Good morning, and welcome to the Nuwellis Inc Second Quarter 2023 Earnings Conference Call. 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] Please note that this event is being recorded. I would now like to turn the conference over to Vivian Cervantes, Investor Relations. Please go ahead, ma'am.

Thank you, Sherry. Thank you, everyone. Good morning. Thank you for joining us to discuss Nuwellis' corporate developments and financial results for the second quarter ended June 30, 2023. In addition to myself, with us today are Nestor Jaramillo, Nuwellis' President and CEO; and Lynn Blake, CFO. We also have Dr. John Jefferies, Nuwellis' Chief Medical Officer, joining us today. At 8:15 a.m. Eastern today, Nuwellis released financial results for the quarter ended June 30, 2023. If you have not received Nuwellis' earnings release, please visit the Investors page on the company's 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 materially differ 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 and subsequent reports. With that, I would now like to turn the call over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to Nuwellis' Second Quarter 2023 Earnings Conference Call. I would like to begin today's call with a recap of the press release that we issued this morning announcing our CFO transition. Effective September 1, Lynn Blake will step down from her role as CFO. We sincerely thank Lynn for her contribution to Nuwellis, her positive impact would be felt long after her departure. Lynn has agreed to consult with the company through March 31, 2024, to ensure a seamless transition. Rob Scott, our current Senior Finance Director will be appointed as Lynn's successor. Rob has been with the company over 10 years and have utmost confidence in his ability to lead the finance organization through the company's next finance -- excuse me, next phase of growth. Rob has very deep knowledge of the business, and I look forward to working with him on the leadership team. In the same vein, I would like to extend a warm welcome to our newest Board member, Mike McCormick, who joined Nuwellis in June. His extensive experience as an executive in the medical technology field would be of great value to the Board, me and our entire organization. Welcome, Mike. Turning to our earnings agenda. On today's call, I will provide an overview of our second quarter performance and we'll give an update on our strategic initiatives. I will also discuss our recent announced supply and collaboration agreement with DaVita and Dr. John Jefferies, our Chief Medical Officer, will add his perspective on the DaVita collaboration as well. Our Chief Financial Officer, Lynn Blake, will then provide detailed commentary on the financial results, before opening the call up for questions, followed by my closing remarks. Turning to our second quarter results. In the second quarter of…

Thank you, Nestor and good morning. We believe there are multiple benefits that will be realized from our collaboration with DaVita. First, the collaboration will increase awareness of the growing number of heart failure patients in the United States. Importantly, this collaboration will improve recognition of a safe and effective therapeutic option in the form of [indiscernible]. Although this therapy has been available for many years, awareness and access continue to be opportunities that are not fully realized. Heart failure continues to increase in incidence and prevalence across all age spectrums, although frequently targeted by industry for research and development, the collective approach to the treatment of volume overload continues to center on the use of oral and intravenous diuretic therapy. Aquadex offers a more predictable and precise approach to treating this very difficult clinical phenotype. With this collaboration the opportunity to increase access will most likely result in more utilization of the therapy. In addition, this pilot leverages expertise from cardiovascular medicine and nephrology, which provides a tolerable vehicle to enhance our understanding of cardiorenal syndrome.

Thank you, Dr. Jefferies. Before turning the call over to Lynn, I would like to reaffirm our business fundamentals, financial discipline and commitment to organizational efficiency. During the quarter, we streamlined our commercial operations to support increased productivity and utilization. We believe our team is now well-designed to continue to increase market penetration of our Aquadex ultrafiltration therapy. Now, I would like to turn the call over to our Chief Financial Officer, Lynn Blake, to discuss our Q2 financial results.

Thank you, Nestor and good morning everyone. Revenue for the second quarter of 2023 was $2.1 million, representing a 14% increase over the first quarter of this year and a 6% decline versus the second quarter of 2022. By segment, second quarter 2023 revenue in heart failure increased approximately 8% over the same period last year, while Critical Care and Pediatric revenue declined approximately 20% and 5%, respectively. As noted earlier, Pediatric revenue increased 72% over the first quarter of 2023 as we saw Pediatric census rebound by the end of the second quarter. And as Nestor mentioned, 14% more patients were treated with the Aquadex therapy than in the same period last year. Gross margin for the quarter was 55.3% of sales, an increase of 730 basis points compared to gross margin of 48% in the prior quarter -- prior year quarter, driven by a combination of favorable sales mix as well as a $100,000 non-cash inventory write-off in the prior year period related to the discontinuation of the distribution agreement. Selling, general, and administrative expenses were $4.7 million in the second quarter of 2023. Compared to the second quarter of 2022, SG&A increased by approximately $400,000. This increase primarily reflects increased legal, audit, and other professional fees in the current quarter. Second quarter R&D expense was $1.5 million, an increase of $400,000 compared to second quarter of 2022. This increase reflects higher spend on our new pediatric CRRT device, as we ramp-up development in preparation for IDE submission in the first quarter of 2024. Total operating expenses were $6.2 million in the quarter, an increase of approximately 15% compared to the second quarter of 2022. Sequentially, total operating expenses decreased about 11%, primarily due to reduced professional fees and lower compensation expense versus the first quarter. Net loss in the quarter was $4.8 million or a loss of $3.55 per common share compared to a net loss of $4.3 million or $40.67 per common share for the same period in 2022. The decrease in the net loss per share in the current year quarter is driven by the year-over-year increase in our weighted average share count. From a liquidity perspective, we ended the second quarter with approximately $9 million of cash and cash equivalents and no debt on the balance sheet, and we had approximately 1.9 million common shares outstanding at June 30th. This concludes our prepared remarks. Operator, we'd now like to open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jeffrey Cohen of Ladenburg Thalmann.

Hi, good morning. How are you?

Good morning Jeff.

Good morning Jeff.

So, just a couple of questions from our end. I guess, first the -- any commentary specific to the Critical Care division for the quarter, down 20% year-over-year? Is it onetime in nature, or any contributing factors that we should be aware of?

Yes. Good question, Jeff. I believe that the decline in Critical Care has a lot to do with our sales of consoles, opening new accounts and also increasing what we call penetration in our current accounts. As I mentioned before, we're still seeing some of the lingering effects of the capital expenditure of hospitals.

Got it. Okay. That's helpful. Can you talk a little bit about the commercial team now versus last quarter? You talked about some streamlining that was done. Could you elaborate a bit on that for us? Thank you.

Yes, of course. We consolidated three territories because we felt that it was more efficient and more productive to consolidate these territories, they were close in proximity. We had a very good sales reps and clinical specialists covering those -- after the consolidation -- and we feel that this is going to be a more efficient way for us to provide clinical support to these territories.

Okay. Got it. And then lastly for us, in any commentary on margins, certainly better than last year, not quite to the level that we were expecting, do you expect that to come back a little bit in your favor over the back half of the year, or should we kind of meet our estimates for the back half to match up with the front half?

Yes. So the year-over-year improvement was roughly half driven by favorable mix in higher disposable sales and about half by the write-off of the -- write-off I mentioned in the prior year quarter, which was bought $100,000. Sequentially, we would expect modest improvement in the second half of the year along with improved volumes. Somewhat dependent, however, on mix of disposables and consoles because we also expect higher console sales in the second half of the year. So, I would say modest improvement sequentially.

Okay. Got it. That does help. Thank for taking our questions.

Thank you, Jeff.

The next question is from Anthony Vendetti of Maxim Group.

Thank you. Before I ask a couple of questions about the DaVita agreement. Can we just talk about the -- I don't know if you gave the number, but how many Aquadex systems were sold or reactivated this quarter?

We have activated -- reactivated three accounts, and we have opened two new accounts in the first half of this year.

Okay. So reactivate three, opened two new, okay. And then obviously, the DaVita agreement should definitely help drive utilization. Is there anything else in the interim that the company is doing differently this year versus last year to drive increased utilization of the current systems that are installed?

Well, in addition to DaVita that we expect that to have an important increase in the utilization, we have the clinical data that has come out in the last seven months in peer-reviewed journals. That has driving a lot of the utilization, especially in the heart failure segment. We expect a few more publications the second half of this year in critical care, cardiac surgery specific. And we expect those publications to continue driving utilization.

Okay, great. And then just a little more on the DaVita agreement. There's select markets that you're going to roll this out into -- have those been identified? And then any color on how, once it's been rolled out into those select markets what's the time frame if there has been one established to roll it out into other territories?

Yes, we have identified a handful of centers where we where DaVita has good presence and so do Nuwellis. And this is the ideal account for us to start the pilot. We are right now in conversations with them. There is a lot of steps before we start having patients treated in the multi-treatment rooms in DaVita's hospital accounts. And we expect to start treating patients in November of this year.

In November of this year. Okay, great. And then just on the cash burn and, is there any, I know you've cut costs but are there any other costs that you think can be cut to control the cash burn or do you feel like at this point know, the company is as lean and at its right size as could be at this point?

You know, there is always ways to cut more expenses, but we're playing a balance between cutting expenses and our future. We're investing significant dollars in our reverse trial, multi-center randomized trial, as well as in the development of the pediatric device. We have also streamlined our operations here in the home office. So with those changes and the consolidation of view of the territories, we believe that we are well positioned to have an efficient organization as well as prolong our runway.

Anthony, I'll just add, we have had high professional fees in the first half of the year associated with a number of activities, including negotiation of the Zavita agreement, as you would expect. So we would expect, I expect lower professional fees overall in the second half of the year as well.

Okay, great. That's helpful. All right, thanks, Nestor. Thanks, Lynn.

Thank you, Anthony.

Our next question is from Brooks O'Neil of Lake Street Capital Markets.

Good morning, everyone. So I'll just follow on with Anthony's questions a little bit. It strikes me, I guess, that the DaVita opportunity is really substantial for you guys, assuming they get engaged in really promoting the product. So what are your realistic expectations for what impact the DaVita agreement can have? And you said, I think to Anthony, that they're going to start selling in November. But what's sort of the timeframe in which you expect some impact. And are we thinking this could be a meaningful inflection for the revenues at the company, or are you -- would you put more eggs in the basket of the REVERSE trial or the pediatric device?

Well, let me see, if I can unwind the three points that you were trying to make there.

Yeah. Okay.

First of all, I do believe that this is going to be an inflection point for us. Their sales organization is four times the size of ours. They have a lot more accounts on the contracts. And so they have a very mature and extensive clinical team. Regarding the expectations, that's what we are doing in the pilot. We're going to learn a great deal during the pilot, which has already started, as I mentioned before. And the pilot will last until May of next year. That's the time that we have given the pilot to be successful and also to learn a lot about what is the quantification of this potential collaboration. Did I answer all?

Okay. Yeah. You clearly.

For REVERSE, I am going to add as well. So thinking about the uplift in revenue trajectory, as Nestor said, the pilot goes through most of the first half of next year. I think the second half of next year could be a significant uplift once commercialization starts. And a factor in that as we mentioned in the call we're continuing to really see headwinds from hospital capital purchase cycle. And we're not alone in that. And in this model, we sell the product to DaVita. DaVita doesn't have to sell the products. They're just offering a treatment across their centers is the vision. So, that will also be a really a tailwind for us to have around that capital cycle.

Sure. I mean, not to beat a dead horse, I know, I've probably asked about this overtime. But every time I think about this situation, I think, unless I really don't understand the clawbacks to hospitals and other providers relative to hospital readmissions to me, this seems like a no-brainer for a hospital that's dealing with heart failure patients could be dealing with them in and an outpatient setting, could eliminate or reduce hospital readmissions related to fluid overload. And yet, even with all the things you've been doing, it seems like getting traction it's hard. And I just would love any insight you can offer in terms of what preventing these hospitals from being what seems fairly logical and obvious to me.

Yes. No, we totally agree with you, Brooks. The ways that this technology is working have a significant clinical and economic impact to patients, providers as well as hospitals. We need to be patient, because in med tech, as you know very well, clinical evidence is very important. And we have received a lot of publications in the last seven months but the un-clinical data for us is going to be the REVERSE trial. And that's why we continue to conduct that trial, spend resources in the trial to get that information that we need. And also, in the same time, we continue to work on reimbursement and try to -- and work towards getting this therapy in the guidelines. So that's, kind of, the path that we are taking and we continue to be focused to make this therapy the standard of care.

All right. I believe it should be…

I was just going to say that it's not easy to change the trajectory of medicine when most of these patients, as Dr. Jefferies has mentioned, have been treated with oral and intravenous diuretics despite the fact that there has been a lot of technology available for more predictable ways to remove fluid from patients that are suffering from fluid overload.

I get that. I mean, is the data still the same that it was a few years ago that heart failure and fluid overload is the number one cause of hospital readmissions across every area of medicine today.

Yes. We believe that, that is what the data is showing that of the million of heart failure hospitalizations, 90% of them are there due to the symptoms of fluid overload. And Brooks our method is working. We increased the number of patients that are treated with Aquadex by 14% over second quarter of last year. So we continue to increase the utilization, the number of patients treated, and that is because of the clinical data that we have provided to the physicians.

That's good. All right. I continue to believe

Yeah, continue believing, Brooks.

Right. Thank you.

Thank you, Brooks.

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Jaramillo for any closing remarks.

Well, thank you, operator. In conclusion, I want to reiterate how excited I am about our future. Our new collaboration with DaVita, the growing body of clinical evidence and the pediatric product pipeline all supports our efforts to make the Aquadex ultrafiltration therapy, the new standard of care and available to fluid overload patients resistant to diuretics, which today is the current standard of care. On September 21st of next month, Nuwellis will be participating in a fireside chat at the virtual Gilmartin Group Emerging Growth Showcase. Live and archive access will be available on the Investors section of our website. As we conclude our call, I would like to thank all our stakeholders, as well as employees, stockholders, physicians, nurses, patients and healthcare workers in the field. Without you, we would not be able to achieve key advances in transforming the lives of patients suffering from fluid overload. Thank you for your ongoing engagement and support.

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