Nuwellis Inc (NUWE) 2018 Q1 法說會逐字稿

Good morning, and welcome to the CHF Solutions Earnings Conference Call for the First Quarter ended March 31, 2018. (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, Tiffany, and thank you for joining today's conference call to discuss CHF Solutions' Corporate Developments and Financial Results for the First Quarter ended March 31, 2018.

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 8:00 a.m. Eastern time today, CHF Solutions released financial results for the quarter ended March 31, 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 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 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 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 the 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.

Please standby, we're having a technical issue.

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Thank you. I apologize for our little snafu, but let me just say thank you, Scott, for the introduction and good morning, to everyone.

Welcome to our first quarter 2018 earnings call and corporate update. CHF Solutions' vision is to be the global market leader in fluid management solutions to improve patient quality of life. We provide health care professionals with a sophisticated yet easy-to-use mechanical pump and filtration system to address food 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 reduces hospital readmissions, which provides our customers an economic solution to reduce the cost of care in this difficult-to-treat patient population.

We're very pleased with having now achieved 4 conservative quarters of double-digit year-over-year revenue growth. Our revenue growth achieved in the first quarter of 2018 is the result of the dedicated execution of our strategy.

In Q1 of 2018, we achieved a significant revenue growth, with 25% increase over the fourth quarter of 2017 and a 15% increase over the first quarter of 2017. 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 to focus on increasing the utilization of the Aquadex FlexFlow System in our largest hospitals.

In the first quarter of this year, we started with 10 U.S. sales territories. Those territories were selected by identifying the largest heart failure admission statistics for hospitals in the specific territory. We statistically expanded -- I'm sorry, we strategically expanded our field clinical specialist team, adding 3 experienced heart field nurses to the field sales force. The field clinical team nicely complements our field sales teams with focused efforts on working directly with doctors and nurses to train and ultimately, optimize the use of the company's Aquadex FlexFlow System in patients suffering from fluid overload who have failed diuretic therapy.

Additionally, we hired a VP of marketing and additional experienced marketing professionals who immediately began to identify and deliver impactful marketing and education materials to our growing sales and clinical field team.

On the international side, we expanded our international commercial strategy by partnering with new distributors in Spain and Italy, who joined our established United Kingdom and Southeast Asia distributors. Given our expended 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, intensive and emergency department positions to remove excess fluid from their patients -- from their fluid overloaded patients when diuretics have failed.

CHF Solutions continues to be at the forefront of fluid management and heart failure, 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 rehospitalization 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 Q1 2018 results and financial details. Following that, I will provide some closing comments, and we'll be open to -- the call to questions.

Thanks, John. Good morning, everyone. Turning to the P&L. Revenue for the first quarter was $1.37 million, a growth of 15% over the first quarter of 2017 and 25% growth sequentially from Q4 2017.

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, which include a markup of 60% over the cost of Baxter incurred to manufacture the product. Additionally, cost of sales include startup manufacturing costs associated with the transition of manufacturing to our facilities in Eden Prairie, Minnesota.

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. 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 internal production volumes and efficiencies increase.

In terms of other operating expenses consisting of SG&A and R&D expenses, they totaled $4.5 million for the quarter versus $2.7 million in the first quarter of 2017. The increase is driven mainly by the investments that we have made in our sales and marketing organization over the last 12 months, including additional sales territories, clinical support and sales and marketing leadership.

In terms of nonoperating expenses, in the first quarter of 2017, we recognized an unrealized gain of $1.4 million related to a change in fair value of our warrant. Those warrants were exercised as part of the warrant exchange that took place in the first quarter of 2017. We did not have nonoperating income or expense items in the first quarter of 2018.

The net loss for the quarter was $4.4 million compared to a net loss in the first quarter of 2017 of $0.9 million or $2.3 million excluding the unrealized gain I mentioned before on the change of fair value of the warrant.

Regarding our liquidity position, we used $5 million to finance operations in the first quarter of 2018, an increase of $3.4 million from the first quarter 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. During the quarter, we completed the final purchase of inventory from Baxter for $1.2 million in accordance with our negotiated agreement.

We ended the quarter with approximately $10.5 million in cash and cash equivalents and no debt. In terms of modeling the remainder of 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 startup 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 in 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. Looking ahead, we continue to fine-tune growth strategies to optimize significant opportunities to improve clinical outcomes and health care cost reduction by giving health care providers a viable and clinically proven alternative to diuretics.

We continue to develop and refine our strategic focus to demonstrate a strong business model by driving revenue, which is the key metric, our employees, shareholders and potential investors will use 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 of our international commercialization as well as the R&D of new product enhancements for our Aquadex product franchise.

Renowned author, Dan Millman, through his character Socrates wrote in the Way of the Peaceful Warrior, "The secret of change is to focus all your energy not on fighting the old but bringing the new." In that spirit, CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing a proven solution to improve the quality of life for these patients, and the clinicians who have the passion to treat them.

Operator, please open the call to questions.

(Operator Instructions) And our first question comes from Jeffrey Cohen from Ladenburg & Thalmann.

Okay, so I just wanted to run through a number of questions. So firstly, John, can you walk me through your -- you said you added 3 into 10 territories, can you just walk me through now the complete size of the commercialization force, number of people out in the field and the territories in totals?

Right. We have 10 sales territories and 4 clinical specialists supporting them. We also have 2 Directors of Sales. So right now, a total team of 16 plus Jim Breidenstein leading it.

Okay, so 17 for the moment. And how does that look as far as -- what would that look like toward the end of the year?

We have budget to add I think 3 more sales territories. We'd like to get them put in place by midyear, and we will also be adding a clinical specialist and potential a National Accounts Director.

Okay. And how are you finding the existing staff? Have you incurred any turnover? Or how does that look?

Well, Jim's done a great job, hiring really some talented folks with strong experience and folks that have done really well in previous medical device sales situations. Jim, I should let you respond to that question just a brief overview of the folks you brought in.

Yes, sure Jeffrey. I'm happy to answer that. The folks that we brought into the organization are senior medical device sales professionals. Many of them have started in the larger Fortune 500-type companies and transitioned through their careers and quite honestly, have earned the right to launch medical device technologies like ours. So they also have a mixture of startup experience to go along with the trainings that they've acquired throughout their careers. We have had, Jeffrey, a little bit of a turnover as expected as you're launching new technologies and fine-tuning the sales model, and quite honestly, the fabric of the people that you bring into the organization, I would deem it a very minor amount, but it has allowed us to fine-tune our hiring profiles as well as we get into the back half of '18 and so on and so forth.

Okay. Super, that's helpful. Claudia, you mentioned, you purchased $1.2 million of inventory to Baxter. So where did that come out of? And I see that your inventory is up now about $1 million from last year to around $2.5 billion (sic) [$2.5 million]? Is that right?

Yes. When we agreed on the final steps to bring manufacturing in-house from Baxter, we agreed to buy the remaining inventory that was with Baxter. And as since you know, it's the raw materials as well as finished goods. So this was all planned as part of that transition.

Okay, got it. The $1.4 million gain on the change of fair value on the warrants on the income statement, you reflected a gain a year ago, Q1, on your income statement, there's no reflection this quarter on the income statement.

Right. We -- those warrants were exercised. Those were warrants that needed to be marked up to fair value. We no longer have warrants that require fair value adjustments, thankfully. Those were exchanged last year in Q1. So we no longer have derivative-type warrants on our balance sheet.

Okay, got it. And then can we talk a little about the OpEx for the balance of the year, $4.5 million, do you see, firstly R&D maintaining this kind of $0.5 million level on a quarterly basis, and then the SG&A, how might that look from the $4 million for the first quarter for the balance of the year? Any insight would be helpful, yes.

Yes, we see a slight uptick on SG&A, again, because we will be adding additional sales people towards the last half of the year. And a slight uptick as well in R&D, as we continue to make investments in our product improvement.

Okay, got it. The shares, 4,031 for the quarter, correct?

Yes.

Cash, $10,504,000 for the quarter, correct?

Yes.

Debt, 0? Long-term debt, 0?

(inaudible) Yes. Yes.

And then, I guess finally, John, could you talk a little bit about some of the conferences and some of the clinical data that some of your users have presented and some of the registries or studies that are ongoing? And how you see heart failure playing out at least for your solution in the short-term, near-term, please?

Sure. Heart failure continues to get a very bright spotlight, because not only the large patient population but because of the health care cost. You've heard me say in the past that in the U.S. in 2017, I think, it was estimated about $30 billion were spent just on heart failure. And that's expected to double over the next 10 to 15 years, so there's just a lot of attention there. I think one of the main opportunities for us is the fact that the current standard of care has many clinical publications indicating that it is somewhat detrimental for the patient, it's not a therapy that helps them relieve the fluid overload but can actually exacerbate the problem. So we're really sitting in a very good spot there to be able to help both clinically and economically. I think that Dr. Maria Rosa Costanzo, who was one of the key opinion leaders in heart failure is probably the most published and outspoken person about the value of ultrafiltration to better care for these patients. She actually will be presenting a paper in Vienna at the European Society of Cardiology, Heart Failure meeting week after next, I believe it is, where she is really pointing out the value of ultrafiltration and particularly, as additional data has come out regarding the CARRESS trial, which showed the way that trial was designed, showed a preference to diuretics over ultrafiltration, and there were a lot of inappropriate protocols included in that trial that have now been published by a couple of different physicians really indicating that it's CM creatine rising is not the issue, and that in fact, a bump in CM creatine has nothing to do with value of ultrafiltration to that patient after a relatively short period of time. So there is continuing data coming out. There is a small trial, I shouldn't say small, it's a large trial, small in that it's getting off the ground in Europe with a different product regarding ultrafiltration, that is getting a lot of good attention. Again, it's one thing to be the only player out there, it kind of helps build the market when somebody else comes along and says they have a product than us -- can also help these patients, so we're the market leaders in fluid management, particularly, in heart failure. And excited to be in this position.

And our next question comes from Raymond Myers with Benchmark .

John, you've answered many of my questions. But I believe that there's some more economic support for Aquadex that we should anticipate shortly. And I was hoping you might be able to preview some of that.

Yes, we commissioned a third-party consultant to do an economic -- basically, a hospital budget analysis to really look at ultrafiltration versus diuretics. And now the results of that have been completed and actually have been submitted for publication in a peer review Journal, in the Journal of Cardiac Failure. And a lot of the actual detailed data that is very positive for ultrafiltration has been embargoed until that publication actually is made public. We do have an abstract that's been presented, I believe, it's this week at ISPOR. And that overview basically talks about the very large economic benefit that ultrafiltration has over diuretics. I'm eager and anxious to be able to publicly talk about the results of the analysis, but we need to protect its publication at this point.

(Operator Instructions) And we have one here from Jeffrey Cohen with Ladenburg & Thalmann.

All right, just

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continues to grow each and every quarter as well for

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So Jim, you're seeing increased revenue as a result of uptick in utilization of existing users

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more prominently as opposed to expansion of the footprint at this point?

I think that there's avenues to grow the business on both fronts.

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obviously, but our strategy is to, again, with a small force and somewhat limited resources is to go deep once you have a

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account that's up and running, and to increase utilization is always the key which will yield long-term sticky adoption, and of course, as we begin to grow and scale

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