Nuwellis, Inc. (NUWE) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the CHF Solutions’ Earnings Conference Call for the Second Quarter ended June 30, 2018. All participants will be in listen-only mode. [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 the call will be available approximately 1 hour after the end of the call. I would now like to turn the conference over to Scott Gordon, President of CORE IR the company’s Investor Relations firm. Please go ahead, sir.

Thank you, Armani and thank you for joining today’s conference call to discuss CHF Solutions’ corporate developments and financial results for the second quarter ended June 30, 2018. With us today are John Erb, the company’s CEO and Chairman of the Board; Claudia Drayton, the company’s CFO. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2018. 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 maybe unable to grow revenue in future quarters; that the company may be unable to execute in its commercialization strategy; the possibility that it maybe unable to raise the funds necessary for the 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 the discussion 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. John?

Thank you, Scott and good morning everyone. Welcome to our second quarter 2018 earnings call and corporate update. CHF Solutions’ vision is to be the global market leader in fluid management with solutions to improve patient quality of life. We provide healthcare professionals with a sophisticated yet easy to use mechanical pump and filtration system to address fluid overload primarily associated with heart failure and related conditions when diuretics have failed. Our technology, the Aquadex FlexFlow system provides a competitive advantage in fluid management offers an effective and clinically proven solution for decongestion and may assist in reducing hospital readmissions and length of stay upon readmission providing our customers an economic solution to reduce the cost of care in this clinically challenging patient population. We are very pleased with having now achieved five consecutive quarters of double digit year-over-year revenue growth. In Q2 of 2018, we achieved significant revenue growth with a 27% increase over the second quarter of 2017 and a 6% increase over the first quarter of 2018. We believe our revenue growth is a result of successful execution of our commercialization strategy which includes adding marketing strength to the organization, adding appropriately scalable sales territories, adding dedicated clinical specialists to the field based team and continuing our focus on increasing the utilization of the Aquadex FlexFlow system – within our currency – within our current accounts as well as expand into brand new accounts across the U.S. We started the second quarter with 10 U.S. sales territories and expanded our commercial team during the quarter by hiring three season sales representatives and increasing our territories to 13. Those territories were selected by identifying the largest heart failure admission statistics for hospitals specific to each territory. Over the last 12 months, we have not only added to our sales team, but have also improved the quality of our existing sales team and have made changes where necessary. As a result, our sales team is early in their tenure with 60% of our reps in their territories for only four months. As announced in Q1, we expanded our field clinical specialist team adding three experienced heart failure nurses to the field sales force, also with only four months tenure. The field clinical team nicely complements our field sales team with focused efforts on working directly with physicians and nurses to effectively train and optimize the use of the company’s Aquadex FlexFlow system for patients suffering from fluid overload, who have failed diuretic therapy. With the recent departure of Jim Breidenstein, Chief Commercial Officer, we are making a few important changes to our sales organization as we do not plan to replace Jim at this time. Our Senior Director of Sales, Richard Roberts and our Vice President of Marketing, Carrie Powers will report directly to me. In addition, the clinical specialist team will now report to marketing. These changes will better align the organization to focus on commercial execution and the clinical training needed to further drive adoption with our key hospitals and hospital systems. We will soon be implementing a national accounts initiative to access the larger hospital systems, group purchasing organizations and integrated delivery networks. Our VP of Marketing and our marketing team have created and delivered impactful marketing education materials to our sales team with a strong focus on the healthcare hospital cost analysis that was presented at the Annual ISPOR Conference in May. The ISPOR data showed a cost savings of $3,975 per patient at 90 days when treated with ultrafiltration versus diuretics despite higher upfront costs. The cost savings resulted from reduced hospital costs, from reduced readmission rates and duration over a 90-day period. The average U.S. hospital has approximately 600 heart failure admissions per year. An average of $3,975 per admission represents a potential savings of over $2 million per year for the average hospital. On the international side, we continue to make important progress by entering into distribution agreements in Spain and Italy, expanding distribution into Hong Kong and partnering with our international logistics warehousing firm to begin distribution in Germany. During the quarter, we also announced that our distributors in Italy and Asia had placed their initial inventory orders and are now supplying Aquadex product to their hospital customers. We also recently announced the Department of Veterans Affairs awarded an up to $6.5 million blanket purchase agreement to CHF Solutions to supply the Aquadex FlexFlow system for outpatient services at the James A. Haley VA Medical Center in Tampa, Florida. The blanket purchase agreement is for an up to a 5 year period with up to $1.3 million in purchases per year and allows but does not obligate the Tampa VA to purchase inventory from us. This expansion with the VAMC Tampa to use the Aquadex system in the outpatient setting provides another option for managing fluid in heart failure patients without requiring an admission to the hospital. Given our expanded worldwide commercialization efforts, we anticipate accelerated sales growth by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists and emergency department physicians to remove excess fluid from their fluid overload of patients when diuretics have failed. We have been pursuing several opportunities to provide a diagnostic tool that will accompany our Aquadex system and provide important monitoring capabilities to help our physicians and nurses in the early identification of a fluid overloaded patient assist in determining when to start therapy and when to stop ultrafiltration. We believe by offering this diagnostic capability it will provide clinicians a valuable tool to assist in guiding therapy, which will allow for quicker adoption and an increase in the utilization of our Aquadex system. We expect to have further news on this front soon. Following the end of the quarter, we raise an additional $5.4 million of gross proceeds in a confidentially marketed public offering of our common stock. CHF Solutions continues to be at the forefront of fluid management in heart failure when diuretics have failed spearheading the growing awareness of the current challenges faced with using IV diuretic therapy only and thereby introducing the value of ultrafiltration treatment as an opportunity to improve clinical outcomes, reduce hospitalization rates and reduce a major expense to the healthcare system. I will now turn the call over to Claudia who can walk you through our Q2 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 second quarter was $1.1 million, a growth of 27% over the second quarter of 2017 and 6% growth sequentially from Q1 2018. Total cost and expenses for the quarter were $5.3 million versus $3.4 million in the second quarter of last year. The major increases were driven by our cost of goods and my investments in selling and marketing expenses. Our cost of goods sold reflected prices paid for the finished goods that we purchased from Baxter under the manufacturing and services agreement we signed at the time of acquisition. The pricing includes a markup of 60% over the cost of Baxter incurred to manufacture the product. Additionally, cost of sales includes startup manufacturing costs associated with the transition of the manufacturing activities to our facilities in Eden Prairie, Minnesota. As we have previously announced at the end of 2017, we completed the manufacturing transfer to in-house operations with the completion of our first production mills. We expect to start selling our own manufactured inventory late in 2018 or early 2019. At that time, we expect to begin to see the margin benefits from eliminating the Baxter manufacturing markups. In later quarters, as our internal production volumes and efficiencies increase, we expect to see additional margin improvement. In terms of increases in selling and marketing expenses, the increases were driven mainly by the investments we have made in our sales and marketing organization over the last 12 months, including adding sales territories, clinical support and sales and marketing leadership. We are also making modest investments in R&D mainly to improve the functionality of our products. We have no significant non-operating income or expense items in the second quarter of 2018 or 2017. The net loss for the quarter was $4.2 million compared to a net loss in the second quarter of 2017 of $2.5 million. Regarding our liquidity position, we have used $8.5 million in cash in the first 6 months of the year to finance operations, an increase of $2.8 million for the first 6 months of 2017. The increase in cash utilization was driven by the investments in our sales and marketing organization, the transition to in-house manufacturing and investments in working capital primarily inventory. We ended the quarter with approximately $7 million in cash and cash equivalents and no debt. Prior to the end of the quarter, we announced the pricing of a $5.4 million confidentially marketed underwritten public offering that closed after the end of the quarter on July 3, 2018. Net proceeds from this offering after deducting underwriter’s discounts and commissions and operating expenses are approximately $4.7 million. In terms of modeling the remainder of 2018, we expect to continue to grow revenue both sequentially and versus the prior year. We expect that our sales force – as our sales force gains tenure in their marketing programs, tools and education programs we have implemented in the last few months begin to have an impact, our revenue growth will accelerate. Regarding our gross margins, it will continue to reflect the inventory pricing paid to Baxter and manufacturing startup cost until late 2018 as we continued to sell through the existing inventory and ramp-up our own manufacturing and inventory in-house. Regarding our operating expenses, we expect to continue to make ongoing investments in our sales force as well as in product improvements. I will now turn the call back over to John.

Thanks Claudia. Before opening the call for questions, let me reiterate that we continue to be optimistic about our future. Looking ahead, we continue to fine tune growth strategies to optimize significant opportunities, to improve clinical outcomes and healthcare cost reduction by giving healthcare providers a viable and clinically proven alternative to diuretics. We continued to develop and refine our focus to demonstrate a strong business model by driving revenue which is the key metric our employees, shareholders and potential investors were used to measure our performance. Our organizational enhancements of this past quarter stand us in good stead to continue progressing our strategy in 2018, including the continued expansion of our U.S. sales force, continued growth in our international commercialization as well as the R&D of new product enhancements for our Aquadex product portfolio. CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing proven solutions to improve the quality of life for these patients and the clinicians who have the passion to treat them. Operator, please open the call for questions.

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

Good morning John and Claudia. This is actually Destiny on for Jeff, how are you?

Good Destiny.

Good. I just have a couple of quick questions and let me start with some of the marketing question, I believe last you spoke on the Q1 call, you had introduced some new marketing materials, I mean educational materials, I am just curious are you utilizing those internationally as well or is that more just for domestic sales force and account?

It’s primarily for the domestic sales force. There certainly are parts of that that are applicable internationally which we are sharing with our international distributors. But a lot of the emphasis right now is on the ISPOR data showing that the health economic savings is considerable. A lot of the data we are now going hospital account by hospital account and demonstrating to them their specific statistics on their readmission rates and their costs and how much that can be reduced by using ultrafiltration has been pretty effective to this point.

Okay, got it. And thinking of international activity, I am just curious if you are getting any feedback from distributors on reception, utilization and average sales cycle for them, are you getting any feedback from them at all?

We are getting feedback. It’s a little early. As you know, we bring them online, they build their inventory. They get out to the accounts that have previously used Aquadex and getting them restarted. There is a process, where we bring their consoles back in for servicing, recalibration and they get a back out to them. So there is a bit of a startup that they are going through now. So a little early to really see trends, but we certainly have distributors that are getting positive input from it being – for it being available again to those international hospital accounts.

Okay, got it. And I am also curious to know if you had noticed any changes in pricing trends in this quarter and do you think you also might recognize some going forward as we are moving to international markets and also expanding domestically?

First, addressing the U.S. market, we have been able to hold our average selling price very near list price and that’s been very consistent. We have not had a need to discount the capital equipment nor discount the circuits that are being purchased. Again, internationally a little early to really give you a good idea around trends there, but I would expect the same situation internationally as we have in the U.S.

Okay. I think that does it for me. Thank you so much for taking the questions.

You’re very welcome, Destiny.

Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to John Erb for closing remarks.

Well, I want to thank you all for joining our second quarter 2018 conference call and wish you all a really good day. Thank you.