Nuwellis, Inc. (NUWE) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the CHF Solutions Earnings Conference Call for the Fourth Quarter Ended December 31st, 2017. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 this call will be available approximately one hour after the end of the call. I would now like to turn the call over to Scott Gordon, President of CORE IR, the Company’s Investor Relations firm. Please go ahead, sir.

Thank you, Tekia. And thank you for joining today’s conference call to discuss CHF Solutions corporate developments and financial results for the fourth quarter ended December 31st, 2017. With us today are John Erb, the Company’s CEO and Chairman of the Board; Claudia Drayton, the Company’s CFO; and Jim Breidenstein, the Company’s Chief Commercial Officer. At 8 am Eastern Time today, CHF Solutions released financial results for the quarter ended December 31, 2017. 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. 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 not be able to raise the funds necessary for the development and commercialization of its products, that the Company may not be able to commercialize its products successfully, that the Company may not be able to successfully integrate acquired businesses, that the Company may not realize anticipated synergies and benefits from acquired businesses 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 and those discussions regarding risk factors as well as a discussion of forward-looking statements in the 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. John?

Thank you, Scott, and good morning, everyone. Welcome to our fourth quarter 2017 earnings call and corporate update. CHF Solutions’ mission is to improve the quality of life for people suffering from fluid overload primarily associated with heart failure and related conditions. We provide healthcare professionals with a sophisticated, yet easy to use mechanical pump and filtration system to remove excess fluid. We believe that our technology will provide a competitive advantage in the fluid management market by providing an effective solution for decongestion and reducing the cost of care relative to other treatment alternatives. I would like to remind you that the Aquadex FlexFlow system consists of three primary components, the console pump, which has a $31,000 list price; a one-time use disposable blood circuit set with a list price of $980; and a small dual-lumen peripheral catheter that simultaneously withdraws blood and returns filtered blood to the patient’s arm. Aquadex is a unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy. Ultrafiltration is a process that removes water and process that removes water and salt from a patient in a manner similar to how the kidney functions. Fluid overload is a condition that is prevalent in heart failure patients, which can lead to decompensation resulting in lengthy and costly hospitalizations. There are over 1 million patients hospitalized per year in the U.S. for acute heart failure and approximately 90% of these patients present with symptoms of fluid overload. Aquadex has been shown in randomized controlled clinical trials to remove more fluid than diuretics and to reduce repeat hospitalizations. Before reviewing our fourth quarter achievements, I would like to provide a short review of 2017. 2017 was a year of strong growth for CHF Solutions as we continued to offer improved outcomes against the standard-of-care for heart failure patients suffering from fluid overload. Our commercialization activity and investment in sales and marketing is key to our strategy that has been gaited by our need to raise cash. By the beginning of the second quarter of 2017, we raised a bit over $9 million, enough cash to finance our operations through 2017. In the second quarter, we added our Chief Commercial Officer, Jim Breidenstein, who hit the ground running hard to enhance our commercialization strategy and build the U.S. direct sales force. He quickly identified hospitals with the largest heart failure admission statistics to geographically target new sales territories and began a process to identifying needed new marketing materials. Also in the second quarter of 2017, Stanford University received approval from the FDA to begin a clinical trial using our Aquadex system to treat pediatric patients. In the third quarter of 2017, we initiated our international commercialization strategy with the signing of a distributor -- a distribution agreement with APC Cardiovascular to service the United Kingdom. During that time, Jim hired six experienced sales reps to expand our U.S. direct sales force to 10 territories while he transitioned the manufacturing equipment from Baxter International to our facility in Eden Prairie, Minnesota, successfully commissioned the clean room and completed validation builds. We are pleased with the results achieved in the fourth quarter of 2017, the result of our consistent execution of our strategy. During the quarter, we made important progress on many fronts. First, we achieved double-digit revenue growth with an 11.4% increase in Q4 2017 over Q4 2016. We believe our revenue growth was the result of our deep account penetration program which focuses on increasing the penetration in our largest hospital accounts by expanding utilization of the Aquadex FlexFlow system in multiple locations with multiple physicians in each hospital. We have growing evidence of our deep account penetration program working in several sales territories, particularly our largest territories. Our Southeast territory has continued to be our strongest with revenue growth going from 100K in the third quarter of 2017 to about 300K in the fourth quarter. We ended the fourth quarter with 10 U.S. sales territories. And as recently announced, we added three experienced clinical specialists in February of 2018, which expands our U.S. commercialization team to 17, including sales management. The field clinical team will enhance sales operations by working with doctors and nurses to optimize the use of the Company’s Aquadex FlexFlow device in patients suffering from fluid overload who have failed diuretic therapy. The Company’s clinical specialists will be based out of New York City, Cleveland, Tampa, Charlotte, and Chicago and will support the field sales staff nationwide. Also in the fourth quarter, we continued to expand our international business with the addition of TransMedic Plc, a new Southeast Asia distributor. We are actively working with TransMedic to clear the regulatory pathway to sell our products in Singapore, Hong Kong and Thailand. Given our expanded U.S. and international commercialization, we anticipate accelerated sales growth and penetration rates as we continue to actively position ourselves in the market as the provider of ultrafiltration products for the cardiologists to remove excess fluid from their fluid overloaded in heart failure patients. CHF Solutions continues to be at the forefront of fluid management and heart failure, spearheading the growing awareness of the issues with IV diuretic therapy and the value of ultrafiltration as an opportunity to improve clinical outcomes, reduce re-hospitalization rates and alleviating major expense from the healthcare system. In addition, during the fourth quarter, the peer-reviewed publication, Heart Failure Reviews, released a comprehensive meta-analysis evaluating the role of ultrafiltration in reducing hospital readmissions in acute decompensated heart failure patients. The positive results of this meta analysis, which included CHF Solutions; Aquadex FlexFlow system are consistent with previous publications that demonstrate the importance of considering ultrafiltration as an alternative therapy for a diuretic resistant acute decompensated heart failure patients suffering from fluid overload. Nine studies with the total of 820 patients were included in the analysis. The analysis showed a reduction in cumulative heart failure hospital readmissions in ultrafiltration patients, a significant reduction in heart failure readmissions at 90 days for patients treated with ultrafiltration, a significantly higher fluid removal and weight loss in ultrafiltration patients, and no difference in renal or cardiovascular outcomes. This data suggests the advantage of ultrafiltration over conventional diuretic lies in the fluid removal, sodium clearance and prevention of the neurohormonal activation. Recent evidence also suggest that rapidly removal of isotonic fluid with ultrafiltration has a high correlation to the reduction in congestive symptoms, sustained heart failure stabilization, reduced diuretic requirements and reduced hospital admissions. The study concluded that ultrafiltration has a potential to provide extended symptom free days, which may reduce overall healthcare costs. On the manufacturing front, our manufacturing implementation has gone very well. During the third quarter, we transitioned the manufacturing equipment from Baxter to our facility in Eden Prairie, Minnesota, successfully commissioned the clean room and completed validation builds. In Q4, we began manufacturing both consoles and blood filter circuits in our facility, now building our own finished goods inventory. We expect the in-house manufacturing capability to have a favorable impact on our gross margins as it will alleviate the market over standard costs charged by Baxter for manufacturing product for us. The timing and magnitude of gross margin improvements will depend on exhausting our inventory of finished goods produced by Baxter later in the year and our volumes and manufacturing capacity utilization beginning in 2018. In late November, we announced the closing and an underwritten public offering of convertible preferred stock with warrants for gross proceeds of $18 million. The use of funds will include continuing our important investment in our commercialization strategy with adding additional sales territories, clinical specialists, and marketing personnel. We also have several product enhancements in the pipeline to further enhance the effectiveness of our ultrafiltration therapy. Looking ahead, we continue to fine tune growth strategies to optimize a significant opportunity to impact both improved clinical outcomes and healthcare cost reductions by giving healthcare providers an option to diuretics. We are developing and refining our strategic focus to demonstrate a strong business model by driving revenue. Growing revenue is a key metric employees, shareholders and potential investors will use to judge our performance. In addition to revenue’s contribution to funding operations, revenue growth is the most demonstrative metric to manifest a successful business turnaround. Management has identified five critical factors to help drive revenue. One, commercial execution; two, enhance product offerings; three, demonstrate health economic advantages; four, provide new clinical evidence; and five, increase partnerships with key opinion leading physicians. I will now turn the call over to Claudia who can walk you through our Q4 2017 results and financial details. Following that, I will provide some closing comments and will open the call to questions.

Thanks, John. Good morning, everyone. Turning to the P&L. Revenue for the fourth quarter was $831,000, a growth of 11.4% over the fourth quarter of 2016. For the year 2017, revenue totaled $3.6 million and grew by 12.4% versus the prior year on a pro forma basis. Our cost of goods sold reflected prices paid for the finished goods we purchased from Baxter under the manufacturing and services agreement we signed at the time of acquisition. Under this pricing structure, our standard margins are around the mid-60s. As previously announced, in the fourth quarter of 2017, we completed the manufacturing transfer to in-house operations with the completion of our first production build. Included in our cost of sales are the start-up manufacturing costs related to this manufacturing transition. We expect that the margin benefits from bringing manufacturing in-house will begin to materialize later in 2018 as we consume the Baxter manufacturing units and our own internal production volumes and efficiencies increase. In terms of other operating expenses for the fourth quarter, they totaled $7.1 million versus $3.3 million in the fourth quarter of 2016. In the fourth quarter of 2017, we recorded a non-cash write-off of our intangible assets and goodwill totaling $4 million. This non-cash write-off was the outcome of the annual impairment review we performed every year during the fourth year. As part of this evaluation, we compare the fair value of our net assets to their book value. The fair value was based primarily on risk-adjusted discounted cash flow projections and the market valuation of the Company’s common shares versus the recorded book value of the Company’s assets and liabilities. This non-cash write-off reflects the amount by which the book value of our net assets exceeded the calculated fair values. Excluding this non-cash write-off, other operating expenses comprised of SG&A and R&D expenses remained flat in the fourth quarter of 2017 and 2016 at $3.3 million. In 2017, our continued investment in our sales organization was offset by decreases in administrative costs. The net loss for the fourth quarter was $7.1 million or $3.2 million excluding the non-cash write-off of intangible assets and goodwill compared to a net loss of $2.9 million for the fourth quarter of 2016. Regarding our liquidity position, our operating cash utilization for the year was $11.9 million, an improvement of 27% from 2016. During the fourth quarter, we completed an underwritten public offering that provided us with net cash proceeds of approximately $16.2 million. We ended the quarter with approximately $15.6 million in cash in cash equivalents and no debt. In terms of modeling 2018, we expect revenue to continue to accelerate and expect that the efforts of our newly hired field personnel and our actions to revitalize the business will continue to show progress. Regarding our gross margins, they will continue to reflect the inventory pricing paid to Baxter and manufacturing start-up costs until mid-2018, as we sell through the existing inventory and ramp up our manufacturing in-house. Regarding our operating expenses, we expect to continue to make ongoing investments in our sales force as well as product improvements. I will now turn the call back over to John.

Thank you, Claudia. Before opening the call for questions, let me reiterate that we continue to be very optimistic about our future. The key milestones achieved and all the behind the scenes work executed during the year are a direct result of the tireless effort and determination of our highly capable and committed team. The achievements of this past year set us in good stead to continue progressing our strategy in 2018 including the continued expansion of our U.S. sales force, continued growth of our international commercialization as well as the R&D of new product enhancements for Aquadex product franchise. We will continue to provide you milestones to track our progress over the coming quarters. Operator, please open the call to questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jeffrey Cohen of Ladenburg Thalmann. Your line is now open.

Hi. This is actually Destiny on for Jeff. How are you guys doing? Good morning.

Doing well. Thank you. Good to hear from you.

Yes. I just had a couple of quick question. Could you remind us how many accounts you currently have, and of those accounts, how many have more than one system?

Let me direct that to Jim Breidenstein, our Chief Commercial Officer.

Certainly, John, thanks. Good morning, Destiny. Currently, as we conclude Q4, we have 120 active accounts. Active is defined as ordering our disposable products. We have approximately 170 accounts out there that exist in the marketplace as we end Q4 that have ordered technical services as well as disposable product. On average, Destiny, from acquiring the business from Baxter, we feel on average that our accounts have 1.5 to 1.8 accounts -- or I am sorry, consoles per account. We feel that there’s approximately upwards of 500 consoles across the country at nearly 300 facilities.

And just one follow-on, gentlemen. The educational materials that you are now using for marketing, are they aimed more for accounts -- existing accounts or are you also using them to acquire new accounts?

Yes. That’s a great question. Thanks for asking it. It’s both. And the reason it’s both is that our current customers and our current operators need some guidance as to best optimize the therapy because it’s a tough to treat patient population. So, what we are doing is relying a tremendous amount on our service and support teams, our sales reps as well as our clinical specialists to educate and quite frankly re-educate our current customer base. And as we continue to add accounts, every single quarter adding over 50 accounts, last year, we know that the best way and the most proper way to launch these accounts is through thorough education. So, short answer Destiny is that these tools and aids will be used at both current customers and our ever-growing and expanding customer base.

Okay, got it. And I just want to clarify, the clinical specialists are typically the individuals facilitating these education materials or is there someone else that’s doing that as well in your sales force?

Yes. Again, the answer to that is well, it’s both. We have three clinical specialists that are highly trained in clinical nursing and many of them have been bedside experienced for many years. And they also will be leading the charge to further educate and use these materials. However, we also have 10 highly, highly trained sales personnel that are also very capable and confident speaking the clinical language, if you will, to further educate the RNs as well as the physicians on the appropriate use of the device. So, both, the reps and the clinicals will be utilizing the technology and doing the trainings.

I just want to take it for a moment and ask about the timeline for the clinical trial or study that’s being carried out for Houston [Ph] Children? Do you have any clarity on that at the moment?

I don’t personally, when you say Houston Children, but John, can you reflect to that or may be Destiny means Stanford?

Yes. I think, she is talking about Stanford trial.

Yes. That’s right.

So, they are beginning to enroll. And as far as how long enrollment will take, I don’t think they’ve actually communicated that to us. I think, it was -- early on they talked about 12 months to enroll. But Jim, I don’t know if you have any more recent update?

No. I think that’s appropriate, John. They are preparing to launch the trial and we should be hearing from them soon. But, as of today, Destiny, that’s the latest and greatest information that we have.

Okay, got it. And last question, I’m just curious if you could offer a little more color on the product advancements that you have?

Well, we -- actually, the product we inherit from Baxter had not had a lot of engineering support for some period of time. And we have found opportunities here for initially some minor improvements in the console and how the console functions. One of the nice things is that the console has been very robust and the initial design that was that was put together is still working exceptionally well. But, just in some of the algorithms how it handles the blood flow, those are improvements. We are also right now working on a new designed catheter. Again, the catheter that currently has been marketed is an older design. And there’s a lot of new materials available in catheter design that we are implementing in the new catheter. We anticipate having your catheter on the market before the end of the year.

Thank you. [Operator Instructions] And I’m showing no further questions in queue at this time. I would like to turn the conference back over to John Erb for closing remarks.

Thank you, operator. I would just like to thank everybody for joining our fourth quarter conference call, and I wish you all have a really good day. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may now disconnect. Everyone have a great day.