Nuwellis Inc (NUWE) 2018 Q3 法說會逐字稿

Good morning, and welcome to the CHF Solutions earnings conference call for the third quarter ended September 30, 2018. (Operator Instructions) Participants on this call are advised that the audio of this conference call is being broadcast live over the Internet and is being recorded for playback purposes. After, the replay of the call will be available approximately 1 hour after the call -- 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, Norma, and thank you for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the third quarter ended September 30, 2018. With us today are John Erb, the company's CEO and Chairman of the Board; and Claudia Drayton, the company's CFO. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended September 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 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 the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully, that the company may not be able to successfully integrate acquired technology 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 and Cautionary Statement 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 in 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 third quarter 2018 earnings call and corporate update. CHF Solutions continues to successfully execute on the strategies we have publicly talked about over the past 18 months, including, one, investing in our direct U.S. sales and clinical teams; two, expanding our clinical target areas with new medical applications for fluid management; three, growing our international market footprint; four, developing and/or investing in diagnostic technologies to help our customers manage fluid removal; and most importantly, number five, increasing revenue growth.

I will review each of these strategic initiatives this morning, starting with our third quarter revenue growth. We achieved a 24% increase in revenue in Q3 2018 over Q2 2018 and a 42% increase in year-over-year revenue versus Q3 of 2017, representing 6 consecutive quarters of year-over-year double-digit growth.

We believe our revenue growth is a result of successful execution of our commercial strategy and the investment we have made in our direct U.S. sales and clinical team. We started the third quarter with 13 U.S. sales territories and 2 clinical specialist. During the quarter, we added 3 additional clinical specialist to bring our field-based commercial team to 20 very experienced individuals, including our Senior Director of Sales and our Director of Clinical Education.

Going forward, we expect modest additional investment in the field organization and we'll focus on leveraging the investments we have made so far. 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 our Aquadex FlexFlow system for patients suffering from fluid overload who have failed diuretic therapy.

The expansion of our field team and our marketing group provides us the additional resources necessary to pursue other market opportunities. To that extent, as previously announced, we have expanded our commercial focus into the post-surgical cardiovascular market. With the synergies between heart failure cardiologists and cardiovascular surgeons in the treatment of heart failure patients suffering from fluid overload, expansion into the post-CV surgical market is a natural next step for commercial focus.

Cardiovascular surgery patients often need treatment for fluid overload and frequently fail diuretic therapy. Surgical patients can be challenged by a fluid overload post procedure due to the extra fluids administered during surgery or medications administered post surgery.

Fluid overload accounts for 13.5% of post-CB surgery readmissions and is reported as the third most common cause of readmissions within 30 days of surgery and the #1 cause after 30 days post surgery.

Excess fluid, if not removed effectively, contributes to renal dysfunction, arrhythmias and infections and is associated with increased ICU length of stay and mortality. We believe the Aquadex FlexFlow system offers the simple form of ultrafiltration that can be prescribed by any medical specialty for the treatment of volume overload in postsurgical patients who are not responding to diuretics. We look forward to continuing to partner with the medical community in the treatment of fluid overloaded patients and believe this initiative creates a significant market growth opportunity.

We are making progress moving into the heart failure outpatient market, primarily with our clinical partnership with the Tampa VA. As previously disclosed, the United States Department of Veterans Affairs has awarded CHF Solutions a 5-year $6.5 million contract to supply Aquadex FlexFlow systems and blood circuit sets to the James A. Haley Department of Veterans Affairs Medical Center in Tampa, Florida.

Both the consoles and the disposables will be utilized for an outpatient physician-initiated study, focused on improving veterans' quality of life and reducing the cost of hospital admissions by utilizing the Aquadex FlexFlow system in VA outpatient care facilities.

Our international business continues to grow with the third quarter additions of Thailand and Germany. We recently received registration from FDA Thailand for our product sold through our current distributor in Southeast Asia, TransMedic, which adds to its earlier commercial launches in Hong Kong and Singapore.

We entered the German market by expanding a relationship with HSC-Medical GmbH, which serves as a fulfillment house and provides logistic support. The Heart Center of Dresden University Hospital, one of Germany's largest cardiology centers, has begun an important clinical evaluation with the Aquadex FlexFlow system.

We are dedicated to providing physicians with solutions to help them more effectively treat fluid-overloaded patients. We remain focused on identifying and researching multiple diagnostic technologies that more clearly inform treatment providers on appropriate Aquadex patient selection, when to initiate therapy, how to manage throughout the therapy and when to discontinue ultrafiltration.

We recently announced a collaboration agreement with NIMedical, an Israeli medical device company. The collaboration will initiate with a small patient evaluation to identify the potential benefits of utilizing the cardiovascular, respiratory and fluid diagnostic parameters from NIMedical's NICaS Hemodynamic Navigator to inform on fluid volume and hemodynamic parameters in patients during ultrafiltration therapy using the Aquadex FlexFlow system.

In addition, last week, we announced our newest collaboration agreement with Daxor Corporation to explore potential synergies between the company's Aquadex FlexFlow system and Daxor's BVA-100 Blood Volume Analyzer. This collaboration will also initiate with a small clinical evaluation to determine synergies of using Daxor's BVA-100 to assist in informing clinicians on fluid volume status, including patient selection, when to start ultrafiltration and how to manage therapy to achieve positive clinical results. We believe that this collaboration with Daxor is another important building block of our strategy to evaluate diagnostic tools, which may refine and maximize the fluid management therapy.

Following the conclusion of both clinical evaluations, we will analyze further additional clinical and future commercial synergies between the technologies, each of which has FDA 510(k) market clearance and the CE mark.

Moving to internal technological advancement. Early in the third quarter, we completed the acquisition of the AcQtrac system technology from Vasamed, Inc. The AcQtrac system is a patented, noninvasive device designed to measure cardiac and hemodynamic parameters utilizing impedance cardiography. It has been 510(k) cleared and CE marked, and we intend to further evaluate product development and seek additional regulatory clearance before that technology will again be available for commercial use in both the inpatient and outpatient clinical settings.

Given our expanded worldwide commercialization efforts, we anticipate further accelerated sales growth by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologist, hospitalist, intensivist and cardiac surgeons.

Our vision is to become the global market leader in fluid management, with solutions to improve patient's quality of life. 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 alone, and thereby, introducing the clinical value of ultrafiltration treatment as an opportunity to improve clinical outcomes, reduce hospitalization rates and reduce major expense to the health care system.

I will now turn the call over to Claudia, who can walk you through our Q3 2018 results and financial details. Following that, I will provide some closing comments and we'll open the call to questions.

Thanks, John. Good morning, everyone. Turning to the P&L. Revenue for the third quarter was $1,363,000, a growth of 42% over Q3 of 2017 and 24% growth sequentially from Q2 2018.

Total cost and expenses for the quarter were $5.6 million versus $3.8 million in the third quarter of last year. The major increases from last year were driven by investments in sales and marketing and research and development. Sequentially, from Q2, our cost and expenses have remained fairly flat and increased by 6% versus Q2 2018, as we begin to more effectively leverage the investments we made in late 2017 and early 2018.

Starting with cost of goods sold. Our cost of goods sold reflect the prices paid for finished goods we purchased from Baxter under the manufacturing and services agreement we signed at the time of acquisition, which includes the markup of 60% over the cost that Baxter incurred to manufacture the product.

Additionally, cost of sales includes start-up manufacturing cost associated with the transition of the manufacturing activities to our facilities in Eden Prairie, Minnesota, which we completed in August 2018. In terms of increases in selling and marketing expenses, the increases are primarily driven by the investments 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, as John mentioned.

We are also making investments in R&D to improve the functionality of our devices and improve customer experience and increase the adoption in the market. During the quarter, we also acquired the AcQtrac technology, as John mentioned earlier. This technology was expensed to R&D during the quarter.

Nonoperating income or expense items were not significant in the third 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 $2.8 million. Regarding our liquidity position, we used $3.3 million in the current quarter to finance operations, an increase of $200,000 over Q3 of 2017 and a decrease of $200,000 sequentially from Q2 2018. For the first 9 months of the year, we utilized $11.8 million to finance operations, an increase of $3 million from the first 9 months of 2017. We ended the quarter with approximately $8.2 million in cash and cash equivalents and no debt.

In terms of modeling the remainder of 2018 and into 2019, we expect revenue to continue to grow double digits versus the prior year and continue the trajectory we have been on for the last 6 quarters. We expect that as our sales force gains tenure and the marketing programs, tools and education programs we have implemented throughout the last 9 to 12 months continue to have an impact, it will result in acceleration of revenue growth.

Regarding our gross margins, they will continue to reflect the inventory pricing paid to Baxter in Q4 2018. We expect to start selling our own manufactured inventory in Q1 2019 and to begin to see the margin benefits from eliminating the Baxter manufacturing markup. In later quarters, as our internal production volumes and efficiencies increase, we expect to see additional margin improvements.

Regarding operating expenses, we expect to continue to leverage the investments we have made in our field organization and in-house manufacturing efforts.

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 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 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 will use to measure our performance. CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management.

We are dedicated to bring improvement solutions and 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) Our first question comes from Jeffrey Cohen of Ladenburg Thalmann.

John or Claudia, can you hear me okay?

Yes. Fine. Thank you, Jeff.

Yes.

So firstly, Claudia, some of your commentary toward the end of -- just a moment ago, you talked about, I guess, aspirations of double-digit revenue growth versus prior year. So annual revenue growth estimated of double digits. Can you be a little more specific?

We have not yet given guidance for the year, and we will do that in the future, but at this point, we prefer not to give formal guidance.

Okay. Got it. So John, can you give us a little more color as far as -- it looks like perhaps Q3 broke out a little bit on the upside, on the revenues. Can you talk a little bit about that ramp, number of cases utilization, number of circuits used and number of facilities that are current users? And kind of give us a flavor there, so we can get a better understanding of -- if it's onetime in nature, if we're going to see some type of growth coming forward as far as Q4 and carried through to '19.

Sure. I think the greatest impact in Q3 was the effectiveness of the sales team that we put in place. As you look at Q2, the majority of those 13 sales territories had been in the -- the individuals have been in their territories less than 6 months, anywhere from 2 to 4 months, really. And it really takes a good 6 months for a new territory to be developed, the sales rep to really know the hospitals, the hospital administration, the physicians and really set up an opportunity within a hospital to grow adoption and utilization. So I think in the third quarter, we began to see that effectiveness. I think we'll continue to see that grow with these 13 sales territories in the fourth quarter. We also have been very positive around looking at hospital systems. A lot of their efforts are not just single hospitals but looking at hospital systems where there might be anywhere from 6 to 15 hospitals. And most of the activity has been getting it implemented in one of the hospitals initially of those systems, and then once it's proven, expanding from there. And that's where a lot of our future growth is going to come from. Total accounts, we're probably just under 200 accounts at this point in time, but the quality of those accounts continues to improve with improved utilization within each account. In the third quarter, we also added 3 more clinical specialists, which took it from 2 up to a total of 5. And we've learned that the clinical specialist is really a key piece of the strategy in developing an account. These are folks who are primarily former nurses -- heart failure nurses that actually spend time in the accounts with the nursing teams to do the training and help increase utilization. If you think about a typical hospital would have 3 shifts of heart failure nurses alone, which could be 8 to 10 nurses per shift, so that could be 40-or-so nurses that need to be trained. And the clinical specialists are doing an excellent job in getting in and spending time with the folks to help them really begin to implement the therapy. So it's really building the base at this point in time. So I think we have the team in place. I think the accounts are coming online. I think utilization is increasing. And as Claudia said, I think we can continue to look forward to a double-digit growth from quarter-to-quarter going forward now.

Okay. Got it. And could you talk a little bit about the commercial team with the addition of a couple of these collaborations as well as the AcQtrac? Will that be growing? Will it stay as one cohesive unit, basically with AcQtrac being a bolt-on in the space? And also how does that look in the CV market as well?

Sure. Well, let me start with the AcQtrac. AcQtrac is a product that we think can be developed into a very complementary tool to be used with our Aquadex system. There is some development work and regulatory work that we need to do to bring that up to the standard of our Aquadex system, and we'll be working on that. So I do not anticipate beginning to commercialize AcQtrac until later in 2019. There are multiple ways to really provide our physicians and nurses with this diagnostic capability of better understanding the fluid level in patients, particularly in the heart failure patients. We believe that the Daxor BVA-100 is an excellent technology that matches up very well with the Aquadex system to better manage these patients. And we're eager to do this initial, small clinical evaluation, so that we really have a good understanding where we can teach customers on how to marry the 2 technologies to improve patient outcome. There are certain messaging that we'll need to put together in working with Daxor to both companies to be able to talk about the benefit of those technologies. So over the next couple of months, we'll be working closely with Daxor on that. And that's also the same with the NIMedical NICaS system. It's a different technology that's more a bio-impedance than a blood volume analysis. But as different physicians have different preferences on how they manage their patient, we felt that it was important to have multiple methods of diagnostic tools to provide for them. So we'll also be doing the small clinical evaluation with the NICaS -- NIMedical's NICaS system. So in early 2019, it would be great if I could commit to getting it done by the end of this year, but I think, really, from a commercialization standpoint, we will begin to see the impact of having a diagnostic tool with Daxor and with NIMedical in the first quarter of 2019. In cardiac surgery, the need for that diagnostic tool is less critical. And I say that because cardiac surgeon, as these patients come off of the cardiac surgery, they are in the ICU, they've been on the heart-lung machine, there is a considerable amount of fluid that is put on the patient. And they know specifically they have added 3 liters, 4 liters or 5 liters of fluid, they need to get that fluid off. So it's more an acute situation for the cardiac surgeon to remove that fluid. And they know how much fluid they put on, a little bit different than what the heart failure patient where that diagnostic technology is more important. There will be physicians that use cardiac surgery, but it's not going to have the same impact as it will in heart failure.

Okay. And then one more, if I may, just prior to AHA next week. Are you seeing or hearing anything on the front of guidelines or any regulatory changes out there as far as any providers and -- related to fluid overload?

No. Not -- we're not seeing anything at this point in time.

Our next question comes from Anthony Vendetti of Maxim Group.

One question for John, and then one question for Claudia. Sorry if I'm a little bit under the weather here, but I just wanted to ask John one question on Daxor. Seems like a perfect fit in terms of the 2 products' compatibility. You said a small trial. Can you give a little more parameters around how many patients would have to be in that trial to see the clinical benefit?

Yes, relatively small. This is a -- more a clinical evaluation than a clinical trial. This could be 10 to 15 patients. And it's really just for both Daxor and CHF Solutions to have a good understanding of how best to have the technologies work together. So both products are already market cleared. There is no need for clinical trial. This is simply a step in the commercialization process to make sure we know how best to tell our customers to utilize the technologies.

And then, Claudia, a very strong gross margin this quarter. Is that somewhat of an anomaly? Or what drove that?

It is driven by increased sales. And we're ramping up our internal manufacturing. As I said, we continue to manage our inventory by selling off the Baxter -- the one that we acquired from Baxter. But we are beginning to manufacture our own. And so that helps by absorbing some of our cost into inventory. As well, like I said, the strong revenue growth has helped as well.

At this time, I'd like to turn the call over to Mr. John Erb for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.