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Cytori Therapeutics, Inc. (NASDAQ:CYTX)

Q3 2008 Earnings Call

November 10, 2008 10:00 am ET

Executives

Chris Calhoun - CEO

Marc Hedrick - President, CSO and Medical Director

Mark Saad - CFO

Analysts

Stephen Brozak - Westerfield, Bakerink, Brozak

Erica Selin - Stanford Group Company

Ryan Gagnon -Gagnon Securities

Buzzy Nolan – Thompson Davis Asset Management

Chad Messer – Piper Jaffray

Julie Hoggatt – Noble Financial

Ken Arnold – Oppenheimer

Jason Napodono – Zacks Investment Research Inc.

Operator

Ladies and gentlemen, thank you for standing by, the Cytori Therapeutics Third Quarter Financial Results Conference Call will begin momentarily. Thank you for your patience, and please do not disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Cytori Therapeutics Third Quarter Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). The conference is being recorded today, Monday, November 10, 2008.

I would now like to turn the conference over to Chris Calhoun, CEO. Please go ahead sir.

Chris Calhoun

Thank you. Good morning. Our discussion today will include forward-looking statements regarding events and trends, which may affect the company's future operating results and financial position.

Some of the risks and uncertainties are described in the risk factor section of Cytori Therapeutics, 2007 Form 10-K, and subsequent SEC filings available through either the SEC or Cytori's website.

We want to focus on three items this morning; the performance of our cosmetic and reconstructive surgery, or CRS business, an update on our StemSource Cell banking business, and finish with our financials. We welcome the opportunity to address all other business developments in the Q&A session.

Cytori CRS Business and related Celution System sales have progressed faster than expected, and have exceeded our expectations. Let me explain in some detail what is driving the success we are seeing in the field.

Broadly speaking, in Europe, surgeons tend to use Celution predominantly for post-cancer breast reconstruction. Recall that the key to our European CRS strategy is to develop specific, on-label breast reconstruction claims, and DRG based reimbursement, partly through our 70-patient multicenter RESTORE II clinical study.

This study is proceeding with more than 10 patients enrolled, and a growing list of EU breast center participants in the trial, which will accelerate enrolment. We expect to have enrollment completed during Q1, 2009.

The reward for Cytori and its investors should be significant when we obtain reimbursement for this important, unmet medical need. To put this in perspective, more than 400,000 women in Europe and key Asian markets, have partial mastectomy procedures each year, and there is no good, reconstructive option for them. Additionally, there are perhaps another 4-million women who have had the same cancer operation in the past, but have not been offered reconstruction because it did not exist at the time.

One can reasonably estimate that the EU and Asia-Pacific market opportunity, by assuming 50% of new breast lumpectomy patients each year and 5% of the backlog patients will opt for the surgery. With an assumed per-patient revenue to Cytori of $2,000, the annual Cytori revenue opportunity is approximately $800-million.

This Ex-U.S. lumpectomy reconstruction opportunity is promising on its own. Furthermore, we're seeing increasing physician enthusiasm for solution technology, to help women that have poor outcomes from previous saline, or silicone implant procedures.

Some place for cosmetic reasons, and others for cancer reconstruction. In fact, recently in a UK Breast Surgery meeting, two prominent EU surgeons presented their experience with more than 50 implant salvage cases using Celution products. This application could add significantly to the utility of the technology, and its usage in the market.

For cosmetic breast augmentation, we are likewise seeing growing support in the market. However, it is with great interest that we have noted that many, if not the majority of the patients in both Japan and Europe, seeking Celution-based augmentation, are not seeking traditional implants, and have no interest in them, but rather are seeking breast size enhancement with their own, natural, living tissue.

The kind only Celution can safely and predictably provide. This important finding leads to two key conclusions for us. First, we believe that the potential market for the cosmetic breast use of Celution can be substantially higher than what we'd expect, just by examining the historical usage of saline or silicone implants. In other words, an unmet, previously unrecognized cosmetic surgery market.

Second, this fact makes the use of Celution by physicians in their practice, very attractive. When Celution augmentation brings in many new patients to a physician's practice, it doesn't necessarily take away implant patients from the practice. There's a strong, economic incentive for the surgeon to become a Celution System customer.

We estimate the average breast cosmetic surgeon could bring an additional half-million dollars in yearly profit, by adding the Celution System to his practice. Strong economic motivation, married to great patient outcomes and physician acceptance, is being used by over 10 full-time sales and technically oriented employees in both Europe and Japan.

Our sales team both sell directly to doctors and work closely with our distributors to educate and train them in the use of Celution. As a result, we are well ahead of our plan for our CRS business.

Near-term drivers of CRS sales should include, peer recommendations among surgeons, growing grass-roots demand among patients, continued presentations in scientific publications, bold enrollment of the RESTORE II study, expansion of CE Mark claims, and initiation of U.S. clinical introduction in 2009. On our next quarterly call, we intend to provide an update plan for the U.S. market.

Turning to our StemSource Cell banking business. We all agree this has been a frustrating and slow process, particularly in Japan, where we expected a faster adoption into hospitals. We are approximately two to three quarters behind where we thought we would be in banking sales at the beginning of 2008.

We are pleased that today, we are able to announce our first, StemSource Cell Bank sale in Japan. In a meeting this evening in Tokyo, with Mr. Furukawa, the President of Green Hospital Supply, we were told that the first Japan bank has been sold. We expect at least one more bank sale in Japan by the end of this year.

I would like to provide some detail on the evolution of the market. There are two potential customers for the StemSource Cell banks, the first are existing cord blood banks, looking to expand their cell banking offering, from only cord blood cells, whose use is rare, and whose customer pool is limited by births.

They realize the opportunity represented by adult, stem cell banking, in which the clinical possibilities are far reaching. B.I.O. Hellenic of Greece is such a customer. This bank was installed in Q3.

The second type of customer is represented by our banking partner in Singapore, as well as the likely customers in Japan, targeted through our relationship with Green Hospital. These groups, typically hospitals desiring to be at the forefront of regenerative medicine, because they are not only the banking infrastructure, but a therapeutic and clinical infrastructure as well. This broadened interest has increased the potential opportunity that has, in many cases, slowed the sales process in Japan.

To detail our progress, we now have seven approved IRB studies in Japan, including eight different leading medical centers and national institutes. Clinical applications include breast reconstruction and augmentation, peripheral artery disease, lipodystrophy, urinary incontinence, liver dysfunction, vocal chord paralysis and chronic ulcers.

Each of the centers involved in these studies is a candidate for StemSource Cell banking and will be developed around a core clinical application. Additionally, we expect these independently funded studies will purchase both Celution Systems, and consumable products to be used in the studies, bringing in an additional revenue to Cytori starting this quarter.

Despite the slow start, the opportunity for StemSource in Japan is significant. We remain bullish on the long-term prospects of this business.

Now let's turn to the financials. In the third quarter, our product revenue increased 64% to $2.3-million, compared to $1.4-miillion for the prior quarter. Not included in the third quarter revenues was approximately $400,000 of products, which were shipped before the end of the quarter, it will be recognized in the fourth quarter.

Included in Q3 revenue is revenue recognized from the installation of the StemSource cell bank in Greece. During the third quarter, Cytori reduced operating expenses, as compared to the same period in 2007, and the second quarter of 2008, through a decrease in general administrative and research and development, offset by a planned increase in sales and marketing.

This trend is expected to continue due to a reduction in August of approximately 15% of our full-time staff and postponement of the development of earlier stage applications until we either bolster our cash position, or complete a development partnership. By growing revenues and further streamlining our expenses, we can significantly extend our cash.

We ended the third quarter with $15.6 million in cash, cash equivalents and accounts receivable. In addition, Cytori entered into a $15 million dollar credit facility, of which $7.5 million has been funded, which provides the company with increased flexibility to expand commercialization activities.

With the StemSource sales slower than initially expected, our ability to achieve the projected $10 to 12 million in revenue is much lower. At the same time, we are extremely pleased with the higher than anticipated progress in CRS and bank sale, and expect a continued increase in our CRS and banking sales in Q4.

In conclusion, we want to share with our shareholders the excitement surrounding our products that we are seeing in the field, both from doctors and patients. Despite challenging economic times around the world, we believe there is a significant opportunity to succeed in the medical markets.

Dale, we'd now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you sir, at this time we will begin the Question-and-answer session. (Operator Instructions). Our first question comes from the line of Steve Brozak with WBB Securities. Please go ahead.

Stephen Brozak - Westerfield, Bakerink, Brozak

Well congratulations gentlemen, on basically continuing to advance this science in the commercial aspects. I'll jump right into a question, and then let other people ask. Obviously you're getting the low-hanging fruit as far as your initial indication, but let me ask you, now that the systems are available in the market, what other indications would you start to say that you're getting feedback on, and interest from -- and I understand a lot of it is going to be preliminary, but this is obviously, the fact that you've crossed over from proof of concept, and now you're going into the commercial venue.

Marc Hedrick

Hi Steve, it's Marc Hedrick. Thanks for that question, and it's really an appropriate time to ask it now that we have really a core of systems out in the field, and doctors are getting increased experience with it.

Our strategy clinically has been to drive two key, sets of clinical trials. One for breast reconstruction for cancer patients, unmet medical need, as well as two important types of heart disease, and those are addressed in our APOLLO and PRECISE trials. Interestingly and strategically, one is for direct delivery into a subcutaneous tissue.

The other one is for intervascular delivery. The planned follow up to those two clinical studies is really what you addressed, which is the investigator initiated studies, or the position pull-through applications.

And as Chris eluded to, there are over 10 such investigator initiated studies that are -- many of which have already achieved IRB approval, that are in progress, and the interest in those is broad and far-reaching and really speaks to the powerfulness of the technology.

Some for example, are in a related fields to occur trials like breast-related work. Some are in wounds and wound care, but others are in a very significant medical market such as liver insufficiency, urinary incontinence, as well as therapy for other organ systems.

So the strategy pointing out, as we had hoped, which is the initial critical anchors are really driving the pull-through of the interest in completely diverse and different markets, and we hope to continue to help sheppard those clinical trials going forward, and in the end, I think that the breadth of the platform and the movement at the new markets will continue to drive not only sales of units, but also annuity sales as well.

Stephen Brozak - Westerfield, Bakerink, Brozak

Just one quick follow up to that; you still are the controlling driver though in terms of what technology, by definition is exploited, in terms of who gets the machines, and what type of overall supervision you give, so you can basically go out there and say, yes we believe this, and you can collaborate with these folks, and/or you can decide against it if you don't believe that this is the area that makes sense or that you'll have the type of return that you're looking for. That is essentially correct.

Marc Hedrick

That's true. We're the driver and it's an awfully big bus, and so our role really is to try to support those areas which we think are strategic and will drive the long-term interest of the company, and that's what we've tried to do in these investigative initiated studies that Chris discussed previously.

Stephen Brozak - Westerfield, Bakerink, Brozak

Great, thanks I'll jump back in the queue.

Operator

Thank you, our next question comes from the line of Erica Selin with Stanford Group. Please go ahead.

Erica Selin – Stanford Group Company

Good morning, thanks for taking my call. I have two questions for you; the first is I was hoping we could get some insight on how many Celutions were placed in the quarter?

Mark Saad

Hi Erica, it's Mark Saad. In the quarter there were 10 units sold.

Erica Selin – Stanford Group Company

Okay, and then my other question is in relation to the U.S. opportunity. I know you guys have gotten a lot of key approvals. I'm not sure if there are any particular ones that you're looking for that we can see as catalysts towards that U.S. entry? Do you think you could inform us which ones those are?

Marc Hedrick

I think the key catalysts for us in the U.S. next year will be clinical introduction of the unit. Part of that is regulatory, part of that is getting the systems in the U.S. and getting patients treated. As you know, we've had three regulatory priorities. The first one has been product clearances in diverse markets.

The second's been getting country registrations, actually getting units sold in the specific countries, and then third, expanding existing claims, and so as a result, we're selling in about 30 plus countries world wide.

But there's no question that the U.S. is critical to our long-term success, So our strategy really has been to leverage existing 510K's as predicates and also create our own predicates, which is you look to, we have three such predicates so far. So our level of dialog with the FDA has already been increasing over the last few months.

The fourth 510K is in progress. We'll continue to work with CVRH, the device unit which is key, and as Chris laid out, next quarter I think we'll be able to give you much more specific information about what our plan is in the U.S., but there's no question it's critical, and we're making progress within the agency and with the overall commercialization plan in the U.S.

Erica Selin – Stanford Group Company

Okay, thank you, and I know I said two questions, but I was hoping I could ask another. Do you know what the status is on the Singapore regulatory environment? And how long it will take to place the units in Japan?

Marc Hedrick

Well with respect to Singapore, it's a similar process, although in a much more compressed way as it is everywhere else, and that's we're continuing to answer questions with the regulatory agency to obtain clearance of the bank.

That is give and take, it's ongoing in the background, but we just don't have a specific date. That's just out of our control, we can't really predict when that's going to happen, but it is moving forward from our perspective. And your next question? I'm sorry?

Erica Selin – Stanford Group Company

The other question was how long do you think it will take to place the bank now that you have a sale in Japan?

Marc Hedrick

Well, I think the history with the B.I.O. Hellenic in Greece bank was that it took approximately three months to close the sale and get to installation. Because in Japan we have an intermediary, which is Green Hospital Supply, it could take a little bit longer, but I think that three to four month rule of thumb is probably within the right time frame.

Erica Selin – Stanford Group Company

Okay, thank you. That's very helpful, and I'll jump back in the queue.

Operator

Thank you, our next question comes from the line of Ryan Gagnon with Gagnon Securities. Please go ahead.

Ryan Gagnon – Gagnon Securities

Can you talk a little bit about your sales strategy, including distribution and how are you doing bringing on additional sales folks at this point?

Marc Hedrick

Our strategy has been to leverage not only distributors in certain key markets, and only to partner with distributors that we feel like have the appropriate technical band-width to sell innovative product like this, and both in Asia-Pacific and in Europe, we have a group of distributors that we think are committed to the product, and are working with us to really -- in lock step to address the most promising accounts in those countries.

On the other hand, we have our own Cytori related sales force that's working not only in European office, which is in Italy, but also in Tokyo as well.

The sale really requires a technical component, which is to gear towards explaining to the doctor how the technology could be useful, training the staff, and getting installation. And so, if you look at Cytori’s sales force, strategically, it’s really geared towards the technical aspect of the sale, which we think is the critical aspect that needs to solved to convert a potential account in to a user.

And so, looking forward, I would expect us to continue to build on that model of when we find the right distributors for markets in which we are selling direct, we may bring that distributor on board.

But at the same time, Cytori is very involved in sales process, not only with our distributors, or with our direct accounts, and we anticipate very staged, wise growth in our current sales force over time as the economics allow, and it allows us to build on the base of opportunity we have.

Brian Gaggnon - Gagnon Securities

Okay. So, with that do you think that over time you’re going to be bringing in industry veterans in this field to be able to help you sell this? I.e. are you going to be bringing in some folks that are already selling in the plastic and reconstructive markets?

Chris Calhoun

Absolutely, and particularly in Europe, where we’re actively selling direct with people on the street. We are evaluating employees potentially and bringing them on board and I think that there’s no substitute for people that have experience in a field and we’ll bring those on, you know, as quickly as we can, in a staged approach to build the sales band wagon.

Brian Gaggnon - Gagnon Securities

Okay. I’m very impressed with the ability to able to sell these CRS Systems in light of Olympus coming with their product some time next year. Can you give us an update on where you stand with the Olympus version of this machine and how much work they are doing to prepare for the launch of this, next year?

Chris Calhoun

Hi Brian, it’s really dramatic, impressive to see a company of Olympus’ size and bandwidth can do when they really get behind something. This product and this project had significant support at Olympus.

So, this has been an ongoing at for years, as we’ve gone from where we are today with the 800 to the CTX which we anticipate will have CD Mark and be able to sell into the CE recognizing countries by the middle of next year, third quarter of next year.

And we see nothing from our relationship with Olympus that tells us that we’re not anything but on track with respect to that net system. And so, we’re continuing to have access to the CT800 and we’ll continue to have access as long as we need to, but we’re very much looking forward to having the expanded platform that the Olympus system provides by the middle end of next year.

Brian Gaggnon - Gagnon Securities

Now, just so that we can kind of follow Olympus’ progress, we should expect that they should start manufacturing machines sometime in 2/2 for a Q3 launch?

Chris Calhoun

That’s correct.

Brian Gaggnon - Gagnon Securities

Okay. A couple more questions. CRS Reorders how are you doing and you biggest customers to date, what are they telling you and what are you seeing as far as reorders and the opportunity for their business?

Chris Calhoun

Well, we don’t have the level of kind of granularity right now to be able to quantitate the number of reorders per unit and for what indications, specifically. And hopefully, over the next quarter or two we will be able to have access to that information.

But, what we know is that we’re continuing to see not only expansion of the sales into areas beyond breast reconstruction, such as breast augmentation, for example, implant salvage, an increasing interest in getting like facial aesthetics and facial reconstruction, so, we thing that that trend will portend nicely for increased sales per unit.

In other words, once someone gets a unit, for let’s say breast reconstruction, in their OR, they get comfortable with it. They start to expand its use beyond that core indication that they had for that.

So, we see that across all of our markets right now. And that usage is tending to increase as the physicians get more and more comfortable with the system and therefore, drive the annuity sales, which is what we hope for.

In some instances, you’ve got doctors who are using it very frequently and very expansively, and others that have the unit, are just now beginning to get to that appropriate comfort level that they got police to take off with the system.

So, there’s no real message here, other than doctors are continuing to use it more and more broadly for more and more indications and ramp up the consumable sales.

Mark Saad

Brian, I can jump in and just add one of our early customers here in Japan, I met with him a couple of weeks ago, and he’s a great kind of case study, if you will, and really the model for the kind of practice that we’re targeting.

And he’s really adopted this into his overall practice, and his goal is to treat over 100 patients in his first 12 months using this. He’s already into the 90 some patients and from an economic point of view, this translates in Japan, which is kind of a higher price point surgery, for these surgeries. He’ll bring in over $2 million of business into his practice based on solution technology. So, it’s profitable, a creed of day one, and he’s bringing in revenue.

And as we sort of articulated in the call, 85% of the patients that he is treating, would not have had an implant, but this is a brand new market that’s emerging here in Japan that didn’t exist before, and it’s an un-served population of patients that we think will be not only big in Asia, but really big around the world as patients who wouldn’t otherwise have a surgery or an implant put in, would come in for this natural augmentation.

So, it’s a very exciting model, and we’d like to find, kind of, these active cosmetic center clinics as well, to really expand our technology.

Brian Gaggnon - Gagnon Securities

How many systems does he have now?

Mark Saad

He, I believe he has six systems in three different clinics.

Brian Gaggnon - Gagnon Securities

Wow, that’s impressive. Chris, on the banking deal, congratulations on your first Japan Bank. Can you talk a little bit more about the details of that and is the opportunity for banking in Japan now that you have this first one underway, do you think it kind of opened the log jam?

Mark Saad

I do, and I was meeting earlier tonight with the president of Green Hospital, here in Tokyo, and also their head of sales and we think, you know, getting to this first one was just a key milestone event that, you know, there’s really a cultural bias against being first here.

So, now that the first one’s kind of stood up and taken the lead, I do see that there is a number of additional banking clients in the funnel that are pretty late stage. And I know we’ve been saying for some time that these banking sales are imminent and it's been frustrating that the process has been so slow, but I think now that we’ve gotten this first one out, we’ll see at least one more here in Japan this year.

And as we mentioned in the call earlier, with the different centers that we’re already working with, on IRBs and specific clinical applications, these tie back to banking. And so, the idea in many of these centers is to have banking as part of an overall strategy that includes this therapeutic and clinical use.

And so these IRBs are part of that overall process of getting funding, getting a clinical application, getting their IRB in place and that process is just taking an enormous amount of time. Many of these are, kind of, the largest, most important national and public health care centers in Japan.

And getting through that kind of bureaucracy is also really slowed the process, but, you know, we are deep into it now, and I think this first one moving and becoming visible this week is going to be key in more to follow.

So, we’re still very, very bullish that this is a big opportunity in Japan and our funnel is very, very full. We’ve got at least 30 different hospitals we have been talking to for, for quite a while, that are moving through the process.

Brian Gaggnon - Gagnon Securities

On the IRBs, can you lay out for us, you know, you don’t have to go through each one as far as what they are doing, but can you tell us which institutions are working on this?

Chris Calhoun

Well there’s a variety of institutions. They are mostly the public institutions. There are a couple private ones in there. There’s some national ones, like National Cancer Center, National Medical Center, so there is some big, well known institutions that are really looking as Mark and I both described earlier, a variety of things ranging from peripheral vascular disease all the way up through wound hearing and some solid organs, like liver.

So there’s really a varied interest in this technology in applying it in this translational way. And I think we’re going to continue to see more and more interest in translational research activity and investigator-initiated studies not only in Japan but I think around the world. And it’s going to be a target market for us.

And we know from being out there, talking to physicians for years about cell therapy, that there is interest in physicians with unmet needs using their own tissue and their own cells. The key has been getting access to those tissues and those cells. And Celution enables that. And it enables that in a safe and predictable way, that they can then try into these various applications.

Brian Gagnon – Gagnon Securities

So, last question. You guys haven’t sold any of your indications, which has been a good thing. How are you feeling about the opportunity of therapeutic partnerships and potentially selling some of the indications in the future?

Mark Saad

Hey Brian, it’s Mark Saad. We’re getting there. It’s been a long time. Like Chris said on the banking side, we’re starting to see the payoff there. I think on the collaboration, development collaborations, we’ve had longstanding discussions with a number of different groups, some of them a little more targeted, some of them a little more broad.

And overall we do see a couple of them getting closer in terms of some targeted therapeutic development areas, either in specific markets or potentially globally, and it’s going to be an important part going forward. Obviously make sure we can get the right deal and then be in a position to move on it. So we’re getting it.

Brian Gagnon – Gagnon Securities

So Mark you think that that opportunity gives you an ability to raise some non-dilutive capital in the future?

Mark Saad

It does. Depending on the scope and the markets, the size of these types of collaborations are varied. And in terms of state of the opportunity, how far along. We’ve got to advance the ball a lot in terms of validating the technology.

We all would have loved a blockbuster deal years ago to fund all our work. But we’ve really had to prove it. And the more we prove it, the more substantial the opportunities seem to become. And in some cases taking something a little bit targeted might be a great way to bring in some non-dilutive capital and advance the ball in a development area that we wouldn't fund ourselves and also serve as a measuring stick to do more of the same.

And once again on the bank side, I think we’ve had a number of different customers. And I think having a first one step forward makes the difference. I think the same holds true on the partnering side. So we’re getting there.

Brian Gagnon – Gagnon Securities

Good. Congratulations, guys. Keep up the good work.

Mark Saad

Thanks, Brian.

Chris Calhoun

Thanks.

Operator

Thank you. Our next question comes from the line of Walter Young with Thompson Davis and Company. Please go ahead.

Buzzy Nolan – Thompson Davis Asset Management

Good morning. This is Buzzy Nolan on Walter Young’s phone line. But a couple of questions, guys. Could you possibly give us a little guidance on the fourth quarter and how it’s started, and how it looks going forward? I’d like to -- if you could address that first?

Mark Saad

Hi Buzzy, it’s Mark Saad again. As Chris mentioned earlier in the call, we did have an additional $400,000 or so of product that was shipped in Q3 that we expect to be recognized in Q4. So we are starting off with a number of units in consumables and can hit the ground running.

And the outlook for the quarter, both in terms of CRS systems and consumable sales as well as receiving additional orders for the stem source bank seems very promising right now. We expect to have a growth quarter and given the variability and the size of these sales, it can really swing wildly, obviously, given the sizes of these orders, especially on the banking side.

But overall, we do expect to see continued growth in both areas this quarter which would be exciting, especially considering that we’ve been able to reduce our cash operating expenses quarter over quarter, not quarter to quarter, since just the second quarter by $1 million. So we’re bringing revenues in, growing revenues, same time as we’re reducing our cash operating expenses as aggressively, I think, as we can to continue to promote the core markets that are vital to our near term future.

So the combination of those two things we think is giving us the possibility to both extend our runway and get us to some opportunities that would hopefully be very value added to the company.

Buzzy Nolan – Thompson Davis Asset Management

Great. And my second question is, during the west credit market that probably any of us have ever witnessed or been a part of, you all do a deal with GE Health Care, or Health Sciences, I guess, for a $15 million credit facility. Can you discuss that for a second and kind of give us an idea what that means, going forward?

Mark Saad

Hi Buzzy, it’s Mark Saad again. I think it is a very important validation to us, given the level of due diligence that GE does. They didn’t do anything I’d say aggressively or quickly, although I think you touched on something that was impressive that it was completed, certainly given the markets I would imagine many of their loan targets were not funded in recent history just given with what’s going on out there.

For whatever reason they did elect to keep our loan, which was very gratifying to us, and at terms that we felt were certainly reasonable given the market and were I think suggestive that they do a significant amount of due diligence and as an organization seemed to be enthusiastic about Cytori’s prospects both hopefully from a financial aspect and who knows where else.

But it seemed to be a good suggestion that a company of their scale and scope and capability did a full review of us and came away with the decision to move forward on that loan.

Buzzy Nolan – Thompson Davis Asset Management

Thanks a lot. Congratulations.

Chris Calhoun

Thank you.

Operator

Thank you. Our next question comes from the line of Chad Messer with Piper Jaffray. Please go ahead.

Chad Messer – Piper Jaffray

Hi guys, thanks for taking my questions. I was just hoping you could comment a bit more on the dramatic increase in gross margins for the quarter, and just talk a little bit about what was driving that and how we should think about those going forward, because that was a stunning move.

And then just so I’m clear on revenue recognition for the bank, I heard in an earlier question about three or four months to get that set up, so I’m assuming, correct me if I’m wrong, that we should start looking for the Japan banking revenue to appear in 1Q next year some time. Thanks.

Mark Saad

Thanks, Chad. It’s Mark Saad. On the margin point question, you’re right. There was a meaningful swing to the positive on the gross margin, and I believe I answered the question a quarter ago suggesting that there is going to be fairly significant variability in gross margin based on a couple of factors.

One, if we’re selling direct or if we’re selling through a distributor. So while there were -- so based on the number of units sold in Q3, most of them were sold direct. So direct sales and depending on which region of the world there’s some variability in pricing. So we sold more and higher priced markets, more direct sales. So that contributed to the increase in gross margins.

Also banking sales direct versus -- first and foremost, the banking sales tend to be higher margin first. And they’re on higher dollar amounts. So when you have a -- you can see where the weight shift would be and if you have a direct sale bank, that’s going to tend to be significantly higher than on a distributor sale such as the relationship we have with Green Hospital. So we had a direct sale to the group in Greece that resulted in a higher margin as well.

So as we look forward and try to use that information predictably, it is difficult. Because it’s going to depend upon whether or not we’re doing banking versus CRS. Hopefully a lot of both, but we’ll see. And more direct versus distributor based.

And on balance, I’ve said before I feel comfortable that we should be north of 50% across all these areas once you lump them all together. Obviously we do everything we can to make it as high as we can, but felt that that was a deliverable number.

And keeping in mind we’re not even touching into the reimbursed markets that we hope will be available as more and more clinical data becomes available, getting into higher priced consumables that are going out to more of those unmet medical need markets. In the meantime, we’re really focused on these private pay markets that if anything are a little bit more price constrained on the consumer basis. So we feel pretty good about what we’re able to do right now. It’s pretty exciting.

And on the second question, you asked about the timing of the banking sales. The pure installation process can take in the four to six week territory. You can probably push that down a little bit, maybe make it a little bit better, from when we have an absolute firm P.O. ready to go to when the bank is installed and ready to run. And hopefully that’s a number that comes down over time.

So I think Q1 is not a bad way to look at the Green Hospital sales. It’s not impossible that they couldn’t move a little bit quicker than that, but I think we’re trying really hard to better speculate the realities of the timing of that side of the business, because we did get some initial expectations that take it a little while to achieve.

But in some of these cases, if the hospitals need to build out a little space, take a room that was being used for something else, clean it out and make it used for a bank installation, so depending on the receptivity of the environment it’s going into, there may need to be a little bit of prework by the hospital followed by about four weeks of Cytori installation, setup and training. ‘

Chad Messer – Piper Jaffray

Okay. Thanks, Mark.

Mark Saad

No problem.

Operator

Thank you. Our next question comes from the line of Julie Hoggatt with Noble Financial. Please go ahead.

Julie Hoggatt – Noble Financial

Hi Guys. Thank you for talking the question. Just on the banking unit, so I better understand. Was that actually the first bank that was sold in Japan, was that recorded in the third quarter, or do you expect that to be recorded in the fourth quarter?

Mark Hedrick

Hi Julie. The bank that was recorded in the third quarter was that sold to B.I.O. Hellenic in Greece. We have been informed, as Chris said as of last night by our partner in Japan that they have received the first order from a Japan customer. In turn we expect to receive a P.O. for that imminently. So with a P.O. on our part, we could begin the installation process. It’s not impossible that that couldn’t be completely achieved in Q4; it would be a little bit early to say anything definitive on that.

So as related to the Japan banking hospital sales, it’s possible that we could see something installed and potentially recognized in Q4, although I think we’ll have to jump through a few hoops to get there. We’ll obviously do our best.

But Q4, Q1 looks reasonable based on getting word that the first bank has been sold by our partner and we expect the P.O. imminently.

Julie Hoggatt – Noble Financial

Okay. And can you give us the non cash expenses that were recorded in the quarter as stock base (ph) expenses and depreciation and amortization? And then also what was your CapEx in the quarter?

Mark Saad

Oh, I can -- our CapEx in the quarter was very light. If you can give me one moment I’ll have those for you.

Julie Hoggatt – Noble Financial

Sure.

Mark Saad

Julie, in the meantime, do you have another question?

Julie Hoggatt – Noble Financial

I don’t.

Mark Saad

Okay. Julie, to break it out for the quarter, if you wouldn’t mind, can I come to you offline after the call?

Julie Hoggatt – Noble Financial

Yeah, that would be fine.

Mark Saad

Thank you.

Julie Hoggatt – Noble Financial

Thanks, guys.

Operator

Thank you. (Operator instructions). And our next question comes from the line of Ken Arnold from Oppenheimer. Please go ahead.

Ken Arnold – Oppenheimer

Morning gentlemen, how are you?

Mark Saad

Hey, good morning Ken.

Ken Arnold – Oppenheimer

Can you update us on the Apollo and Precise trials going on in Europe, please?

Mark Hedrick

Sure, Ken. This is Mark. Precise, just for everyone else, that’s a 36 patient chronic ischemic heart trial. We are really at the end of the second of three cohorts. We have approximately 21 patients enrolled. The key to carrying that study across the goal line is really getting this third site in Denmark up and running.

That site’s approved. The system’s in Europe. The team is trained. And they tell us they have a backlog of patients. So between that new site and the two existing sites we hope to get that fully enrolled as quickly as we can.

The Apollo trial, it’s a reminder that the 48 patient acute myocardial infarction trial, treated 10 patients in that trial. We’re in the first of four cohorts. Two sites, one primary site that’s enrolling, and that’s the site in Rotterdam.

As an aside, the team in Rotterdam at the TCT meeting, transcatheter therapeutics meeting, which is where a lot of interventional cardiology related presentations are made, presented the first patient treated in the trial, and the six month follow-up data from that patient.

Now, that is a double-blind, randomized, prospective trial, so we have no idea whether the first patient received placebo or cells, but they did report that the first patient, which was a 49 year old male that had a very significant myocardial infarction and his ejection fraction immediately after coming to the hospital and getting their intervention was about 45 % and at the six month follow-up, the same LB angiogram assessment of the ejection fraction was 63 percent, which is normal.

So was that a control, was that treated? We really don’t know. But the fact that we are moving through this first cohort in the Apollo study, we’re almost through the second cohort in the Precise study, and the fact that these are safety studies and we are continuing to move forward I think is a very good sign for the possibility of these treatments having utility in the market in the future.

Ken Arnold – Oppenheimer

When do you think the precise realistically full enrollment can be accomplished?

Mark Hedrick

Well, we don’t have any working experience with this third site but that third site is critical. And I think we are -- the initial trial suite that drove us to where we are, the group in Madrid, it slowed considerably and exhausted some of their patient referral networks for these type of chronic ischemic heart disease patients. So I think we’re trying to get that side in Denmark.

We’re rolling as quickly as we can. There’ll be patients enrolled, I feel very confident, by the end of the year. Will we get to that complete enrollment by the end of the year? Doubtful. I’m sure it will go into first quarter. But beyond that, it’s very difficult to predict when exactly that enrollment will complete. But the trend I think is very positive.

Ken Arnold – Oppenheimer

Okay, thanks. And congratulations on advancing the science.

Mark Hedrick

Thank you, Kenny.

Operator

Thank you. Our next question comes from the line of Jason Napodono with Zacks. Please go ahead.

Jason Napodono – Zacks Investment Research Inc.

Good morning, guys.

Mark Saad

Hi Jason.

Jason Napodono – Zacks Investment Research Inc.

Just a question on the investigator trials that are going on in Japan. How are they getting the system? Are you selling that to them at a discounted price; are you providing it to them?

Mark Saad

Chris, would you like to answer that?

Chris Calhoun

Yes. Hi, Jason. Each of these centers that are running the IRB are getting funding independently. So they’re either doing grants or they have their own internal translational budgets that they’re using. And they are purchasing systems. And typically they are not discounted and then they are also purchasing consumables. Okay? This will be a nice revenue source for the company, and I think as part of our broader strategy, as rolling translational research sales into Europe as well.

Jason Napodono – Zacks Investment Research Inc.

Okay. And then second question, what’s the opportunity to get some investigator-sponsored trials like that in the U.S.?

Mark Hedrick

Well, Jason, it’s Mark. I think that opportunity is absolutely there. And if you -- I think our EU and our Asia-Pacific strategy is a strategy that can work in the U.S. And as we discussed before, next quarter I hope to lay that out better for you, but the grant would be to include that same strategy that working for us outside the U.S. and import that into the U.S.

Jason Napodono – Zacks Investment Research Inc.

Okay. That’s it. Thank you, guys.

Mark Hedrick

Thanks.

Chris Calhoun

Thanks.

Operator

Thank you. As there are no additional questions at this time, please continue with any closing remarks.

Mark Saad

Great, thank you. With stem source sales finally getting underway in Japan and increasing revenues from CRS sales, Cytori is making great progress. Our installed basis systems is growing, enrollment is up at our ongoing clinical studies, we’re seeing an expansive interest in using Celution products and technology to help patients around the world.

Professor Travelli in Rome, Italy recently told us that he’s positive Celution technology is changing the approach to many surgical applications, and that it will surely improve the patients’ quality of life. Cytori is leading the way in bringing regenerative medicine to patients today. Thank you for your time, your support and for all your great questions.

Operator

Ladies and gentlemen, this concludes the Cytori Therapeutics Third Quarter Financial results conference call. If you’d like to listen to a replay of today’s conference, please dial 1-800-405-2236 or (303) 590-3000 with the access code 11121933 followed by the pound sign. We would like to thank you for your participation, you may now disconnect.

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