Earnings Transcript for CTSO - Q3 Fiscal Year 2024

Operator: Thank you for standing by. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the CytoSorbents' Corporation Third Quarter 2024 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Investor Relations Consultant, Adanna Alexander. Please go ahead.

Adanna Alexander : Thank you, Catherine, and good afternoon, everyone. Welcome to Cytosorbents' Third Quarter 2024 Financial and Operating Results Conference Call. Joining me today from the company for the prepared remarks are Dr. Phillip Chan, Chief Executive Officer; and Pete Mariani, Chief Financial Officer. For the Q&A portion of the call, Dr. Chan and Mr. Mariani will be joined by Vincent Capponi, President and Chief Operating 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. Actual results may differ from results discussed today. And therefore, we refer you to a more detailed discussion of our performance represented by management include estimates today as of November 7, 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 third quarter 2024. 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 is my pleasure to turn the call over to Dr. Phillip Chan.

Phillip Chan: Thank you very much, Adanna, and good afternoon, and welcome, everyone, to our third quarter 2024 earnings call. CytoSorbents is a leader in the treatment of life-threatening conditions in the intensive care unit and cardiac surgery through blood purification and the removal of harmful substances from blood with our proprietary sorbent bead technology. Cartridges filled with these beads are high-margin single-use disposables that are plug-and-play compatible with the existing blood pump machines found in hospitals today, such as dialysis, ECMO and heart-lung machines. Our technologies are used in a broad number of blood purification applications. Specifically, 2 important applications are

Peter Mariani : Thank you, Phil, and hello, everyone, on the call. After spending the last few months with the team and gaining a much deeper understanding of the business, I cannot be more excited and encouraged about the future of CytoSorbents. Given my experience across several high-growth medical device companies, I believe CytoSorbents' blood purification technologies are positioned for growth and expansion, and I look forward to working with the leadership team and all stakeholders as we develop the full potential of this technology. Today, I'll discuss our third quarter financial results and provide an update on our cash runway. Product revenue was approximately $8.6 million in the third quarter of 2024, above our previously guided range of $8.3 million to $8.5 million representing an 11% increase and compared to $7.8 million in the third quarter of 2023. Third quarter '24 grant revenue was approximately $800,000 compared to approximately $1.1 million in the prior year. This decrease was due to the conclusion of several grants over the past 12 months. Total third quarter revenue for the quarter, which includes both product sales and grant revenue, was approximately $9.4 million, representing a 7% increase as compared to $8.8 million in 2023. Product gross margins were 61% for the quarter, above our previously guided range of 50% to 60% and down from 72% in the prior year's quarter reflecting a planned production slowdown to rebalance inventory, along with a short-term manufacturing issue, which resulted in a lower number of CytoSorb devices produced in the quarter. This issue has since been resolved, and we are ramping up to more normalized production levels and product margins through the fourth quarter. As a reminder, we moved into our state-of-the-art manufacturing facility in Princeton, New Jersey, 1.5 years ago in anticipation of expanding into the North American markets. As such, this manufacturing infrastructure is designed to support significant commercial growth as we continue to support our international critical care business as well as roll out DrugSorb ATR in the U.S. and Canada. Total operating expenses were $9.7 million and decreased 25% year-over-year, driven by the completion of the STAR-T trial and the impact of additional cost-cutting efforts implemented over the previous year, which included a 25% reduction in headcount. As a result, operating loss improved by 40% year-over-year. In today's report, we are introducing additional non-GAAP measures, including EBITDA, adjusted EBITDA and adjusted net loss and net loss per share. We use these non-GAAP financial measures for financial and operating decision-making and to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. Adjusted EBITDA loss for the quarter, which excludes the impact of noncash stock compensation and changes in foreign currency, improved to $3.5 million compared to adjusted loss -- adjusted EBITDA loss of $5.6 million in the prior year, driven primarily by the reduction in operating expenses. Net loss for the quarter was $2.3 million compared to $9.2 million net loss in the prior year and adjusted net loss for the quarter, which also excludes the impact of noncash stock comp and changes in foreign currency, improved to $4.5 million or $0.08 per share compared to an adjusted net loss of $6 million or $0.14 per share in the prior year. Now our cost-cutting efforts have also resulted in lower cash burn in the quarter of $2.7 million versus approximately $5 million in the second quarter of this year. Cash conservation will continue to remain a top priority as we drive further efficiencies in our core business, support opportunistic expansion in international geographies and prepare for our expected launch of DrugSorb ATR. As of September 30, we had $12.2 million in cash, which includes $6.5 million of restricted cash and $5.7 million in unrestricted cash. In June of this year, we entered into a loan and security agreement that can continue to provide additional milestone-based liquidity. Specifically, the agreement provides up to a total of $20 million in debt financing, $10 million was immediately available under the facility and $5 million, which is included in our restricted cash. This -- or the $5 million that's included in our restricted cash is subject to release by March 31, 2025, predicated on the FDA's acceptance of our marketing application for DrugSorb ATR, which we have recently received and receipt of $3 million to $5 million of new equity proceeds. Additionally, the loan agreement provides for a second tranche of $5 million, which may be drawn at the company's request between July 1 and December 31 of next year, provided the company receives FDA marketing approval of its DrugSorb ATR application. Now as Phil noted, I've been -- it's been a very fast start for me at CytoSorbents. I've had the opportunity to spend significant time with our dedicated team in New Jersey, understanding the compelling value of our technology and talent. And I've spent 2 weeks with our European team at 2 medical conferences, traveling with sales reps, visiting with surgeons and several of our distributor partners and getting a solid understanding of our team and operations. I've also met with many investors and look forward to connecting with the broader investment community as we tell the story of the credible and relevant value of our therapies for patients, surgeons and hospitals. I'm excited to partner with the team on this journey. We are working hard to ensure that we have the right strategies and operating disciplines in place to drive profitable growth in our core business over the near term and ensure that we are resourced and prepared to execute an effective launch of the DrugSorb ATR opportunity in the North American CABG market upon FDA approval. That concludes my prepared remarks, and we'd like to open the -- open it to questions. Catherine?

Operator: [Operator Instructions] Your first question comes from the line of Tom Kerr with Zacks Small-Cap Research.

Tom Kerr: A question on the FDA submission, the substantive review process. Is that the only step? Or are there steps after that? Or can they ask for additional information? And kind of what is that review process entail?

Phillip Chan: Yes. That is the main review process for our De Novo submission. Historically, the target has been for FDA 150-day review. But post pandemic, it's been about 11 months or so, almost a year. So because of that, we expect the decision from FDA did come sometime in 2025. I would note that we do have breakthrough device designation, and that makes us eligible for priority review, which provides for more interactive review with the agency, more of a collaborative back and forth in informal discussions. And so that priority review process is known to decrease the overall review time as is the De Novo as well.

Tom Kerr: So could an approval best case be in the second quarter of 2025, but normally expected in third quarter of 2025? Did I get that right?

Phillip Chan: I think that what we've stated is that we expect that approval will happen sometime in 2025. And we cannot predict time lines of the FDA.

Tom Kerr: Yes. Okay. No worries. Any update on the Taiwan launch? Is that going as planned? Is it business being done there?

Phillip Chan: Yes. Our regulatory approval in Taiwan was just recent, but we have been actually working with that distributor for a long time collaboratively to get that approval. Very motivated distributor, very knowledgeable about the local market in Taiwan. And so we anticipate that the launch will begin to accelerate more likely in the next year or so.

Tom Kerr: Okay. And then one more, and I'll get back in the line. The loan proceeds, the $5 million that's in restricted cash, did that come out of restricted cash in the fourth quarter because you submitted the application? Am I understanding that right?

Peter Mariani: No. That restriction comes out. It will come out once we -- now that we've had the acceptance from the FDA. That was the first milestone. And then the second is we have an opportunity to essentially unleash a total or unrestricted total of $10 million of liquidity by raising $5 million. So if we raise $5 million in the next -- if we raise $5 million of new equity, that $5 million will be unrestricted. So it allows us to free up $10 million of liquidity with a raise of $5 million.

Operator: [Operator Instructions] The next question comes from the line of Tom Kerr with Zacks Small-Cap Research.

Tom Kerr: Sorry, I didn't hear any other questions. I'll jump back in, if that's okay. Can you explain and provide more color on the PuriFi pump sort of program? Is that just a usage trial type? Or is it going to be marketed more extensively? I didn't quite understand if it was sort of a trial phase or how that's going to work?

Phillip Chan: Yes. The purpose of the PuriFi pump is multifold. One is to help build an infrastructure of blood pumps that can run our CytoSorb cartridges around the world in places where they don't have the dialysis infrastructure that more westernized countries have. That's one thing. The second thing is that because it's such an easy-to-use pump, and we've gotten lots of feedback that it is a very user-friendly machine, it encourages early treatment with CytoSorb, which we believe is very important to have a good outcome. I always view critical illness like walking away from home. The further away you walk away from home, the longer it takes back and lots of bad things can happen in the meantime. It's the same thing with critical illness. So the goal with our CytoSorb therapy is really to treat aggressively upfront early to stop the deadly inflammatory response that causes organ failure and death. So the PuriFi pump is a key part of our strategy to expand the usage of our therapy. And in the future, I think you'll see it as an important item when we go to other types of applications such as hospital-wide removal of blood thinners, for example, such a machine could be easily used in the emergency room or in the operating room, for example, and also in other applications such as, for example, the treatment of liver failure. So from a business model perspective, we see PuriFi as an 'enabling technology. It is not something that we need to make money on, although we -- in some territories, we sell the device for a profit. In other places, we subsidize that device with sales of CytoSorb. And so -- but the goal is, again, to get that device out there so people use more CytoSorb cartridges, which is the main goal. CytoSorb at 70-plus percent gross margins is really the high-margin disposable regardless of the pump used. So right now, we are moving that machine. We are ordering it and moving that machine to either sales or to trial periods where users are using the device and seeing whether or not they like it. And as in every market launch, that sometimes takes time. But I think the positive thing is that the market reaction to the pump has been outstanding. We've sold this in the vet market in the United States. We've sold this in very established Western medicine hospitals. And we've also placed this in distributor territories, and it's very well regarded.

Tom Kerr: Great. That clarifies that a lot. One more quick financial one. The gross margins, you said return to normal in the fourth quarter. Does that mean low 70s? Or could there be a drag or high 60s? Or can you define normalized at this point?

Peter Mariani: Yes. I think the best way to think about that is we're returning to more normalized across the fourth quarter. So I would say in the lower end of that range at this point. But look, the team has done a great job of developing efficiencies, and I think we've got a whole lot of clarity around how to get back to very, very solid production levels and normalized gross margins as we get through the quarter.

Phillip Chan: Great. Maybe just to add...

Peter Mariani: What's that?

Phillip Chan: Sure. No, just to maybe add some color. I mean the long-term goal is to return back to the 75% to 80% range that we've been targeting. And so for -- in particular, for CytoSorb product gross margins, and we believe that's absolutely possible.

Peter Mariani: Yes.

Tom Kerr: So that will happen in 2025 is what you're saying?

Peter Mariani: Yes, we'll provide more. We'll look at guidance and outlook on the next quarter call.

Operator: There are no further questions at this time. I will now turn the call back over to CEO, Phillip Chan, for the closing remarks.

Phillip Chan: Well, thank you, everyone, for joining the call today. If you do have any other questions, please feel free to reach out to us at ir@cytosorbents.com. We look forward to updating you in the future. Have a great evening, everyone, and thank you very much. Have a good night.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.