Nuwellis, Inc.

Good day and thank you for standing by. Welcome to the New Ellis Incorporated Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the 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 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Basco from Gil and Martin Group. Please go ahead.

Thank you, operator. Thank you for joining today's conference call to discuss New Ellis corporate developments and financial results for the second quarter ended June 30th, 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 Ellis released financial results for the quarter ended June 30th, 2022. If you have not received New Ellis earnings release, please visit the investor's page on the company's website. During this conference call, the company will make forward-looking statements, except for historical information mentioned during this 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 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 not be able to commercialize its product 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 of 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 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 and discussions of risk factors included in the company's press release issued today, the company's latest 10-K, the 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 like to turn the call over to Nestor Jaramillo, New Ellis' CEO.

Thank you, Matt, and good morning, everyone. Welcome to New Ellis' second quarter 2022 earnings call. In today's call, I will provide an overview of our revenue performance and our and an update on our strategy. George Montague, Newella CFO, will provide detailed financial results, followed by my closing remarks before we open the call for questions. We are encouraged by our second quarter performance, both because we continue to build momentum in our financial results, but also because our solid progress executing our strategy to make the Aquadex system the standard of care for restoring fluid balance. These results represent the second consecutive quarter with double-digit sequential growth, suggesting that the Aquadex system is gaining traction in key academic institutions across the country. Strategically, we have secure reimbursement for outpatient ultrafiltration therapy, initiated a key pivotal trial intended to improve the level of medical society practice guidelines, and we are making strategic enhancements to our product portfolios. We believe these key initiatives position the company favorably as we look to the back of 2022 and enter 2023. The results we are providing this morning are due in great part to the accomplishment of my teammates across New Orleans who demonstrated a commitment to our mission of transforming the lives of people with fluid overload and their passion for serving our customers on a daily basis. Take Lisa, for example. our clinical specialist in the southeast, whose close relative passed away in Lisa's arms as a consequence of fluid overload before she knew that the Aquadex therapy even existed. As a clinical education specialist in one of our fastest-growing territories, Lisa now works to expand the use of Aquadex in hospitals to ensure that other families don't have a repeat of her experience. Another example is Libby, our most tenured account manager. Libby recently assisted a nurse who was using Aquadex to remove the excess fluid from a patient who had lost brain function. Aquadex had a critical role in preserving the organs and honoring the family's wish that the organs be donated to someone in need of a transplant. Libby said to me, and I quote her, This experience has really touched my heart. It's so satisfying what we do in this company, and it's very personal to me. Fueled by this passion, Libby has added four new hospital accounts over the past year. And finally, I can share this story of Meredith Eleven years ago when Meredith was getting her master's degree in nursing, she studied the results of using the Aquadex therapy in her hospital and published a zero percent readmission for heart failure patients resistant to diuretics. Meredith never forgot that experience and two weeks ago she accepted an offer from us to be the clinical education specialist in the Maryland territory. where she will play a critical role in helping New Wellness achieve our goals. Why am I emphasizing these examples of New Wellness teammates? Because I want to underscore that the momentum New Wellness is building in the market is the direct result of having a strong team who's passionate about our mission and deeply committed to improving the lives of patients. Turning to our quarterly results, Revenue for the second quarter came in at $2.2 million, representing 15% sequential growth from the first quarter of 2022. However, down compared to the record-setting prior year second quarter. Given this strong sequential growth, we continue to be encouraged by the implementation of our improved sales management system, which has allowed us to better execute our long-term commercial strategy. Reviewing second quarter performance by customer segments, critical care and pediatrics posted a strong growth versus the prior quarter, fueled by higher console sales and also increased utilization of our disposable circuits in some accounts. Heart failure revenue was below prior quarter and was also the primary driver and I was talking about the pressures from the inflationary situation. And while we're not immune to inflationary pressures, the 14% decrease in operating expenses compared to prior year demonstrated how we have been able to prudently manage expenses while focusing our efforts and investments in strategic initiatives that I will discuss momentarily. We also moderately increased circuit and consoles pricing during the second quarter to partially offset these inflationary pressures. Next, I would like to provide a business update on our four key strategic initiatives. First, the initiation of our reverse HF pivotal clinical trial and its impact on future demand trends. On June 29th, we announced enrollment of the first patient in the reverse HF trial representing a key milestone for the business. As a reminder, reverse HF will evaluate the clinical outcomes and economic value of the Aquadex ultrafiltration therapy in comparison to intravenous diuretics for the treatment of fluid overload in patients with worsening heart failure and who are at risk for rehospitalization. As a company, we are committed to the ultimate goal of making the Aquadex therapy the standard of care for fluid management in heart failure patients that are resistant to diuretics. We believe a successful trial will provide additional evidence needed to have ultrafiltration included within medical society practice guidelines, which will lead to many more patients benefiting from Aquadex therapy in the future. With the announcement of our first enrolled patient in late June, we have started to see an increased interest from other hospitals looking to participate in this study. This has prompted numerous sites to engage with our sales organization to either buy or upgrade consoles because the reverse HF protocol requires the use of the smart flow. Also on the clinical front, an analysis of the avoid HF clinical study using the Flinkelstein-Schonfeld method of wind ratio was submitted for consideration at the late breaking trial at the Heart Failure Society of America's 2022 Annual Scientific Meeting to be held in September. This study will provide additional evidence to support the use of ultrafiltration to treat heart failure patients suffering from fluid overload. Our second strategic initiative is to target outpatient facilities treating heart failure patients. You may recall that effective on January 1st, 2022, the American Medical Association granted a new and dedicated Category 3 CPT code for therapeutic ultrafiltration. This CPT code supplements DRG-based reimbursement for inpatient care by allowing healthcare providers to also seek reimbursement for a professional fee. This new CPT code also expands reimbursement to include facility and professional fees for outpatient procedures. This means that for the first time, CMS provides reimbursement for ultrafiltration administered in an ambulatory setting. As an example of outreach regarding the outpatient opportunity, on June 21st, we held a physician-led webinar discussion discussing the benefits of treating heart failure patients suffering from fluid overload with Aquadex ultrafiltration in the outpatient setting. The three panelists from the Ohio State University, the Advanced Heart Failure Specialist in Dallas, and from the MedStar Good Samaritan Hospital in Baltimore, discuss the clinical and economic challenges associated with the current standard of care for managing fluid overload among heart failure patients. During the panel discussion, they also explore strategies for treating these patients and share their experiences treating patients in the ambulatory setting using the Aquadex therapy. According to the panelists, heart failure patients with fluid overload are often caught in a cycle where they are hospitalized, inadequately decongested, sent home, and then rehospitalized when congestion issues resurface, leading to a national readmission rate of 24% at 30 days and 50% at 90 days. according to Dr. Ramesh Imani, one of the panelists in the webinar, stated that ultrafiltration adequately decongest patients as demonstrated by a reduction up to 79% in unscheduled 30 days readmission in patient studies at the Ohio State University. From a commercial standpoint, we have started to target outpatient centers that have historically performed similar therapies and are actively making them aware of the available reimbursement. While still early, we are very encouraged by the initial engagement with these outpatient centers and expect this initiative to contribute nicely to growth in 2023. We look forward to providing an update of this growth driver in future earnings goals. Our third initiative is on the product development front. We continue to make progress on our pediatric continuous renal replacement therapy device, having achieved key internal development milestones in the second quarter. Last, but certainly not least, our fourth initiative, the implementation of our new sales management strategy is both strategic and operational in nature. From a strategic standpoint, we are focusing sales efforts on high-potential accounts in geographic locations where we can better service them. We're also increasing the clinical composition of our team in the field to better support new and existing accounts in therapy adoption. From an operational standpoint, we have implemented a key account management approach with better targeting and disciplined follow-up. While we're still early, we are encouraged by two quarters of double-digit sequential growth since deployment of this initiative. In summary, we continue to advance in the execution of our strategy with the ultimate goal of making Aquadex therapy the standard of care for restoring fluid balance. We are establishing the foundation for a permanent and appropriate reimbursement We advance the clinical evidence to support the clinical and economic value of the therapy, and we increase the number of new accounts using the Acquadex system. Now, I would like to turn the call over to George to discuss the financial results.

Thank you, Nestor, and good morning, everyone. Turning to our financial results, Revenue for the second quarter was $2.2 million, representing 15% sequential growth from the first quarter of 2022 and down 12% compared to the prior year period. As Nestor mentioned, sequential revenue growth in the quarter was driven primarily by strong growth in our pediatrics and critical care segments. Sales to heart failure customers were down just slightly versus prior quarter, but drove the majority of the decrease versus prior year. Gross margin was 48.0% for the second quarter compared to 60.2% in the prior year period. The decline in gross margin for the second quarter of 2021 was primarily due to lower fixed overhead absorption because of decreased sales and finished goods inventory levels, partly offset by favorable pricing. During the quarter, we also reported a $112,000 non-cash inventory write-off resulting from the discontinuation of a distribution agreement. Including this one-time charge, gross margin would have been 53.1%, and we expect gross margin to revert to the high 50% range during the remainder of the year. Selling general and administrative expenses were $4.3 million during the second quarter. Relative to the prior year period, SG&A expenses declined $806,000, or 16%. The decline in SG&A expense was driven by continuing cost vigilance, lower sales, and non-recurring prior year costs. Second quarter research and development expenses were $1.107 million, $67,000 lower than the second quarter of 2021, and even sequentially. We are also prudently managing R&D costs while ensuring that the pediatric CRRT project remains fully funded. The net loss for the quarter was $4.3 million, or minus 41 cents per share, compared to the net loss in the second quarter of 2021 of $4.7 million, or minus 72 cents per share, based on an adjusted share count. Second quarter of 2022 net cash used in operating activities was $3.9 million, compared to $3.8 million in the prior year period. Regarding our liquidity position, we ended the second quarter of 2022 with $15.3 million in cash and cash equivalents. Total expenses through the first six months of 2022 have decreased 12% compared to the prior year. And 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. I will now turn the call back to Nestor for some final remarks.

Thank you, George. As I reflect on the first half of 2022, I remain encouraged by our considerable progress in executing our strategy. This includes securing reimbursement for ultrafiltration, initiating a pivotal clinical trial, and improving our product portfolio. We remain focused and determined in winning new business. increasing utilization among our existing customers, and targeting hospital outpatient centers to drive future growth. 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 would like also to take this opportunity to thank the many healthcare providers who continue to take care of patients under very difficult conditions, to our investors for their continuing support of New Wellness and its mission, and to our teammates for their resilience and hard work to fulfill our company's mission. Thank you for your interest in New Wellness. Operator, you can open the call to questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question is from the line of Jeff Cohen from Leidenberg Thalmann. Your line is now open.

Go ahead, Nestor and George. How are you?

Hey, Jeff. Thank you for being here.

So I guess, firstly, I had a couple questions around the reverse study that started enrollment, reverse HF. So it looks like total enrollments planned at 372. What's the timeline and how long would you expect to enroll the patients and approximately how many centers would you expect to be online during the enrollment?

Good question, Jeff. As you mentioned, the target for the sample size of the study is 320 patients. We plan to enroll anywhere from 18 to 20 sites, and we are about half completed the startup initiation of about nine sites. And we expect the enrollment to be, depending on the number of sites and how fast they enroll, anywhere from two years to two and a half years.

Okay, got it. Correct me if I'm wrong. Clinical trial shows 372.

I'm sorry, Jeff. Could you repeat the question?

I believe it's 372.

372, correct.

Got it. Okay. And, Minister, could you talk a little bit about the outpatient ambulatory settings? Currently, give us a sense of... how that stands as far as your active accounts, and then give us a sense of your upcoming funnel and how that may play out and how your sales organization may penetrate or proceed the outpatient setting over the coming quarters.

Jeff, historically, we have seen about a dozen centers that were using the Aquadex in the outpatient setting. We are, and many of them discontinued because of the absence of reimbursement. Now we're targeting this dozen centers to begin with, and we are getting very good reception from them about the reimbursement and about the enhancements that we are doing on the device to better guide the therapy. So we expect to see the results early 2023.

Got it. And then lastly for us, Nestor, if you could jump back to the acute and hospital setting and talk to us a little bit about restrictions relative to COVID and then talk to us a little bit about staffing issues that may be permeating or increasing or decreasing on the hospital side as far as using Aquadex.

Yes. Well, our sales reps continue to experience increased hospital access as the infection rates continue to reduce. And with our new sales management system, we're helping our sales reps be more purposeful when using their time when meeting with these customers, therefore being more effective and increasing sales, as you have seen in the last two quarters. We are seeing some pushback in terms of the hospital economics, especially on the capital equipment purchase. But because of the passion of our sales organization and the commitment and the story that we have to tell on our therapy, we're getting over some of those pushbacks.

Perfect. Okay, that does it for us. Thanks for taking the questions.

Thank you, Jeff.

Thank you. Our next question is from the line of Brooks O'Neill with Lake Street Capital Markets. Your line is open.

Good morning, guys. Thanks for taking my questions. I'm just curious, maybe you could talk a little bit about whether you think your efforts to control costs are likely to hamper your efforts to grow the business or how you're trying to balance those two factors.

I'm sorry, Brooks, could you repeat the question? We were having some technical issues in terms of hearing you.

Sure. Sorry. Sorry. Can you hear me now?

Now we're much better.

Okay. So I'm curious if you could just talk a little bit about whether you think your efforts to control costs are going to hamper your efforts to grow the business or how you're balancing those two factors.

Hi, Brooks. This is George. Let me answer that. And the short answer is no. You may recall in really looking back in Q4, when the financial markets looked a lot less stable, we tightened the belt and actually increased the funding, the prioritization given. to reverse HF, given to development of the pediatric device, as well as given to our new sales management structure. And so we're investing in those areas, including over time actually adding even more clinical resource in the field, but we're not spending money on other things. And that's what's enabled us to advance in the execution of our strategy, while significantly decreasing our spending rate as well as cash burn, in line with our expectations, right, that we set for ourselves and communicated with you at the beginning of the year. We're right on track with that.

Great. So I guess I have to ask you, I think you're doing all the right things. I think heart failure is a huge problem for hospitals and patients, and I'm just curious, you know, what do you think it's going to take and when do you see sort of time to traction? I guess Jeff was asking a little bit about this, but just can you talk about do you think you'll start to see meaningful traction in 2023 or is it going to take until the reverse trial is done? What are you thinking and what are you seeing out there in the marketplace now?

Well, Brooks, We are starting to see traction in the market with our existing customers increasing their consoles, the number of consoles, and we are adding a lot of new accounts, hospital accounts. So we're seeing that traction to start. But until we have some clear evidence of the economic and clinical value of this therapy, it's going to continue as we are seeing today. mid-teens growth. You remember we issued a press release about the submission of the AVOID-HF trial analyzed under this new win ratio statistical analysis. And if that gets accepted at the HFSA late breakthrough clinical trials, will see a pickup in sales because that is going to provide clinical evidence of how well the therapy is working both on the clinical and the economic side. We are not able to share with you the information in that abstract, in that paper that was submitted because of the embargo from the society. But if it doesn't get accepted, we're going to publish that information because it's compelling.

Right. That's fantastic. So just one more. Obviously, I guess in the current environment, everybody's focused on capital availability and whether you, you know, are going to need to come back to the market or whether you feel like you have enough capital to at least fuel the tank for a while. Can you just talk about how you guys are viewing capital availability and what your needs might be in 2023 and beyond? Okay.

Yeah, as we've said for a few quarters now, Brooks, you know, we feel that we have sufficient cash to fund operations through the second quarter of 2023 while we execute on our growth strategy. And we'll be opportunistic about when to seek additional financing prior to that time, but we prefer to not go down to the wire in securing it. So kind of like you saw us go out last September, when we saw the opportunity, you'd anticipate us doing the same this year when we see the right opportunity.

Okay, great. Thanks a lot.

Thank you. Our next question is from the line of Anthony Vendetti from Maxim Group. Your line is now open. Anthony, your line is now open.

Thank you. Some of this may have been some of this may have been covered in your initial remarks, Nestor and George, but due to the poor quality of this call, I'm just going to go through a couple of questions that I have, if you don't mind. So the revenue breakout by segment, did you provide that?

Yes. In fact, Anthony, I was going to suggest, I think that when we came back in, we restarted maybe a little bit later from where you got cut off. And so I don't know that they heard this portion, Nestor, if you just want to repeat. Nestor Davidsen- Yeah. Okay.

Yeah. In terms of the performance by customer segment, critical care and pediatrics posted a strong growth versus the prior quarter. fueled by higher console sales and also increased utilization of our disposable circuits in some accounts. Heart failure was below prior quarter and also was a primary driver for performance versus prior year. And I will add that critical care continues to be our largest customer segment, representing about 40% of the total revenue. And it is followed by pediatrics and then heart failure. And this provides further support for the successful expansion strategy that we implemented in late 2019 to diversify our therapy beyond just heart failure.

Right. No, that makes a lot of sense, and obviously this supports that. So critical care was about 40%. Pediatrics was what percent approximately?

It's about 30%. Okay.

And then in terms of total systems now at the end of second quarter, at 6-30-22, at the end of June, how many total systems now do you have installed?

Well, I don't know if we have provided that information in the past, Anthony. We can get it to you soon. But we assume that we have probably 200, 250 systems out in the field, in the market.

Okay.

That are being actively used, correct?

Right. That is actively used, 200 to 250 systems being actively used. Okay. And just out of curiosity, how many were installed or sold in the second quarter?

We – We had a record sales of consoles, but we have not provided this information in the past, Anthony. Okay. If it's something that is very important for you and your analysis, we'll be happy to provide it at a later time.

Okay. Yeah, that just helps us, but I'm glad to hear it was a record quarter. Anything that you could share – with regarding utilization trends for the systems that are out there? Are you seeing increased utilization about the same? Just maybe anecdotally how you could describe it.

Yeah, as we mentioned in previous quarters, we see, I should say we have seen and continue to see strong growth in utilization. in our larger accounts, and Nestor mentioned that we actually saw increases in console purchases from some of those accounts, so that not only are they driving utilization, their equipment's fully utilized, and so they're expanding their fleet, if you will. And so that's very encouraging. And then the opportunity for us, so that actually also demonstrates the value of our therapy when incorporated in the flow of a system's patients. And the opportunity for us is to replicate that across even more accounts. And as we talk about our sales management strategy, that's a big thrust of that.

Okay, great. One of the accounts, if I'm correct, is Mount Sinai. And I believe they, over the last couple of years, purchase additional systems. Can you talk about the utilization trends there? You know, what do you think led them to purchase additional systems? And then as a last question, can you talk a little bit about the agreement that you have with DAX or for the BVA for blood volume analysis?

So, yeah, I can talk about the utilization, and Nestor will respond to DAX for us. So I can tell you that, well, actually, Bounce Dynate is a very good customer of ours, and they weren't the customer that bought – one of the two customers that bought more consoles in the second quarter. So it goes, you know, beyond just one or two accounts. And we kind of look at it in aggregate, and in aggregate, the utilization did, at the larger accounts, did continue to trend upward at a very high level in the second quarter. So, like I said, it's more a matter of getting that proven formula that we're seeing in the larger accounts, which includes very reputable hospitals and hospital systems such as Mount Sinai, replicating that across more accounts. And there are indications of progress in that regard.

And then our relationship with DAX continues to be there, but it is more of a pilot trials that we're doing in two or three different accounts. And just to see, to study the value of the two therapies and the two technologies together. If you may recall that the last...

No, no, go ahead. Go ahead, Nestor.

No, I was going to say, I don't know if you or you heard from Daxter, there was an abstract presented at last year's ACC with a very preliminary data. I think it was about eight patients. That last year's ACC with a very preliminary data. I think it was about eight patients. And it shows a lot of promising future of the two therapies together, but still very early in the research. Okay.

Thank you very much. I'll hop back in the queue.

Thank you. And at this time, I'm showing no further questions. I would now like to turn the conference back over to Nestor for closing remarks.

Thank you very much for attending the second quarter 2022 earnings call, and I wish you a happy day.

This concludes today's conference call. Thank you for participating. You may now disconnect.