Nuwellis, Inc. Q2 FY2020 Earnings Call

Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Second Quarter Ended June 30, 2020. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the end of the call. I would now like to turn the conference over to Claudia Drayton, the company's Chief Financial Officer. Please go ahead, madam.

Thank you, Phyllis. Thank you for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the second quarter ended June 30, 2020. With us today are John Erb, the company's CEO and Chairman of the Board; myself, Claudia Drayton, the company's CFO; and Nestor Jaramillo, the company's President and Chief Operating Officer. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2020. If you have not received CHF Solutions' earnings release, please visit the Investors page at www.chf-solutions.com. During the course of this conference call, the company will be making forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of CHF Solutions are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve known and unknown risks and uncertainties that are based on management's beliefs, assumptions, expectations, and information currently available to management. Those risks include, but are not limited to, risks associated with the possibility that the company may be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully, and the other risk factors described under the caption Risk Factors and elsewhere in the company's filings with the Securities and Exchange Commission. By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements whether as a result of new information, new developments, or otherwise. You should review the cautionary statements and discussion of risk factors included in the company's press release issued today, the company's latest 10-K, subsequent reports, as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statements for additional discussion of risk factors that could cause actual results to differ materially from management's current expectations. Those discussions regarding risk factors as well as the discussions of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company's website at www.chf-solutions.com. With that said, I would now like to turn the call over to John Erb, CHF Solutions' Chief Executive Officer and Chairman of the Board.

Thank you, Claudia, and good morning, everyone. Welcome to the second quarter 2020 earnings call and corporate update. This year continues to be a challenge for health care throughout the world due to the ebb and flow of the pandemic. Although the world has dramatically changed, we know our business model has not changed in the long run, and we remain optimistic about the durability of our business. We are confident that our priorities are clear and focused. Our goal is to grow our global market leadership in fluid management with solutions that change patients' lives. As I have described in the past, we are expanding beyond our initial business of serving the needs of chronic heart failure patients to meeting acute needs in critical care, such as cardiovascular surgery, and the life-saving needs in pediatric kidney care. The company achieved very solid performance in the second quarter of 2020 despite hospital access restrictions, elective surgeries dramatically reduced, and hospital financial concerns and restrictions on purchasing capital equipment. We achieved our highest quarterly revenue with growth of 14% over the prior quarter and opened 4 new hospital accounts in the quarter. Also in this quarter, we reinitiated Aquadex therapy in 9 additional hospitals that had abandoned the therapy during Baxter's ownership. Additional accomplishments included the use of Aquadex by intensivists and nephrologists in treating their COVID-19 patients, demonstrating opportunity to prevent acute kidney injury and mitigating the need for dialysis. We hosted an interactive clinician-led webinar to discuss cardiopulmonary-renal management in real-world COVID-19 patients moderated by Daniel Goldstein, MD, Professor Vice Chairman, Department of Cardiothoracic Surgery, Montefiore Medical Center in New York. We submitted a patent application for an adoption to the Aquadex Smartflow system to rapidly clear cytokines, including Interleukin 6 from the blood. Removal of cytokines from the blood may improve the condition of patients suffering from COVID-19 and many other infectious diseases. We signed a distribution agreement with Transimed Medical Equipment Company LLC, covering the United Arab Emirates, the first distribution partnership in the Middle East region. The company now has distribution agreements covering 14 countries outside the U.S. Children's Hospital of The King's Daughters in Norfolk, Virginia has initiated ultrafiltration therapy using the Aquadex SmartFlow system in pediatric care. The company hosted an interactive physician-led webinar to discuss the recent publication, SARS-CoV-2, COVID-19 and intravascular volume management strategies in the critically ill and the role of ultrafiltration in the treatment of patients with COVID-19, moderated by Ravindra Mehta, MD, Professor of Clinical Medicine Emeritus, Division of Nephrology and Hypertension, Department of Medicine University of California, San Diego School of Medicine. We initiated a pilot distribution agreement with RenalSense, Ltd., to offer complementary solutions for fluid management, the agreement of CHF solutions to market and sell RenalSense's Clarity RMS, a real-time monitoring system in certain U.S. territories. Clarity RMS is a critical care monitoring system that continuously measures urine flow rates and automatically transmits real-time data and fluctuation notifications to medical staff on a 24/7 basis. This information reflects changes in renal function and provides an early sign of acute kidney injury risk, enabling rapid intervention with therapeutic solutions such as CHF Solutions' Aquadex SmartFlow ultrafiltration system. Subsequent to the end of Q2, on July 14, we announced key takeaways from our recent webinar, where David Askenazi, MD shared his experience and perspectives on the treatment of fluid overload in pediatric patients weighing more than 20 kilograms. Also subsequent to the quarter end, on July 16, we announced the development of a pediatric registry through a partnership with the Acute Kidney Injury Critical Care Research Foundation and Watermark Research Partners. The registry will collect real-world evidence on the use of Aquadex SmartFlow ultrafiltration system in pediatric patients with fluid overload. During the second quarter, our efforts to help physicians and hospitals battle the terrible effects of the COVID-19 pandemic did have a positive impact on utilization of disposables in those hospitals where the Aquadex system had been utilized in the ICU setting prior to the pandemic. The use of Aquadex by intensivists and nephrologists in treating COVID-19 patients has demonstrated the opportunity to prevent acute kidney injury and mitigate the need for dialysis. Although we are very optimistic, there is a considerable level of uncertainty for the future. So we are closely managing our cash, implementing expense controls, and pursuing avenues to fund operations. I will now turn the call over to Claudia, who will walk you through our Q2 2020 results and financial details. Following that, I will provide some additional comments, and we'll then open the call for questions.

Thanks, John. Good morning, everyone. Turning to our financial results. Revenue for the second quarter was $1,863,000, an increase of 14% sequentially from Q1 2020, and up 11% from Q2 of last year. Revenue performance for the quarter was driven by increased demand from hospitals treating COVID-19 patients. This increase helped offset the impact of access restrictions that many hospitals have imposed on our sales representatives. For the second quarter of the year, we estimate that 34% of our revenue was driven by hospitals treating patients with COVID-19. Regarding our cost of sales and operating costs, I will briefly comment about major drivers. First, regarding our cost of sales, our gross margins were about 64.4% for the quarter, a significant increase from Q1 2020 margins of 51.2% and from Q2 2019 margins of 50.2%. The improvement in margins is mainly the result of increased production to support the launch of our new Aquadex SmartFlow and to meet expected future demand increases. Next, regarding our SG&A expenses of Q2 2020, expenses were $4.2 million, an increase of 6.6% over Q2 of 2019. The increase results from having fully staffed territories, including clinical specialists we hired during 2019 to assist in opening and training new accounts. Our R&D expenses were $885,000 in Q2 2020, a 32% decrease compared to Q2 of last year. Last year, we had reported an increase in product development spending to support our pediatric submission and improvements for the next-generation Aquadex SmartFlow console, which received FDA clearance and CE Mark during the first quarter of this year. The net loss for the quarter was $3.9 million or $0.10 per share compared to a net loss in the second quarter of 2019 of $4.4 million or $1.93 per share. Regarding our liquidity position, we used $3.3 million of cash in the quarter to finance our operations or $8.8 million for the first 6 months of the year, which is comparable to 2019. As previously announced, during the quarter, we announced the completion of 2 registered direct financing transactions for net proceeds of $3.5 million. Additionally, during the quarter, we received approximately $2 million in cash proceeds from the exercise of warrants. We ended the quarter with approximately $7.8 million in cash and cash equivalents and no debt. In terms of modeling the rest of 2020, we continue to closely monitor the situation caused by the COVID-19 pandemic. While we have seen increased utilization of our therapies in areas of the country where we have an established presence and where hospitals are seeing an influx of COVID-19 patients, our access to hospitals continues to be limited, and thus, we believe that it will continue to impact our traditional business. At this point, we expect to stay on course with our growth plans, which is growing revenue double digits, both sequentially and versus the prior year. Regarding our gross margins, we expect that Q3 and Q4 will be lower than our Q2 margins and will be more in line with the margins we saw in Q1 as we lower production builds related to the Aquadex SmartFlow launch. Overall, for the year, margins will show improvement versus last year. Regarding our operating expenses, we expect our sales and marketing spend to remain consistent with the current quarter as the impact of having fully staffed territories is offset by reduced travel expenses. In R&D, we expect spending to remain consistent with the levels we reported this quarter. Finally, regarding our NASDAQ listing. As we have previously disclosed, the price of our stock has been below $1 since December 2019, and we are currently under the first 180-day period to regain compliance with NASDAQ's minimum bid requirement. This period expires on August 28. If we have not regained compliance with the minimum bid price before August 28, we intend to seek a 180-day extension from NASDAQ to regain compliance with the NASDAQ listing requirements, and we believe we are eligible for this extension. I will now turn the call back over to John.

Thank you, Claudia. CHF Solutions continues to be focused on the health and safety of our employees. Our production and some of our engineering staff continue to work on-site at our manufacturing facility and most of our team is maintaining business operations by working remotely. Production of the Aquadex products continues and has seen minimal disruption of the supply chain for components and materials. We have been able to retain all of our employees, including 30 employees in our field sales organization. Before the COVID-19 pandemic, almost 100% of our business came from hospitals with close to 70% of what are now considered elective procedures. These 30 field sales and clinical employees continue to be restricted from access to most hospitals and face challenges with new hospital rules. As elective procedures come back online and hospitals again start to schedule the needed elective procedures, our sales and clinical team have proven ready and have quickly reengaged with hospital accounts. We now have a full complement of 13 sales reps filling our 13 U.S. sales territories. We also have our clinical specialists team of 13 to not only train the talented professionals who use our equipment but also to increase utilization of Aquadex consoles in each hospital account when they can return to provide support. We are continuing to support our customers as they strive to manage and control the impact of the COVID-19 pandemic. Physicians on the front lines of treating patients with COVID-19 have used Aquadex therapy for patients who need fluid removal between dialysis treatments as an alternative therapy when dialysis machines or trained dialysis personnel are not available. In addition, patients who are hemodynamically unstable and fluid overloaded who may not be able to tolerate dialysis but still need fluid removal are being treated with the Aquadex therapy. We have been able to help many hospitals, physicians, and nurses battle the COVID-19 pandemic by providing consoles and remote training on the Aquadex system. We have established training protocols using remote video web tools and webinars. We have worked closely via telephone, text, emails, and web tools with key physicians who are successfully helping patients survive the virus using the Aquadex system. With the three webinars we have supported, we are finding ways to help these physicians educate their peers on how they have successfully managed excess fluid in the patient's lungs, how they have offloaded stress on the patient's kidneys by removing fluid, and how they have supplemented the need for dialysis as many COVID-19 patients experience acute kidney failure. I want to reiterate that we are very pleased that we produce a product that is providing a meaningful therapy for treating COVID-19 patients. We know we are very fortunate to be less impacted than many small medical device companies, but the rest of the year is full of uncertainty. We are very optimistic about the value we can bring to our customers and our investors. We anticipate that when health care returns to some level of new normal, we will see accelerating sales growth by continuing to position ourselves as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists, cardiac surgeons, pediatricians, and nephrologists who treat fluid overload. After receiving FDA market clearance for the pediatric indication in late February, we began to initiate our training program with a couple of children's hospitals. In early March, we had 20 children's hospitals in a queue to receive training. The training program requires not only our clinical education specialists but also physician support from one of the three busy pediatrician physicians that have extensive experience in using the Aquadex system in pediatrics. In the second quarter, we were able to train one children's hospital as all hospital access was stopped due to the fear of COVID-19 contamination. We have trained the new children's hospital's physician and nursing staff by using a video web tool and hope to slowly continue with this virtual training capability. We anticipate a continued restriction to hospital access for several months. The critical care market opportunity is somewhat on hold during the hospital access restrictions. There are limited procedures being done at this time, but we do see some product revenue coming from hospitals that have used Aquadex and do not have all their ICU beds dedicated to COVID-19 patients. There is also a strong reluctance on the part of patients that may need a critical care procedure but do not want to be in a hospital that is caring for COVID-19 patients due to fear of contamination. We continue to see strategizing our business in three phases. Phase 1 is designated now. Our focus now is on liquidity, expense control, sustained operations, employee health, and investments in key areas such as virtual physician support and training. Phase 2 is designated through the recovery, with a focus on retention of the field sales team, inventory supply, and maintaining key physician relationships. Phase 3 is designated the long gain with a focus on continued pipeline investments and product enhancements, adding complementary products, implementing training at children's hospitals for pediatric care, and pursuing new market opportunities in critical care like liver disease, ECMO, and burn. Operator, please open the call for questions.

Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

It looks like a pretty good readout for the quarter. I just wanted to probably ask a few questions. As far as COVID, you talked about 34% from the second quarter. Can you give us a general sense of the number of placements or number of facilities where that was coming from? And was that internal shifting from critical care or from cardiac? Or are there new units there as well?

Well, it's primarily coming from hospitals that were users of our product in their critical care area in the ICU. So as they began to utilize those beds for COVID-19 patients, they increased utilization of Aquadex. Most of those hospitals actually brought in additional consoles to support the COVID-19 patients. We actually would say that the 34% came from 8 hospitals that were really directly increasing the volume because of COVID, and these were basically in the hotspots in the U.S., such as New York City and Georgia.

Okay. Perfect. Got it. And on the pediatric side, could you give us a little further color? I'm assuming that current pediatric use is on the order of a handful or two of units. And you talked about there being a backlog or a queue of 20 or so for March. So how might that play out over the next 3 or 4 quarters? I know a lot of it is hospital and pandemic dependent. But do you expect those to get peeled off? And has there been a change since March in the actual number on the queue side of 20?

We have a list of hospitals we're working to progress through different phases. In Phase 1, we've identified the hospitals we want to engage. In Phase 2, these hospitals have invited us to discuss implementing the therapy. Phase 3 involves them purchasing the equipment, and Phase 4 is when they're actively using it. Currently, there are 5 children's hospitals in Phase 4 utilizing the product. In the second quarter, about 20% of our revenue came from children's hospitals, indicating a solid volume from these 5. We have another 6 or 7 hospitals in Phase 3 that have bought the equipment and are in line for training. This training will come from our clinical specialists and the key physicians who pioneered the use of Aquadex for treating COVID patients. As conditions improve, we will be able to provide additional training and onboard more hospitals. We recently started working with King's Daughters Hospital, and they are now operational. It’s going to be a gradual process as more hospitals become ready. We currently have around 30 children's hospitals across all phases, so our pipeline is robust. We just need to get them trained and operational.

That's super helpful. And then lastly for me, Claudia, on the margin side, any commentary there? We're still expecting a continual march up for the balance of this year and going forward. It looks like Q2 came in fairly solid. Are there some further synergies there to derive, both on the cost side as well as the volume side?

Sorry, Jeff, was that a question? I'm sorry.

Yes, it was a question.

On margins, yes, I think we had strong margins in Q2 as we prepared the inventory for the launch of our Aquadex SmartFlow. Looking ahead, those margins might not be as high in the next few quarters. However, as volume increases, we expect to see an improvement in margins. I believe we were at 64%, and I would still estimate that we will be in the low 60s for our margins in the upcoming quarter. Yes. Year-on-year, 2020 versus 2019, for the year, we will see a nice improvement. But like John said, and like I stated in my prepared remarks, Q3 and Q4 will be a bit lower than Q2.

Your next question comes from the line of Anthony Vendetti with Maxim Group.

I was curious if you could discuss how you achieved 34% of your revenues from approximately 8 hospitals treating COVID-19. What impact do you think this has on the marketability of the Aquadex system, especially since it's being utilized during such a crucial time? I understand your strategy has shifted from cardiac care to critical care and pediatrics. Do you believe this shift will accelerate your movement into critical care? Also, as hospitals begin to reopen, do you think this experience will enhance the potential for adoption?

Anthony, this is Nestor. I'll answer that question. It's a very good question. Yes, for sure, all the webinars and education that we have done with our key opinion leaders have helped create an awareness of how effective the Aquadex SmartFlow system has been in treating COVID-19. The reason that these COVID-19 patients come to the ICU is due to respiratory problems, but also multi-organ failures. That happens quite a bit outside the COVID-19 patients that come into the ICU, so we have really strengthened our positioning of the Aquadex system in the ICU setting. Did I answer your question?

Yes, that’s helpful. Can you talk a bit more about the rollout in children's hospitals and the training process? I understand some physicians are involved in the training. Have you managed to conduct that training remotely? How is the training progressing? Regarding sales, even though it’s challenging to access hospitals, have you found ways to reach new hospitals remotely, or is that still difficult given their shifted focus?

Let me address that question in two parts. Firstly, most of the training we have conducted with pediatric facilities has been done remotely. There have been a few occasions where physicians and nurses from pediatric hospitals wanted to meet with us outside the hospital, and in one case, we provided training at a hotel. Secondly, we plan to continue utilizing remote tools, as we have had significant success reaching out to physicians this way. The main consideration is when we conduct the training, and for that, we will need full access to hospitals in order to train the majority of those pediatric centers that are currently waiting for training.

I would like to add a point. In my earlier comments, I mentioned that we have reinitiated use in nine hospitals that had previously stopped using the therapy during Baxter's ownership. These hospitals are already familiar with the product, and the training requirements there are less demanding. Nestor and his team have been very innovative in driving revenue growth by returning to accounts where training is easier to manage and bringing them back online. Achieving a total of 13 hospitals operating during the quarter, even amidst COVID-19, is a significant accomplishment. We will keep finding creative ways to train and get hospitals operational. The great thing is that it doesn't require a hard sales pitch to encourage usage; it’s about demonstrating the value that Aquadex therapy provides. Acceptance is generally swift, followed by training. I sometimes wish we had 50 salespeople and 50 clinical specialists to cover more hospitals faster. Nevertheless, we're making progress with the resources we do have, and I believe the team is delivering very effectively.

Excellent. And then just on the pediatric side, 5 children's hospitals are using it, 6 or 7 have purchased it and are now training. On the 5 that are using it, I know it's approved for pediatric patients greater than 20 kilograms. Any feedback from the hospitals? And I know you're also looking to get approval for pediatric patients less than 20 kilograms. Where is that in terms of trials? Are some of the physicians already using it and having success with pediatric patients less than 20 kilograms?

Well, physicians have the authority and the right to use any medical device that they deem necessary to help their patient. So they're not restricted by the label that we received from the FDA. The restriction is on us that we can't market it for any use off-label. So we only market it for the use in pediatrics 20 kilograms and above. There is a fair amount of usage, though, by physicians in treating patients under 20 kilograms. We initiated this pediatric registry, which we think is going to be significant to not only help physicians understand how it's being used, when it's being used, and where it's being used, but also for us to gather the clinical data that we will need to then look at should we be pursuing or when should we be pursuing pediatrics under 20 kilograms. So that is not a hinder to the physicians to be able to utilize the product to help their patients. It's only a requirement we have in how we market the device.

Understood. Understood. I know it might be hard to, at this point, figure out the timing. But if you had a general idea of when do you think you might try to put together an application to the FDA for less than 20 kilograms? Is that tough to gauge right now as the focus is on COVID-19? Or is that something that's definitely in the works you'll update us on in the future?

Yes. It'd be premature for me to estimate when I think we'd be ready to submit an application to the FDA for that. But we are working on it. We are working on enhancements to help physicians how they're utilizing the product today. We have the registry that's going to help from a clinical standpoint. There are also physician-initiated clinical trials in pediatrics that will be helpful here. So clinical data is needed for how the product is used in pediatrics over 20 kilograms, and we are working on that.

And at this time, there are no further questions. I would like to return the call back to management.

Well, I want to thank you for joining our second quarter 2020 conference call, and I wish you all a great day. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.