Nuwellis, Inc. Q1 FY2024 Earnings Call

Good day, and welcome to the Nuwellis First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Vivian Cervantes, Investor Relations with Gilmartin Group.

Thank you, Cindy. Good morning, everyone. Thank you for joining us in today's conference call to discuss Nuwellis' corporate development and financial results for the first quarter ended March 31, 2024. In addition to myself, with us today are Nestor Jaramillo, Nuwellis' President and CEO; as well as Rob Scott, CFO. At 8:00 a.m. Eastern today, Nuwellis released financial results for the first quarter ended March 31, 2024. If you have not received Nuwellis' earnings release, please visit the company's investor page on its website. During this conference call, the company will be making forward-looking statements. All forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and the company assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to the cautionary statements and discussion of risks in the company's filings with the SEC, including the latest 10-K. With that, I'd like to now turn the call over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to Nuwellis First Quarter 2024 Earnings Conference Call. On today's call, I will provide an overview of our first quarter performance and give an update on our strategic initiatives. Our Chief Financial Officer, Rob Scott, will then provide detailed commentary on the financial results before opening up the call for questions, followed by my closing remarks. Nuwellis generated $1.9 million in revenue for the first quarter of 2024, a 2% increase year-over-year driven by our 11% increase in consumable utilization. Our pediatric customer category once again led the way with 40% revenue growth, driven by a 54% increase in consumable utilization. We continue to grow our pediatric customer category, acquiring 5 new accounts over the past 12 months for a total of 40 accounts compared to 10 accounts in 2019 prior to FDA clearance. Revenue in our critical care customer category was flat. However, consumable utilization grew by 9%, and heart failure revenue decreased by 38%, driven by lower utilization and console sales. We continue to see healthy consumable utilization trends signaling strong therapy adoption. Consumable sales in Q1 represented 82% of total revenue, which grew 11% compared to last year. We continue to balance the strong sales of consumables with the unpredictable capital sales cycle in our hospital accounts. Our capital rental program provides an alternative to customers experiencing capital budget constraints with a solution to treat patients with Aquadex. Similar to last year, first quarter capital sales were lower than expected. However, as in the second half of 2023, we expect capital sales to increase throughout the year as our pipeline of new target accounts is robust. We are confident of our growth momentum in 2024 due to the increased awareness of the efficacy of Aquadex, including recent clinical data reported at the Technology and Heart Failure Therapeutics Conference, known as the THT Conference in early March. A delayed-breaking clinical trial session demonstrated that the use of the Aquadex resulted in a clinically and statistically significant reduction in heart failure hospitalizations and heart failure events at 30 days. This new clinical data is the result of our key priority to continue developing strong clinical and economic evidence for using the Aquadex system to treat patients with fluid overload who are unresponsive to diuretics. In addition to the steady organic growth in our base business, we look forward to new product sales in our fast-growing pediatric category. In addition to expanding the utilization of Aquadex, we are progressing our DaVita pilot program, which I will provide more details on next. Now turning to our recent commercial development and expected new product introduction. In February, SeaStar Medical received a humanitarian device extension, or HDE, from the FDA for its selective cytopheretic device, branded QUELimmune, for use in pediatric patients with acute kidney injury due to sepsis or aseptic condition. Nuwellis has exclusive U.S. license and distribution rights, and we have begun commercializing QUELimmune in targeted medical centers by pursuing IRB approvals in 5 accounts while simultaneously engaging in preliminary dialogue with other key pediatric institutions. The unique technology behind QUELimmune has demonstrated a 77% ICU survival rate in children with potentially deadly hyperinflammation. We believe this product will positively impact the patient population for which it serves, and we look forward to providing continued updates as this collaboration progresses. We also continue the development of our pediatric continuous kidney replacement therapy device, branded Vivian. We, along with many pediatric nephrologists, believe this product will positively impact survival and improve the quality of life of neonates and small children with kidney malfunction or those born without kidneys. This device complements SeaStar Medical's QUELimmune device, and we believe these two products together will add meaningful value to our growing portfolio of products for pediatric patients with fluid overload and renal disease. We continue to advance the pilot phase of our supply and collaboration agreement with DaVita. As a reminder, this collaboration allows DaVita and Nuwellis to pilot Aquadex therapy for adult heart failure patients in selected U.S. markets. Pairing Aquadex with DaVita's clinical infrastructure could help accelerate the clinical adoption of ultrafiltration when diuretics are ineffective. We have made introductions in 9 hospitals with very positive results. We look forward to providing more specific information during the quarter. In early April, we announced the launch of ultrafiltration therapy for heart failure patients using the Aquadex at Henry Ford Health as part of our pivotal reverse heart failure clinical study. Based in Michigan, Henry Ford Health is one of the nation's leading academic heart failure centers recognized for clinical excellence in heart failure, heart transplant, and left ventricular assist devices. We are honored to be working with them as their heart failure program is one of the largest in Michigan. Dr. Jennifer Cowger, Head of the heart failure program, will lead the efforts, and I look forward to hearing her findings as the study progresses. We currently have 123 patients involved in the randomized multicenter trial, and Henry Ford is the only site in Michigan offering this study intervention. I'd like to now turn it to Rob to discuss our first quarter financial results.

Thank you, Nestor, and good morning, everyone. Turning to the Q1 financial results. Revenue for the first quarter was $1.9 million, representing a 2% growth over the prior year period driven by an 11% increase in consumables utilization, partially offset by a decrease in console shipments. Our pediatric customer category had the strongest growth in Q1, with a 40% increase year-over-year, driven by a 54% increase in consumables utilization. Critical Care revenue was flat but experienced a 9% increase in consumable sales. Total revenue was offset by a decrease in utilization in heart failure console sales. Gross margin was 64.1% for the first quarter compared to gross margin of 58.4% in the prior year quarter. The margin improvement was primarily driven by higher manufacturing volumes of consumables in the current year period. Selling, general and administrative expenses were $4.6 million in the first quarter, a decrease of 16.1% compared to $5.5 million in the first quarter of 2023. The decrease in SG&A was primarily due to reduced headcount and compensation-related expenses, as well as lower corporate administrative expenses. First quarter research and development expense was $1.3 million compared to $1.4 million in the prior year period. Total operating expenses were $5.9 million in the quarter, a decrease of approximately $1 million compared to the first quarter of 2023. The period-over-period decrease was due to cost-saving measures implemented early in the second half of 2023 and carried forward to the current period as we continue to drive operating efficiencies. We anticipate significant expense reductions approaching 50% through operating efficiency initiatives for the rest of the calendar year. Operating loss in the first quarter was $4.7 million, compared to an operating loss of $5.8 million in the prior year period, resulting in a $1.1 million period-over-period improvement. Net loss attributable to common shareholders in the first quarter was $3.8 million or a loss of $0.60 per share compared to a net loss attributable to common shareholders of $6.5 million or $5.76 per share for the same period in 2023. We ended the first quarter with $1.4 million in cash and cash equivalents and with no debt on the balance sheet. On April 30, Nuwellis closed an underwritten public offering with gross proceeds of $2.7 million before deducting underwriting discounts and commissions related to the offering. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Our first question comes from Anthony Vendetti of Maxim Group.

So, Nestor, I was just curious about the C-Store distribution agreement. You mentioned it on the call. I was just wondering if you could talk about where that's at in terms of are all your salespeople trained on it? Have they started selling it? What’s your expectation on a quarterly basis or by the end of the year for that? And also just talk about the cross-selling opportunities.

We have begun training our personnel, particularly our clinical education specialists. We are focusing on two initial phases, starting with five centers where we are obtaining IRB approvals in line with the HDE requirements. I anticipate that clinical personnel from SeaStar will be heavily involved at these first five sites alongside our own team. Once everyone is trained, we will proceed to the next five centers, which have already been selected. Regarding cross-selling, the opportunity with QUELimmune is promising as we discuss our upcoming technology, as the two devices complement each other well. Our device is specifically designed for pediatric CRRT, while QUELimmune is dedicated to pediatric cytopheretic applications. Together, they will significantly enhance life-saving efforts and improve the quality of life for children and newborns.

Okay, great. Before I ask a few questions about cost reduction, I'd like to discuss your expectation that capital equipment sales will increase over the year. When you make a capital equipment sale, what is the expected annual consumable generation for that equipment? What factors influence that? Could you provide some insight into how the sales process works?

Okay. First of all, I just want to acknowledge that our capital equipment sales have been lumpy, just as we saw in the first part of last year. We're not the only ones with that situation; I saw the earnings release of two companies, GE being one of them, and they reported a very low capital sales due to all the capital constraints that hospitals are facing post-pandemic. The use of consumables per console in a hospital depends a lot on how much utilization in the different specialty units that the hospital is using Aquadex. We have centers like Mount Sinai in New York City or Washington MedStar in Washington, D.C. that treat 20 to 30 patients a month, and this high utilization of the consoles results in 6 to 12 consoles in these institutions. We also have institutions that only have 1 or 2 consoles and they may treat 5 to 10 patients per quarter, as low as per quarter or as high as per month. So, the only driving factor here is how much the doctors are prescribing the therapy to the different patients in the hospital.

Okay, that’s helpful. And switching gears to the cost reduction. I think there was a comment about 50% reduction in costs for this year, in addition to salary reductions and so forth. Were there any programs that you have either scaled back or if not, how did you get to a 50% number?

Well, the three strategic initiatives that we have been mentioning over the years are sales and marketing, reverse heart failure, and Vivian, the pediatric dedicated device. The first two initiatives have not been affected. The third one, Vivian, is in the final phases of development, and the software development is the main hurdle, for which we are using many consultants on software development, and that was the part that was affected the most.

Okay. And then just lastly on the cash. So, $1.4 million at the end of the quarter and $2.7 million was the gross proceeds, I believe, for the offering on April 30. What were the net proceeds of that offering that were added to your balance sheet?

The net proceeds were approximately $2.4 million.

Okay, great. We can try to estimate what the burn rate is per quarter. Internally, with the cost reductions that you're trying to implement, do you have an anticipated cash burn rate for this quarter?

We believe that the net proceeds we received from this last financing will provide enough cash until early fall, which would allow us time to execute on three key milestones that we have communicated. Those three milestones are commercialization of QUELimmune, the SeaStar device, the continuing execution on the DaVita pilot, which we expect to start treating patients soon, and a potential for a reimbursement change in the APC code. Once we execute on those three milestones, we can return to the market for additional financing if necessary.

This concludes our question-and-answer session. I'd like to turn the conference back over to Nestor for some concluding remarks.

We are confident that our growth momentum in 2024, led by increased awareness of the efficacy of Aquadex and increased therapy adoption will result in a strong year, especially as hospital capital expenditure headwinds diminish. In addition, we look forward to new product sales in our fast-growing pediatric category as we commercialize QUELimmune SCD from our exclusive distribution agreement with SeaStar Medical, in addition to expanding the utilization of Aquadex as we progress our DaVita pilot program. I would like to conclude by highlighting the Nuwellis mission, which is to transform the lives of patients suffering from fluid overload. Our Aquadex ultrafiltration therapy is the superior method for removing excess fluid from patients suffering from fluid overload, as demonstrated at the THT conference, and it is our goal to reach as many patients as possible to enhance their quality of life. I want to thank all our stakeholders, Nuwellis employees, stockholders, physicians, nurses, patients, and healthcare workers in the field. Without your support, we would not be able to achieve key advances in transforming the lives of patients suffering from fluid overload. Thank you for your participation and support, and we look forward to a productive 2024.

The conference has now concluded. Thank you for today's presentation. You may now disconnect.