Nuwellis, Inc.

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Good day and welcome to the Noelis, Inc.

Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star and two. Please note that this event is being recorded. I would now like to turn the conference over to Vivian Cervantes, Investor Relations. Please go ahead, madam.

Thank you, Sherry. Thank you, everyone. Good morning. Thank you for joining us to discuss Noelis's corporate developments, and financial results for the second quarter end of June 30, 2023. In addition to myself, with us today are Nestor Jaramillo, New Orleans' president and CEO, and Lynn Blake, CFO. We also have Dr. John Jeffrey, New Orleans' chief medical officer, joining us today. At 8.15 a.m. Eastern today, New Orleans released financial results for the quarter end of June 30, 2023. 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. All forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and the company assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to the cautionary statements and discussion of risk in the company's filings with the SEC, including the latest 10-K and subsequent reports. With that, I would now like to turn the call over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to New Orleans' second quarter 2023 earnings conference call. I would like to begin today's call with a recap of the press release that we issued this morning announcing our CFO transition. Effective September 1st, Lynn Blake will step down from her role as CFO. We sincerely thank Lynn for her contribution to New Orleans. Her positive impact would be felt long after her departure. Lynn has agreed to consult with the company through March 31st, 2024 to ensure a seamless transition. Rob Scott, our current Senior Finance Director, will be appointed as Lynn's successor. Rob has been with the company over 10 years and has an utmost confidence in his ability to lead the finance organization through the company's next phase of growth. Rob has very deep knowledge of the business, and I look forward to working with him on the leadership team. In the same vein, I would like to extend a warm welcome to our newest board member, Mike McCormick, who joined OLS in June. His extensive experience as an executive in the medical technology field would be of great value to the board, me, and our entire organization. Welcome, Mike. Turning to our earnings agenda, on today's call, I will provide an overview of our second quarter performance and will give an update on our strategic initiatives. I will also discuss our recent announced supply and collaboration agreement with DaVita and Dr. John Jeffries, our Chief Medical Officer will add his perspective on the Davida collaboration as well. Our Chief Financial Officer, Lynn Blake, will then provide detailed commentary on the financial results before opening the call up for questions, followed by my closing remarks. Turning to our second quarter results, in the second quarter of 2023, New Orleans generated $2.1 million in revenue. a 6% decline versus the second quarter of 2022, and a 14% increase over the prior quarter. Utilization, or the number of circuits per console sold, increased 14% over the same period last year, reflecting an increase in the number of patients treated with the Aquadex therapy, offset by a decrease in sales of consoles. We have observed similar macroeconomic conditions with other med tech companies that have announced growth in treatment procedures, but lingering capital constraints in many hospital accounts. By segment, we are pleased to report a rebound of our pediatric business in the second quarter, with sales increasing 72% from the first quarter, reflecting an improvement from the low census we saw in Q1, and continued momentum in our heart failure segment, supported by growing awareness of our clinical evidence. Second quarter 2023 revenue in heart failure increased 8% over the same period last year, while critical care and pediatric revenue declined 20% and 5%, respectively. In heart failure, The 8% revenue growth in Q2 follows year-over-year heart failure revenue growth of 21% in Q1 2023. These strong results can be attributed to growing awareness of our clinical data and support from multiple peer-reviewed publications over the past several months, validating the clinical and economic benefits of the Aquadex therapy. We continue to focus on driving awareness among clinicians and providers to help them understand that ultrafiltration is the next logical step in the care pathway. In other words, patients for whom oral or intravenous diuretics are not effective should immediately move to ultrafiltration therapy, which is a mechanical fluid removal solution and as such is more controllable, precise, and predictable. This is the message our field organization is now delivering, and based on the heart failure segment revenue results the past two quarters, the message is having positive results, as demonstrated by increased sales of disposable circuits. Now I would like to provide additional updates on our top strategic initiatives to help accelerate clinical adoption of our Aquadex ultrafiltration therapy. On June 20th, we announced we have entered into a supply and collaboration agreement with DaVita to pilot Aquadex Ultrafiltration Therapy to treat adult patients with congested heart failure and related conditions in select U.S. markets. Pairing the Aquadex system with DaVita's care team could expand access to ultrafiltration therapy to many of heart failure patients in the U.S. suffering from fluid overload and reduced related healthcare costs for providers and payers. The planning phase of the pilot program is underway. NUHELAS and DaVita are working together to actively explore sites for selection and develop treatment pathways. Through the pilot, ultrafiltration therapy using Aquadex will be available at certain DaVita hospital customers and outpatient center locations. with both companies collaborating on the rollout of the therapy, initial training, and patient support. At the conclusion of the pilot, DaVita has the option to extend the supply agreement with NWELAS for continued provision of ultrafiltration services for inpatients, emergency rooms, observation units, and outpatient facilities for up to 10 years. DaVita's clinical infrastructure could potentially help accelerate the clinical adoption of ultrafiltration when first-line medical treatments are ineffective. Our organization is thrilled and actively collaborating with the DaVita team as we prepare to roll out the therapy. Turning to our product development initiatives, we continue to advance the development of our pediatric continuous renal replacement therapy device and anticipate IDE approval in first half of 2024. This product addresses the unmet needs of the pediatric patient population and could significantly increase the quality of life for neonates and small children with kidney malfunction, kidney issues, or those born without kidneys, all of whom suffer from life-threatening renal dysfunction. We, along with many pediatric nephrologists, believe this product would be a game changer for this patient population. I would now like to turn the call over to our Chief Medical Officer, Dr. John Jeffries, to further discuss our strategic collaboration with DaVita. John?

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

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

Thank you, Nestor, and good morning, everyone. Revenue for the second quarter of 2023 was $2.1 million, representing a 14% increase over the first quarter of this year and a 6% decline versus the second quarter of 2022. By segment, second quarter 2023 revenue and heart failure increased approximately 8% over the same period last year, while critical care and pediatrics revenue declined approximately 20% and 5% respectively. As noted earlier, pediatrics revenue increased 72% over the first quarter of 2023, as we saw pediatrics census rebound by the end of the second quarter. And as Nestor mentioned, 14% more patients were treated with the Aquadex therapy than in the same period last year. Growth margin for the quarter was 55.3% of sales, an increase of 730 basis points compared to growth margin of 48% in the prior year quarter, driven by a combination of favorable sales mix as well as a $100,000 non-cash inventory write-off in the prior year period related to the discontinuation of a distribution agreement. Selling general and administrative expenses were $4.7 million in the second quarter of 2023, Compared to the second quarter of 2022, SG&A expenses increased by approximately $400,000. This increase primarily reflects increased legal, audit, and other professional fees in the current quarter. Second quarter R&D expense was $1.5 million, an increase of $400,000 compared to second quarter of 2022. This increase reflects higher spend on our new pediatric CRRT device, as we ramp up development and preparation for IBE submission in the first quarter of 2024. Total operating expenses were $6.2 million in the quarter, an increase of approximately 15% compared to the second quarter of 2022. Sequentially, total operating expenses decreased about 11%, primarily due to reduced professional fees and lower compensation expense versus the first quarter. Net loss in the quarter was $4.8 million or a loss of $3.65 per common share compared to a net loss of $4.3 million or $40.67 per common share for the same period in 2022. The decrease in the net loss per share in the current year quarter is driven by the year-over-year increase in our weighted average share count. From a liquidity perspective, we ended the second quarter with approximately $9 million of cash and cash equivalents and no debt on the balance sheet. And we had approximately 1.9 million common shares outstanding at June 30th. This concludes our prepared remarks. Operator, we'd now like to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone telephone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question is from Jeffrey Cohen of Lindenburg Salmon.

Hi, good morning. How are you?

Good morning, Jeff. Good morning, Jeff.

So just a couple questions from Aaron. I guess firstly, any commentary specific to the critical care division for the quarter down 20% year-over-year? Is it one time in nature or any contributing factors that we should be aware of?

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

Got it.

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

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

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

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

Okay, got it. That does it for us.

Thanks for taking our questions. Thank you, Jeff.

Next question is from Anthony Vendetti of Maxim Group.

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

We have reactivated

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

Okay, so reactivated three, opened two new.

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

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

And then just a little more on the debate of agreement. there's select markets that you're going to roll this out into. Have those been identified? And then any color on how, once it's been rolled out into those select markets, what's the timeframe if there has been one established to roll it out into other territories?

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

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

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

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

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

Thank you, Anthony.

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

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

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

Did I answer all of your questions?

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

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

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

All right.

It's very easy.

I believe it should be.

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

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

Yes, we believe that that is what the data is showing, that of the million heart failure hospitalizations, 90% of them are due to the symptoms of fluid overload.

Right.

Wow. And, Bruce, our message is working. We increased the number of patients that are treated with Aquadex by 14% over the second quarter of last year. So we continue to increase the utilization, the number of patients treated, and that is because of the clinical data that we have provided to the physicians.

That's good. All right.

I continue to believe.

Yes.

Onward and upward.

Continue believing, Brooks. Great. Thank you. Thank you, Brad. Thank you.

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

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

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