to wait obviously for the review and the comments from the agency. We have not had any additional discussions with the agency since our last call, so there's no update on that front. But we do believe that the application will provide the necessary information for a very, you know, productive and collaborative interaction with the agency and to allow them to proceed with their necessary benefit to risk analysis.

Michael Sarcone
Michael Sarcone
Analyst at Jefferies

Got it. Thanks, Makis. So then, you know, maybe one or two for Kathy. Just on the gross margins, the press release today mentioned the line of sight to 80%. You know, can you talk about, you know, what gets us to 80%? Maybe what level of sales might get you there. And then just kind of the second part of that is more in the near term, how are you thinking about gross margins in the second half of 2024?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yeah, I think-

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Yeah.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Actually, Michael. Oh, okay. Kathy, go ahead, please.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Yeah. So Michael, you know, obviously volume is going to, any amount of volume growth is going to increase our product gross margins, and they should go up very rapidly. I expect that at 15%-20% year-over-year growth, we should see approaching 80% or at 80%. So it should be relatively straightforward. Of course, once we get approval in the U.S., the margins will be even higher, and then we would see, like, exceptional growth rates in our overall gross margins.

Michael Sarcone
Michael Sarcone
Analyst at Jefferies

Got it. Thanks, Kathy.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

And, um-

Michael Sarcone
Michael Sarcone
Analyst at Jefferies

Sorry, go ahead, Phill.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

I'm sorry, Michael. You know, one of the people responsible for helping to drive our gross margins higher is Vincent Capponi, our President and Chief Operating Officer. Maybe, Vince, you wanted to give a little commentary on how our manufacturing processes have improved, and our confidence that we can get to that 80% on a blended basis.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Thanks, Phill. So, we've made a lot of improvements in the last year in the operation. We've actually reduced the labor requirement by almost 30% in part of the operation, the filling processes, to help offset some of the, the lower volumes that we've had. So with the improvements that we're continually making here, we expect that, you know, we're going to, you know, continue to see improving margins. But as Kathy said, it's really dependent upon the volume as well. I think the other thing we need to keep in mind is that as part of our controlling costs, we're actually lowering our inventories. We're doing that by slowing down the production, so that we can conserve the cash, as we go through the FDA approval.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

So to Kathy's point, and when we get to the 15%-20% growth rate, we certainly have a line of sight to that 80%+, plus an approval obviously for DrugSorb-ATR with much higher ASPs than the current CytoSorbents will certainly contribute to that. But it's also based on the mix of the direct sales, the higher, if you will, gross margin direct sales versus distributor, which are lower margins than the direct. So, again, there's a lot of factors in that, but what we're doing is we are continuing to improve the operation. Again, it's going, as Kathy mentioned, going to be very dependent upon volume, but we do have a number of cost improvements that we're, you know, slowly implementing in the process here to hopefully get us back to that 80% soon.

Michael Sarcone
Michael Sarcone
Analyst at Jefferies

Great. Very helpful. Thanks for all the color.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks very much, Michael.

Operator

Your next question comes from the line of Yuan Zhi with B. Riley. Your line is open.

Yuan Zhi
Yuan Zhi
Senior Healthcare Research Analyst at B. Riley Securities

Congrats on a good quarter, and thank you for taking our question. Kathy, congrats on the retirement, and, Phil, welcome on board. Exciting time for you to join here at CytoSorbents. Maybe, Phill, start with you. Can you provide more color, what factors pushed the revenue to grow in second, second quarter? And do you see similar trends in 3Q? Any comment on the volume versus the price change will be helpful.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yeah, I think that in the second quarter, what we saw was strength in the distributor and partner channel. I think that it coincided a little bit with the launch of our PuriFi pump. And as we told you previously, the PuriFi pump is intended to help establish an infrastructure of blood purification capabilities in countries where they don't have well-established dialysis infrastructures. And so, this typically is found in our distributor territories that are not necessarily in Western Europe, for example, as with Germany and Italy and France and the U.K., for example, and Spain, for example. So I think that strength in that particular channel was good, and our hope is that, you know, our third quarter, which is typically a seasonal quarter for us because of holidays in Europe will be a respectable quarter.

Yuan Zhi
Yuan Zhi
Senior Healthcare Research Analyst at B. Riley Securities

Any comments on the volume versus the price trend year-over-year?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

You know, as Vince mentioned, you know, the transfer prices to distributors are typically lower than our ASPs to, for direct sales. But, you know, on the other hand, we benefit from having a lower cost of distributor sales because we don't incur those direct costs of a sales force ourselves. That being said, our pricing has been fairly stable, across the board, both in transfer pricing as well as in direct sale pricing as well. But what you'll see from Q2 results is that the distributor channel was stronger for this quarter.

Yuan Zhi
Yuan Zhi
Senior Healthcare Research Analyst at B. Riley Securities

Got it. And, a following question is: How will the delivery of PuriFi Pump contribute to the revenue growth in 3Q, either itself or helping the sales of CytoSorbents territories without the infrastructure? Can you provide more colors on that?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yes. You know, we have a different model for rolling out the PuriFi Pump in different parts of the world. And I think, though, the thing to keep in mind is that we're not looking to necessarily make money on the PuriFi Pump, right? This is very much the printer, printer cartridge model, where the printer's provided at relatively low cost with the goal of driving disposable revenues of the printer cartridge. This is very similar to our, our approach to the PuriFi Pump. Again, the PuriFi Pump is there to establish this infrastructure of blood purification capabilities so that they can use more of our CytoSorb devices. And so, I think moving forward, you know, the goal is to really drive CytoSorb volume rather than, you know, a typical hardware company trying to drive sales from hardware, if that makes sense.

Yuan Zhi
Yuan Zhi
Senior Healthcare Research Analyst at B. Riley Securities

Yeah, got it. Yeah, that's very helpful. Thank you.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Sure.

Operator

Your next question comes from the line of Tom Kerr with Zacks Small-Cap Research. Your line is open.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Good afternoon, guys, and congratulations, Kathy, and thanks for all your detailed explanations and quick response to questions. So I appreciate it. Can you clarify, I'm unclear on the Canadian submission, because originally I thought it was gonna be jointly. Now, it's gonna happen after the FDA submission, so it's a fourth quarter event? And sorry, I don't have the slides in front of me, but can you clarify when that is expected to be submitted to the Canadian authorities?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yeah, I think that what you heard us say today is that we expect to get both of those submissions in the third quarter with the prioritization, of course, for the U.S. FDA application. So, you know, I think that we remain on track to try to achieve that, but we certainly will be prioritizing the FDA submission first.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Okay, so it's possible the Canadian submission could roll in the fourth quarter, but that's not your goal, correct?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

That's not. Yes, that's not the goal, and I think that we're reiterating our guidance of a third quarter submission for both.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Okay. All right. Sorry, misunderstood that. A couple financial questions. On the R&D down to $1.5 million, is that just the comparison against the STAR-T trials a year ago, or is there anything else in there?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

You know, there's been a number of-

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Sorry.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Go ahead, Kathy, please. Kathy, you may be on mute. Please go ahead.

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

Oh, thanks, Phill. You know, the largest impact is coming from the STAR-T trial completion, so we're not incurring those hospital costs and patient costs that are associated with the trial. There has also been a strong focus of our R&D efforts on exclusively grant-related activities, where their costs of those personnel are funded through the grants. So we have been prioritizing that, making sure that is the focus of the team to try to cut down in any non-grant R&D costs. So both of those are contributing, but the highest impact is coming from the STAR-T trial being complete.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Compared, the comparisons, right. So is that a good number to use for the second half of the year, $1.5 million per quarter? Would that be-

Kathleen Bloch
Kathleen Bloch
Outgoing CFO at CytoSorbents

I think it is, yes. Yes.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Okay. One last big picture question for Phill or anybody. The Taiwan thing seems interesting. Can you talk about that and what the size of that business could be, or could it be the next Germany? Is it that big enough of a market?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yeah, I think it remains to be seen. I mean, Taiwan is, as you may have read from the press release, a very large market, and a big believer in blood purification. So from an opportunity standpoint, it's very exciting. We're working through a distributor in Taiwan currently, and they, in fact, were helpful in getting the Taiwanese approval and registration. So, time will tell to see how this will develop, and but we have a lot of hopes for Taiwan, but it's just one of many countries where we're working to drive CytoSorb sales.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

Got it. Last financial question for me. You guys did receive the $15 million loan, right? It wasn't a subsequent event at the end of the quarter?

Phillip Chan
Phillip Chan
CEO at CytoSorbents

We closed the financing at the last day of the quarter, so it was a Q2 event.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

And the financing happened in the second quarter.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Yes, that's correct.

Thomas Kerr
Senior Equity Research Analyst at Zacks Small-Cap Research

All right. Thank you. That's all I have for today.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks, Tom.

Operator

As a reminder, it is star one if you would like to ask a question. Your next question comes from the line of Sean Lee with H.C. Wainwright. Your line is open.

Sean Lee
Sean Lee
VP of Equity Research at H.C. Wainwright & Co.

Hey, good afternoon, guys. Congrats to Kathy, and wish you a happy retirement, and welcome, Pete. I look forward to working with you. Most of my key questions have been answered, but I'm just wondering, you were mentioning the doing R&D mostly on the grant. So I was wondering, what are the key major projects that you are working on in terms of the grant-supported ones? I know previously, you had worked on HemoDefend with Pentagon. I was wondering whether that's still going on and whether there are other projects or product that we can look forward to. Thanks.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Sure. Thanks, Sean. Yes, the programs that R&D programs, preclinical R&D programs that are being funded right now, really are focused on HemoDefend-BGA and, the use of HemoDefend-BGA and, but in different form factors for either military, civilian, or industrial usage. And I think that we're making excellent progress in that program. We continue to seek additional funding opportunities for that program, and, we're getting very close, I believe, to, human testing. So, Vince, would you like to comment about the HemoDefend program?

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

Sure, Phill. Thanks. So, Sean, to hear from you. We've made quite a bit of progress on the HemoDefend-BGA, as Phill mentioned. You know, there's a couple different form factors that we're focused on to really get to what we think will be the most accessible markets, which would be the military and then ultimately the civilian. So those programs are... There's two key programs that are funding that right now. We have a couple other grants that are in preparation right now to extend that funding further into commercialization through funding of a clinical trial and ultimately scaling for commercialization.

Vincent Capponi
Vincent Capponi
President and COO at CytoSorbents

But, as Phill mentioned, you know, there are n-number of different form factors, but really the two key form factors that we're pushing for very aggressively are related to the military application and then also what would be at the point of collection, which, by the way, will feed into potentially the freeze-dried, if you will, plasma market. We're working closely with a couple of people in that area as well, where we think we can provide some value. Thanks, Sean.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks, Vince.

Sean Lee
Sean Lee
VP of Equity Research at H.C. Wainwright & Co.

Great. Thanks for taking my questions.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Thanks, Sean.

Operator

As a reminder, it is star one if you would like to ask a question. With no further questions at this time, I would like to turn the call back over to Dr. Phillip Chan for any additional or closing remarks.

Phillip Chan
Phillip Chan
CEO at CytoSorbents

Well, thank you everyone for joining the call today. If you do have any other questions, please feel free to reach out to me directly at pchan@cytosorbents.com while we manage this transition, and I'll hopefully be able to reply to your questions where possible. Have a great evening, everyone, and thank you very much. Good night.

Operator

Ladies and gentlemen, that concludes our conference for today. We thank you for your participation, and you may now disconnect.

Operator

Please wait. The conference will begin shortly.

Executives
Analysts
    • Efthymios Deliargyris
      Chief Medical Officer at CytoSorbents
    • Eric Ribner
      Managing Director at LifeSci Advisors
    • Michael Sarcone
      Analyst at Jefferies
    • Peter J. Mariani
      Incoming CFO at CytoSorbents
    • Sean Lee
      VP of Equity Research at H.C. Wainwright & Co.
    • Thomas Kerr
      Senior Equity Research Analyst at Zacks Small-Cap Research
    • Vincent Capponi
      President and COO at CytoSorbents
    • Yuan Zhi
      Senior Healthcare Research Analyst at B. Riley Securities
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