Nuwellis, Inc.

Good day and thank you for standing by. Welcome to the New Wellness, Inc. First Quarter 2022 Earnings. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Matt Baxo. Please go ahead.

Thank you, operator. Thank you for joining today's conference call to discuss New Orleans corporate developments and financial results for the first quarter ended March 31st, 2022. In addition to myself, with us today are Nestor Jaramillo, the company's president and CEO, and George Montague, the company's CFO. At 8 a.m. Eastern today, New Orleans released financial results for the quarter ended March 31st, 2022. If you have not received New Orleans' earnings release, please visit the investors page on the company's website. During 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 New Ellis are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1925. 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 including 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 not be able to commercialize its products successfully, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, and the other risk factors described under the caption risk factors and elsewhere in the company's filings with the Securities and Exchange Commission. The company believes that these forward-looking statements are reasonable as of today's date. However, you should not place under reliance on the forward-looking statements because they speak only as of the date when made. By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether because of new information, new developments, or other circumstances that might subsequently arise. You should review the cautionary statements in 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. 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. With that said, I would now like to turn the call over to Nestor Jaramillo, New Orleans' CEO.

Thank you, Matt, and good morning, everyone. Welcome to New Orleans' first quarter 2022 earnings call. Revenue for the first quarter came in at $1.93 million, representing 17% sequential growth from the fourth quarter of 2021 and essentially even with the prior year period. Sales early in the quarter were negatively impacted by COVID-19, which limited elective procedure volumes, hospital access, and funding priorities. However, COVID-19's impact subsides as we progress through the quarter, allowing the sales trajectory to improve. Sales of consumables proved particularly strong in the first quarter, driven primarily by increased utilization of the Aquadex therapy at our largest accounts and favorable order timing. Reviewing performance by customer segment, both critical care and pediatric posted strong growth versus the prior quarter, fueled by higher consumable sales volumes across many of our current accounts. However, both of these segments had lower total revenue than the prior year period due to fewer console placements in the first quarter of 2022. The shortfall in consoles was offset by strong hard failure growth, which benefits from increased utilization and order timing. I would like to point out that Critical Care continues to be our largest customer segment and represent nearly half of our revenue, followed by pediatrics and then heart failure, thereby providing an indication of the success of our expansion strategy, which we implemented in late 2019 prior to the pandemic. On our previous earnings call in March, I mentioned the following four growth catalysts we expect to positively impact performance in 2022. One, improved reimbursement, two, additional compelling clinical evidence, three, a new sales management system, and four, product development. Now I would like to speak on each of them, starting with reimbursement. Effective January 1st, 2022, the American Medical Association granted a new Paragory 3 current procedure terminology code or CPT code for the therapeutic ultrafiltration procedure. This code is the 0692T. This code supplements DRG-based reimbursement for inpatient care by allowing healthcare providers to also seek reimbursement under a professional fee. Prior to this code, physicians treating patients suffering from fluid overload in the inpatient or outpatient setting did not have an appropriate CPT code to bill for treating their patients with the Aquadex and often did not receive adequate reimbursement. In addition, this CPT code expands reimbursement to include facility and professional fees for outpatient procedures. To date, reimbursement in the outpatient setting has been an important reason for not using Aquadex to treat patients in an ambulatory setting. We anticipate this new code will lead to increased utilization of Aquadex therapy, and in so doing, will allow for tracking of Aquadex utilization and costs throughout Medicare and commercial payers' claims databases. in support of obtaining a permanent CPT code that adequately and fairly compensates healthcare providers and facilities when using ultrafiltration. To support patients and customers with access to the AQUADEX, we have proactively established a third-party patient access program to answer questions related to the new CPT code and general reimbursement questions. Throughout 2022, we will continue to work to establish appropriate reimbursement for the use of Aquadex in support of our four-pillar growth strategy, which are reimbursement, clinical evidence, sales productivity, and product development. While it is too soon to quantify the benefit from improved reimbursement, it has generated considerable interest from our customers. Switching to our clinical evidence efforts, we continue to make progress building a dossier of evidence demonstrating our product's therapeutic and economic value that will drive utilization and recognition in the medical society's guidelines. More significantly, we receive independent institutional review board, or IRB, approval for the trial protocol of our reverse HF randomized control multicenter trial. This trial is designed to validate clinical outcomes and the economic value of Aquadex therapy for the treatment of fluid overload in patients with worsening heart failure. We are confident that the results of this trial will help ultrafiltration be considered as the first-line treatment option and standard of care for heart patients who are otherwise refractory to the benefits of diuretics. We are now working to initiate sites and begin enrolling patients in this pivotal trial during the second quarter of 2022. Additionally, abstracts covering the use of Aquadex in pediatric patients who suffer from kidney disease were recently were presented at two academic conferences. We're also awaiting publication of a peer-reviewed journal article demonstrating the clinical benefit to mortality and morbidity when using the Aquadex system earlier in the treatment pathway for critical care patients undergoing open-heart surgery. The third growth catalyst has to do with sales productivity. Following the broad rollout of our new sales management system, we are encouraged by the progress already made in the first quarter of 2022. Specifically, it has enabled our sales reps to have higher quality interactions with key stakeholders at the individual account level, which we believe played a vital role in delivering strong quarterly results. we added our first customer resulting from the relationship with Premier Group Purchasing Organization that we entered. We continue to make inroads with additional Premier accounts and currently have several customer product trials underway. The last growth catalyst I want to highlight is the progress we have made on product development, specifically we continue to make advances on both a new dual lumen catheter and a dedicated pediatric continuous renal replacement therapy device, both of which remain on track. In summary, we continue to advance in executing our strategy with the ultimate goal of making the Aquadex therapy the standard of care for fluid management in patients that are resistant to diuretics. We continue to expand commercial relationships, establish the foundation for appropriate reimbursement, build supporting clinical evidence, and develop differentiated products. Like many businesses, we have been affected by COVID-19, inflationary pressures, a difficult hiring environment, and the time required to develop appropriate reimbursement and clinical activity. As we move past the latest wave of COVID-19 and its impact on hospital infrastructure, we see a strong underlying momentum in our business. In 2022, we will continue to leverage our investments to execute our long-term strategy. Now, I would like to turn the call over to George to discuss the financial statements.

Thank you, Nestor, and good morning, everyone. Turning to our financial results, Revenue for the first quarter was $1.93 million, representing 17% sequential growth from the fourth quarter of 2021 and essentially even with the prior year period. As Nestor mentioned, sequential revenue growth in the quarter was driven primarily by increased utilization of Aquadex therapy and order timing. Gross margin was 57.2% for the first quarter, a 6.8 percentage point improvement from the prior year period. The increase in gross margin compared to the first quarter of 2021 was driven primarily by favorable product sales mix and lower inventory revaluation expense. We continue to be encouraged by the progress we are making in our operations in support of gross margin improvement. Selling, general, and administrative expenses were $4.4 million during the first quarter. This was 16% below prior year due to continuing cost vigilance and certain non-recurring administrative costs in the prior year period. First quarter research and development expenses were $1.1 million compared to $0.9 million in the first quarter of 2021. Higher spending compared to the previous year reflects increased investment toward our dedicated pediatric device. The net loss for the quarter was $4.5 million, or 42 cents per share, compared to a net loss in the first quarter of 2021 of $5.2 million, or $1.62 per share, based on an adjusted share count. As a result, net cash used in operating activities improved from $5.4 million in the first quarter of last year to $4.8 million in the first quarter of this year. Regarding our liquidity position, We ended the first quarter of 2022 with $19.3 million in cash and cash equivalents. We believe we have sufficient cash on the balance sheet to provide a meaningful runway to fund operations through the second quarter of 2023 while we execute our growth strategy. Looking to the future, we are cautiously optimistic as we continue to closely monitor the situation caused by the COVID pandemic and availability of healthcare workers. We remain focused and determined on winning new business and increasing utilization among our existing customers, and we demonstrated success in that regard during the first quarter. We have also scaled back spending in areas not critical to our top-line growth or key strategic initiatives, thereby decreasing the cash burn until market conditions improve. I will now turn the call back to Nestor for some final remarks.

As I reflect on the first quarter of 2022, I remain encouraged by our considerable progress in executing our strategy. This includes securing reimbursement for ultra-filtration, initiating pivotal clinical trial, and improving our product portfolio. This is a continuation of the playbook we developed in 2019, and all indications are that it is a winning formula. Thank you for your interest in New Wellness. And I would like to take this opportunity to thank the many health care providers who continue to take care of patients under very difficult conditions, and to our employees for their resilience and hard work to fulfill New Wellness's mission. Operator, you can turn the call to questions.

Thank you. As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad. If your question has been answered or you wish to withdraw your question, press the pound key. Again, that's star one to ask a question. Your first question comes from the line of Jeffrey Cohen from Leidenberg-Talman. Your line is now open.

Good morning, Nestor and George. This is actually Destiny on for Jeff. Thank you for taking our questions. Firstly, I know you said it's a little too soon to kind of quantify the benefit from the CPT code, the Category 3 CPT code. I'm just curious, based on your commentary around additional interest, is that coming from any segment in particular, i.e., heart failure, critical care, or pediatrics?

Primarily from the heart failure that we have seen the interest. As you know, that has been one of our primary segments where reimbursement has had an impact in the past.

Okay, got it. Thank you. And then given that you saw some disruptions in maybe the first four to six weeks of Q1, as did so many others, I'm curious if you could talk to some of the trends you're seeing in Q2 now that it's kind of settled and, you know, things are back to a more normalized level. Mm-hmm.

Yes, we just started Q2, and the trend that we have seen is very similar to what we saw in later Q1. So we expect to have a good Q2 quarter.

Okay, perfect. Thank you. And then could you just discuss some of your outside of the U.S., anything to comment on there? Sure.

On the OUS and outside of the United States? Well, coincidentally, I just returned from a one-week traveling in Europe, visiting our key distributors, and also meeting a potential new distributor. And they are very excited about what we are doing in terms of the new product development, as well as the clinical evidence, this clinical trial. So they were excited. very impacted by COVID-19. As you probably saw in the news, most of the major countries, Germany, Spain, Italy, were shut down during COVID-19. So they are very excited now that the COVID is subsiding, and especially with everything that we are doing, again, from the product development and the clinical evidence.

Got it. Thank you. And then You received IRB approval for your protocol for reverse HF. I'm curious, does that change anything on timing, and what are the near-term next steps that you guys will need to take in order to progress that to the next level?

Well, as I mentioned, we are in the process of initiating sites, and we expect to have the first patient enroll any day now, and we'll continue to enroll in patients throughout Q2 and the rest of the year. But we're very excited. The study and the protocol has been well received by many physicians that are going to participate and those that are not going to participate as well.

Okay, got it. Thank you. I'll jump back in queue.

Thank you. Thank you.

Your next question comes from the line of Anthony Vendetti with Maxin Group. Your line is now open.

Thanks. You mentioned higher consumables this quarter. Can you also just talk about if capital sales were a little bit weaker than you expected, why was that? Is COVID still impacting in January access to hospitals, or is your access now back to normal? Right.

Good morning, Anthony, and thank you for the question. Yes, indeed, as we mentioned in previous calls, we have been impacted by the negative impact that hospital has had with the pandemic, especially on accessing the hospitals by our sales organization, as well as their funding priorities. So that had an impact in terms of both opening new accounts as well as purchasing capital equipment. So we hope that now that the pandemic is subsiding that we can see more return to capital purchases. But I'm going to let George also give you some more information.

Yeah, and in our own planning, we anticipated a little bit of a downtick this year because we realized in looking at the numbers that last year benefited from the launch of the SmartFlow because we saw a lot of customers upgrading their FlexFlow to SmartFlows, and we thought a lot of that upgrade activity would, or I should say the bulk of that activity would occur last year. So we did see that benefit last year that's not recurring, that influences the numbers, and that's you know, kind of over and above the considerations that Nestor mentioned.

Okay. And Nestor, maybe just talk a little bit more about pediatrics in terms of what your expectations were for this quarter and what your expectations are going forward. You know, I know that's a big push for you guys, and I was just wondering if you could give us a little more color on how that's going so far this year.

Right. Yeah, Anthony, pediatric is a very important strategic segment for us. And as we mentioned, we are spending considerably funds to develop a pediatric dedicated device. So this is a very important segment for us. The reasons for our pediatric strong results in Q1 has to do with pediatric census across a number of accounts. And additionally, you know the Pediatric Registry was recently presented in two recent academic symposiums, so that helped and that encouraged the utilization of the Aquadex. Moving forward, we will expect to see similar results for the remaining of the year.

Okay, great. Thanks. I'll jump back in.

I'm not showing any further questions at this time. I would now like to turn the call back to Nestor Jaramillo for the closing remarks.

Okay. Thank you for joining our first quarter earnings call. We would like also to invite you to attend our annual shareholder meeting which will be held virtually at 2 o'clock p.m. Central Time on May 17, 2022. Further instructions for participating in that meeting can be found in our proxy statement. If you have not done so, I encourage you to complete and submit your proxy for the upcoming meeting. Thank you and have a good day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.