Nuwellis, Inc.

Good day and welcome to the New Ellis third quarter 2023 earnings conference call. All participants will be in a 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, please press star, then one. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Vivian Cervantes, Investor Relations with the Bill Martin Group. Please go ahead.

Thank you, Danielle, and thank you, everyone, for joining us in today's conference call to discuss Newellis' corporate developments and financial results for the third quarter ended September 30, 2023. In addition to myself, with us today are Nestor Jaramillo, Newellis' President and CEO, and Rob Scott, CFO. We also have Dr. John Jeffries, NWELLIS' chief medical officer with us today. At 8 a.m. Eastern today, NWELLIS released financial results for the quarter ended September 30, 2023. If you have not received NWELLIS' earnings release, please visit the investor's page of the company's website. During this 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 of 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 currently 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'd like to turn the call now over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to New Orleans' third quarter 2023 earnings conference call. For our call today, I will provide an overview of our third quarter performance and give an update on our strategic initiatives, including our supply and collaboration agreement with AVIDA and our exclusive license and distribution agreement with C-STAR for its Selective Cytopheretic Device, or SCD, which recently received an FDA-approvable letter for use in pediatric acute kidney injury under a proposed humanitarian device exemption. Dr. John Jeffries, our chief medical officer, will also add additional color on our DaVita collaboration and our clinical programs and will provide his perspective on recent news affecting the renal industry. Our chief financial officer, Rob Scott, will then provide detailed commentary on the financial results before opening the call for questions, followed by my closing remarks. Before I turn to third quarter results, I would like to acknowledge concerns about the current market situation and its effect on companies like Nuelles. The reason I feel confident in the future of Nuelles is because we have three fundamentally sound short-term growth drivers. First, We have our organic business, which is growing, represented by five consecutive quarters of year-over-year growth in our core heart failure business. Second is the expected commercialization of three new products within the next two years. And third is our supply and collaboration agreement with DaVita. Turning first to our organic growth and third quarter results, In the third quarter of 2023, New Orleans generated $2.4 million in revenue, a 17% increase versus the third quarter of 2022, and a 16% increase over the prior quarter. What is most relevant in our view is therapy utilization, or the number of circuits per play console, which increased 26% over same period last year, reflecting continued increase in the number of patients being treated with the Aquadex therapy. Last quarter, in Q2, the utilization was 14%. By customer category, we are pleased to see firm growth across each of the three category targets. With third quarter 2023 revenue in heart failure, posting a 27% increase over the same period last year, critical care, a 16% increase, and pediatrics, a 9% increase. Higher console sales led the heart failure growth, while utilization gains drove critical care and pediatric performance. We continue to attribute strong organic growth, especially in heart failure, to the growing awareness of our clinical data and support from multiple peer-reviewed publications over the past 18 months, validating the clinical and economic benefits of the Aquadex therapy. We are focused on driving awareness among clinicians and providers to help them understand that ultrafiltration through the use of the Aquadex system is the logical step when diuretics are not working and should be implemented earlier in the care pathway. Patients for whom oral or intravenous diuretics are not effective should immediately move to the mechanical fluid ultrafiltration therapy, which is more controllable, precise, and predictable. This is the message that our field organization is consistently delivering and is having positive results. I would like to point out that our installed base measured by placed Aquadex consoles is key for New Orleans because it generates revenue quickly and is a leading indicator for growth in utilization of the therapy. The more consoles we place, the more patients are treated. With that, although our installed base in Q3 grew, we also continue to see lumpiness in hospital capital spending trends. Hospitals across multiple geographies are still facing capital budget constraints. As we navigate this environment, we are pleased to offer both rental programs and consult sales, all while driving increased utilization in our systems. For example, in the first half of this year, our sales of consults were soft, but our rental revenue increased by 36%. However, in Q3, our sales of consoles grew sequentially, but our rental revenue was soft. The good news is that hospitals are getting around the capital budget constraints by renting consoles while still growing the number of patients treated with the Aquadex therapy. We will continue to monitor hospital capital spending, especially in light of an elevated interest rate environment. Our second growth driver is our expected new product introductions within the next two years. We are excited that Seastar Medical recently received the FDA approvable letter for its selective cytokine device, or SCD, where we are exclusive U.S. distribution rights for the use in pediatric acute kidney injury patients. We are even more excited about the pool analysis from two non-controlled clinical studies showing that pediatric patients over 10 kilograms with acute kidney injury requiring continuous kidney replacement therapy treated with C-STARS SCD had a 77% reduction in mortality and zero dialysis dependency at day 60 and zero device related serious adverse events or infections. Turning to our internal product development program, also earmarked for our high-growth pediatric patient category, we continue to advance development of our pediatric continuous kidney replacement therapy device, which is complementary to the C-STAR SCD therapy. We, along with many pediatric nephrologists, believe this product will have a profoundly positive impact in survival and significantly improve the quality of life of neonates and small children with kidney malfunction, kidney issues, or those born without kidneys. We are executing to plan to continue and continue to expect IDE approval in the first half of 2024 with full FDA clearance and commercial launch in the U.S. early in 2025. Finally, we continue to move forward with our supply and collaboration agreement with AVIDA to pilot Aquadex ultrafiltration to treat adult patients with congestive heart failure and related conditions in selected U.S. markets. In pairing the Aquadex system with AVIDA's care team, we aim to expand ultrafiltration therapy to many of the heart failure patients in the US suffering from fluid overload and unresponsive to diuretics. We are actively engaged in finalizing treatment pathways and pilot study sites. At the conclusion of the pilot, DaVita has the option to deliver its ultrafiltration service approval and expand ultrafiltration services to inpatient, emergency room, observation units, and outpatient facilities in their contracted hospital accounts. Once that approval is delivered, our supply and collaboration agreement will be effective for up to two five-year terms. We believe the future success of our pilot program with DaVita could potentially accelerate the clinical adoption of ultrafiltration when first-line medical treatments are ineffective, changing the revenue growth trajectory for New Orleans with an accelerated path to profitability. I would like now to turn the call over to our chief medical officer, Dr. John Jeffries, who will provide additional call on our FIDA collaboration and our clinical programs, in addition to his perspective on recent news affecting the renal industry.

Dr. Jeffries? Thank you, Nestor, and good morning, everyone. I'd like to cover three topics with you today. First, our collaboration with DaVita, as you heard alluded to. Second, the progress we were making with our reverse clinical trial. And then third, our thoughts on ongoing announcements regarding the impact of a certain class of weight loss drugs or these so-called GLP-1 agonists in renal care and our business. So for us, it's encouraging to note that our collaboration with DaVita continues to leverage expertise from cardiovascular medicine and nephrology, which provides a powerful vehicle to enhance our understanding of the cardiorenal syndrome. As such, we continue to look forward to increased awareness of the growing number of heart failure patients in the United States and improve recognition of ultrafiltration as a safe and effective therapeutic option. Whereas treatment of fluid overload continues to center on the use of oral and intravenous diuretic therapies, Aquadex offers a more predictable and precise approach to treatment of this very difficult clinical condition. Building on our body of clinical evidence, we continue to make progress on our reverse HF trial, evaluating mortality and heart failure events within 30 and 90 days of hospital discharge. To date, we now have 15 sites activated and a seven-fold increase in the number of enrolled patients since Q4 of 2022. As it relates to weight loss drugs, GLP-1 receptor agonists are increasingly prescribed in the US and internationally. These drugs are known to help regulate blood sugar levels. There are reports that GLP-1 receptor agonists may also reduce the risk of heart failure and other cardiovascular events in patients with type 2 diabetes. There's also evidence that these drugs may improve symptoms of heart failure. However, these reports are relatively small, and long-term benefits in these areas are yet to be determined. Therefore, it is currently unclear how GLP-1 receptor agonists will impact the use of ultrafiltration. Given the increasing number of heart failure patients around the globe, there will likely still be a strong need for fluid removal in these patients some of which will benefit from mechanical diuresis as opposed to drug-based interventions. In addition, this class of drugs may have the potential to bend the curve across multiple phenotypes, which means that there may be different rates of progression to advanced heart failure and other diseases, such as end-stage renal disease. It may mean that more people will ultimately benefit from additional therapeutic options, such as Aquadex. For example, instead of going to a mechanical device such as a left ventricular assist device or a heart transplant, patients may continue to be treated with guideline-directed medical therapy and experience heart failure exacerbations, which presents an opportunity for us to deliver ultrafiltration therapy to improve volume status in these acute and chronic settings. Thank you, and I'll turn it back over to Nestor.

Thank you, Dr. Jeffries. With that, let me now turn the call over to Rob to discuss our Q3 financial results.

Rob? Thank you, Nestor, and good morning, everyone. Revenue for the third quarter of 2023 was $2.4 million, representing a 16% increase for the second quarter of this year and a 17% increase versus the third quarter of 2022. By customer category, third quarter 2023 revenue in heart failure increased approximately 27% over the same period last year, and critical care and pediatrics increased 16% and 9% respectively. We are pleased to highlight that despite hospital capital budget constraints, console sales increases led heart failure category growth, while increases in utilization of the Aquadex systems drove critical care and pediatric performance. Gross margin was 57.3% for the third quarter of 2023, compared to 61% in the prior year period. The decline in gross margin was primarily driven by lower console manufacturing volumes. However, our U.S. disposable product margins are 74%, which are in line with medical technology industry standards. Selling general and administrative expenses in the third quarter were $3.4 million, a decrease of approximately $800,000 compared to the prior year quarter, driven by reduced headcount and related compensation expense. Third quarter research and development expense was $1.1 billion, an increase of approximately $200,000 compared to third quarter 2022, reflecting a modest increase in spend related to the final phases of development of our new pediatric CRRT device as we approach IDE submission. Total operating expenses were $4.5 million in the quarter, a decrease of approximately 12% compared to the third quarter of 2022, and a decrease of 26% sequentially. Both the year-over-year and sequential decreases were due to cost-saving measures implemented early in Q3. Net loss in the third quarter was $3.4 million or a loss of $1.81 per common share compared to a net loss of $3.9 million or $36.72 per common share in the prior year period. The year-over-year decrease in the net loss per share is driven by an increase in sales lower spend, and an increase in weighted average share count. We ended the third quarter with no debt and $4.9 million in cash and cash equivalents on the balance sheet, and we had 1.9 million common shares outstanding at September 30th. On October 17th, we closed $2.25 million of gross proceeds before deducting underwriting discounts and commissions and a public offering of Series J, convertible, redeemable, preferred stock, and warrants. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question comes from Aaron Wuchmier from Lake Street Capital. Please go ahead.

Hey, good morning, guys. This is Aaron on the line for Brooks this morning. I guess I want to start with sort of your expectation regarding the partnership with DaVita as it sort of relates to what you see them contributing to your success and the financial arrangement you have with them. I know you mentioned a little bit in the prepared remarks, but I'm just trying to get a bit more color on what we can sort of expect with that aspect going forward here.

Yes, good morning, Aaron. Good question. As you know, DaVita provides both ambulatory dialysis service as well as inpatient dialysis for patients that are hospitalized needing dialysis. And they have a team of nurses and medical staff to provide that dialysis in the inpatient, in what they call the DaVita multi-treatment rooms. So the idea is for patients needing ultrafiltration that have contract with DaVita for the dialysis is to do their ultrafiltration in their rooms. Now, when you look at their public documents that they have published, you see that they have a large number of contract hospitals doing the dialysis. So the idea with this collaboration and supply is for us to sell the product to DaVita and they will provide the services to the hospitals to do ultrafiltration in fluid overload patients. Okay. Did I answer your question, Aaron?

Yeah, yeah. And then I guess sort of the same question in reference with Seastar, you know, how would that differ materially, I guess?

Well, their device for pediatric use, we have an exclusive license and distribution agreement with them. Patients, pediatric patients needing to come into the hospital with inflammatory reaction can be treated with the C-STAR device and significantly improve their mortality rate as well as their quality of life. So the idea is for us, for our organization, our field organization, to distribute that product in the pediatric hospitals, especially the ones where we have also ultrafiltration business.

Gotcha. Okay. And then if I could ask just one quick follow-up. You know, obviously there's a fairly significant reduction to operating expenses this quarter. You sort of mentioned that they were due to some cost-saving measures. Is this sort of the plan moving forward to continue to make these cuts to OPEX or do you sort of see a different path to sort of achieving your longer-term goals? Thanks for taking the questions.

Yes. On the last question, we did some savings measures in Q3. because we needed to right-size and also provide more runway to our cash. So we don't expect to do anything more in the future, anything drastic in the future, but we will continue to find ways to be more effective and efficient, both in the field as well as here in our headquarters with our product margins. Gotcha. That's very helpful. Thank you, guys. Thank you. Thank you, Erin.

The next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Thanks. Good morning, guys. Good morning. Just a little bit more of a follow-up on DaVita. So I know it's the pilot phase, but can you talk a little bit about what the plan is for the rollout How many centers? And during this pilot phase, do you expect there to be a contribution to sales either in this quarter at all, or is it more of a 2024 situation?

Yes. Yeah, good question, Anthony. Just to be clear, this is – Collaboration that we were doing with DaVita is new to every stakeholder in this treatment. I mean, it's new to DaVita, it's new to us, and it's new to the hospitals. So we decided to do a pilot just to learn everything that we need to learn about this collaboration, which includes treatment pathways for patients, billing, a contract amendments that DaVita would have to do with their hospital customers. So we wanted to take the time to make sure that everything goes well both for the hospitals as well as for DaVita and for us. So that's why we're initiating this pilot and we are in the process of defining the care pathway, what are the sites that are more fitted to do this collaboration and So we're having a lot of good results, a lot of good acceptance by hospitals that are contracted by DaVita, but they want to do ultra filtration. And for reasons, they have capital budget issues or nursing staff issues. So they feel that the collaboration with the Welles and DaVita will fit their needs appropriately. So to answer your second part of your question about the impact in Q2, Well, the idea is that DaVita would buy the consoles and the circuits as we start treating patients in the hospitals.

Okay, so they'll start actually purchasing them. You mentioned the contract, contract amendment, Nestor. So DaVita has a certain contract with their customers and the amendment to add in ultrafiltration Is that just a small amendment that they add in and what would that look like? Do they have to agree to purchase? Could they rent? Is there a lot of flexibility there or are you attempting to standardize it with DaVita and their customers?

Good question, Anthony. The answer to those questions is what we plan to obtain with this pilot. So right now, DaVita has contracted hospitals to do dialysis, so they will have to amend those contracts to do ultrafiltration. DaVita will buy the product from us, and they will provide the services to their patients with their own clinical staff. So what I assume is, or what we are all assuming, is that the hospital would pay a per-patient fee to DaVita for treating those patients for ultrafiltration. But DaVita will take care of the rest.

Okay, great. That's very helpful.

Yeah, and that's the benefit for the hospital. Hospitals that are having some capital budgets or nursing staff, this is a viable way for them to treat ultrafiltration patients.

And then a follow-up on the difference between that and maybe Seastar's SED device for pediatrics. So is that a similar situation where you purchase from Seastar and then you sell that device either with your ultrafiltration device or separately depending on what the customer is looking for?

Correct. We will purchase the product from C-Star, and then we will sell it to the customers with our ultrafiltration services. But let me just clarify something here, too. Our new pediatric dedicated device would be a CRRT device. That's the device that would be paired with C-Star's device right now. Right now, when we start selling the device, the C-STAR device, that would be to use with their own CRRT devices that the hospitals would already have.

I see. So your new continual replacement renal therapy device is what you'll pair with the SCD device. But right now, until that device is available, the hospitals are using whatever device they have for CRRT.

Correct. Right now in the market, there is only adult CRRT devices being used on these pediatric patients. So the C-STAR device will be used with any CRRT device currently used to treat this patient, but they're all adult. When we introduced our pediatric dedicated CRRT device, together with the C-STAR device would be a much better therapy for these patients. This is why we believe, as well as many pediatric nephrologists, that this is going to change, be a game changer.

Game changer, yeah. Sounds like a good partnership. Correct. You did mention, I just wanted to say, you mentioned two, did you mention two to three new products, this being one of them? Were there others that you could talk about or not at this time?

Mm-hmm. Yes, good observation, Anthony. We have three new products that we are going to be introducing in the next two years, starting with the C-Star device. That's one. We're also introducing very soon an additional catheter, venous catheter, to be used with our Aquadex system. And then... mid-2025, we plan to commercialize the pediatric dedicated CRRT device. So those are the three devices in the next two years.

Great. Okay, thank you very much. Appreciate it. I'll hop back in the queue.

Thank you.

As a reminder, if you have a question, please press star 1. Seeing that there are no further questions, I would like to turn the conference back over to Nestor Jaramillo for closing remarks.

Thank you, operator. We are deeply encouraged by our progress across multiple initiatives, including organic growth in our core business. We believe the success of our Davida pilot program will lead to ultrafiltration service approval, expanding ultrafiltration therapy, and meaningfully accelerate our revenue growth and path to profitability. To this, we add new product opportunities in our high-growth pediatric category with the C-STAR SED device, targeted for marketing approval for commercialization by year-end 2023 or early 2024, depending on the HDE approval. Finally, with increased awareness of our body of clinical and economic evidence, We are continuing to advance market penetration in our ultrafiltration therapy with healthy growth in therapy utilization in our heart failure, critical care, and pediatric categories. As we conclude our call, I would like to thank all our stakeholders, as well as employees, stockholders, physician, nurses, patients, and healthcare workers in the field. We have a full and exciting lineup of opportunities ahead And I appreciate your continued support as we drive meaningful progress in our initiatives to transform the lives of patients suffering from fluid overload with our Aquadex system ultrafiltration therapy. Thank you.

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