Nuwellis, Inc.

Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero. Good morning and welcome to New Wellness Earnings Conference Call for the second quarter ended June 30, 2024. All participants will be in a listen-only mode. Should you need any 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 telephone keypad. To withdraw your question, please press star, then two. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately one hour after the end of the call. I would now like to turn the conference over to Vivian Cervantes, Investor Relations for Gilmartin Group. Please go ahead, ma'am.

Thank you, Operator. Good morning, everyone. Thank you for joining us in today's conference call to discuss Newellis' corporate developments and financial results for the second quarter end of June 30, 2024. In addition to myself, with us today are Nestor Jaramillo, Newellis' president and CEO, as well as Rob Scott, CFO. We are also joined today by our chief medical officer, Dr. John Jeffries, who is available to take your questions. At 8 a.m. Eastern time today, Newellis released financial results for the second quarter of 2024. If you have not received Newellis' 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 your 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 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 for the SEC, including the latest 10-K. With that, I'd like to now turn the call over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to New Orleans' second quarter 2024 earnings conference call. On today's call, I will provide an overview of our second quarter performance and give an update on our strategic initiatives. Our Chief Financial Officer, Rob Scott, will then provide detailed commentaries on our financial results before opening up the call for questions, followed by my closing remarks. New Orleans generated $2.2 million in revenue for the second quarter of 2024, a 6% increase year-over-year, driven by a 30% increase in heart failure and critical care consumables utilizations. which translates to an increase in the number of patients being treated with Aquadex. This growth in consumables is a strong indication of the broader use of the Aquadex therapy in patients with fluid overload and not necessarily only in heart failure patients. Pediatrics saw a 10% revenue decline in the quarter with an increase in console cells offset by a decrease in consumables utilization. As a reminder, the utilization in consumables in the pediatric customer category is driven primarily by census, or the number of children born with kidney disease, which was soft this year, this quarter. However, our pediatric business continues to be strong with solid momentum as we expand Aquadex to pediatric patients at one of the largest hospital networks in Florida in mid-May. Fueling the growth in consumables is the new data supporting the clinical and economic benefits of using Aquadex that were presented at the Technology and Heart Failure Therapeutics Conference early this year. Now turning to our recent commercial developments and new product introductions. We were pleased to announce the first commercial sale of Qualimmune to Cincinnati Children's Hospital last month. This is a significant milestone as it allows us to further penetrate the pediatric market and significantly advance the standard of care in pediatric critical care. Qualimmune, or the selective thyrophoretic device for pediatrics, represent a transformative solution for pediatric patients suffering from acute kidney injury due to sepsis or a septic condition on antibiotic therapy and who require kidney replacement therapy. Early clinical data suggests a 77% survival rate for patients treated with this new therapy. As a reminder, New Welles have an exclusive U.S. license and distribution agreement for pediatric hospitals with C-STAR Medical. This therapy is now accessible under the humanitarian device exemption from the FDA to medical institutions like Cincinnati Children's, giving nephrologists and intensive care physicians a novel option to address the needs of these critically ill pediatric patients. We believe this product will have a positive impact on the patient population it serves, and we look forward to providing continued updates as we continue to roll out more devices around the country. We continue to be excited about our pediatric continuous kidney replacement therapy device, branded Vivian, which we are developing currently. We, along with many pediatric nephrologists, believe this product will have a positive impact on survival and improve the quality of life of neonates and small children with limited or no kidney function, kidney issues, or those born without kidneys. This device is complementary to the Qualimmune device, and we believe these two products together will add meaningful value to our growing portfolio of products for pediatric patients with fluid overload and renal disease. I'd like to now turn to Rob to discuss our second quarter financial results.

Thank you, Nestor, and good morning, everyone. Turning to the Q2 financial results, revenue for the second quarter was $2.2 million, representing a 6% growth over the prior year period, driven by a 9% increase in consumables utilization and strong U.S. console ASPs. Our critical care customer category led the way with 28% growth, followed by heart failure with 9% growth year-over-year. These customer categories were up primarily due to consumables utilization and more patients being treated with Aqueducts. Pediatric results were down 10% year-over-year, primarily due to a decrease in consumables utilization. As Nestor mentioned, our pediatric business depends primarily on census. Gross margin was 67.2% for the second quarter compared to gross margin of 55.3% in the prior year quarter. The margin improvement was primarily driven by higher manufacturing volumes of consumables and lower fixed overhead manufacturing expenses. Selling general and administrative expenses were $3.2 million in the second quarter, a decrease of approximately 31%, as compared to $4.7 million in the second quarter of 2023. The decrease in SG&A was primarily realized through efficiency initiatives enacted in the second half of 2023. Second quarter research and development expense was $558,000 compared to $1.5 million in the prior year period. The decrease in R&D expense was primarily due to reduced consulting fees and compensation-related expenses. Total operating expenses were $3.8 million in the quarter, a decrease of approximately $2.4 million, or 38%, as compared to the second quarter of 2023, as we continue to realize savings from operating efficiency initiatives enacted in the second half of Operating loss in the second quarter was $2.3 million compared to an operating loss of $5 million in the prior year period, resulting in a $2.7 million period-over-period improvement. Net loss attributable to common shareholders in the second quarter was $7.7 million, or a loss of $18.85 per share, compared to a net loss attributable to common shareholders of $4.8 million, for $127.65 per share for the same period in 2023. We ended the second quarter with $1 million in cash equivalents and with no debt on the balance sheet. On July 25th, New Ellis closed a registered direct offering of common stock and concurrent private placement of warrants to purchase common stock with gross proceeds of approximately $2 million before deducting placement, agent fees, and other offering expenses. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Thank you. And at this time, if you would like to ask a question, please press the star 1 on your telephone keypads. Again, you may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll pause for a moment to allow the questions to enter the queue. And while we wait, we'll take our first question from Jonathan Ashcroft from Roth.

Thank you very much. Good morning, guys. I was wondering, can you help us on the R&D trend guidance, you know, that drop? Is that reflective, you know, kind of representative of what's going on going forward, or is that going to pop back up a little?

That's a great question, Jonathan. Yeah, just to speak to that trend, we do anticipate the spend to continue maybe consistent with where it is in Q2. However, you know, going forward, we will be continuing development of Vivian, our pediatric continuous renal replacement device. The long hole in the tent is software development. We anticipate ramping that up here in the very near future. So, yeah, I anticipate some pickup in R&D expenditures, maybe not right away here in T3. All right.

Okay. I'm juggling about three calls here. So I don't know what you said earlier, but can you talk about your pediatric percent of revenue, the growth with that, and how things might be going on with that Florida pediatric hospital?

Yeah. Jonathan, this is Nestor. Thank you for joining. Our pediatric business represents about 30%. of the total revenue, and it's primarily driven by two factors. One is opening new accounts, and the other one is census or babies and small children born with kidney or renal failure. So this quarter, while we saw an increase in the console sales because we opened new accounts, we also saw a decrease in the census. which means there wasn't that many small children or babies born with kidney disease. And that is the primary driver for our pediatric utilization of consumables.

Okay.

Did you speak to any sort of guidance you might have for Qualimmune, given that that's, you know, A, started, and B, actually in patients, you know, being used with patients already?

Right. Jonathan, it's hard to give guidance on Qualimmune, and the reason for that is that this is an HDE-approved device, and HDE requirements are that hospitals need to have IRBs, Internal Review Board approval, by every hospital, one at a time. So we need to get the IRB approvals in the hospitals before they can issue a purchase order. So right now, a lot depends on the IRBs, on the hospitals, when do they meet, what kind of questions they have. So, so far, we only have one hospital that have gone through the whole process of IRB and then purchase orders submission.

And that's actually more than the first patient that you had announced earlier, or is it still one patient treated?

No, there's been more than one patient treated in the same, in one hospital in Cincinnati Children's. Okay. I believe that it's been about three patients. Don't quote me on that number, but I think it was about three patients that have been treated. I last talked to a nurse about a week and a half ago, and that was the information that she provided.

And, you know, did you give any update on the progress with the trial with Divya?

The pilot.

The trial with Divya, we have not. Oh, the pilot with Vivian. We have not finished.

No, no, the pilot with Davita. The pilot with Davita in their specific hospital room.

Yeah. Jonathan, that is a good question and difficult to answer because, frankly speaking, we have not seen that much progress from last quarter. It's been slower than anticipated. It has required a lot more interaction with the hospitals that we anticipated. And just as a reminder, this pilot was new, or the utilization of Aquadex in a hospital by the DaVita personnel is new to DaVita, is new to us, and is new to the hospital. They have never been done ultrafiltration by a third party in a hospital. So what we have anticipated or what we've seen is a more intense interaction between hospitals and AVIDA and us than expected.

I mean, wouldn't they be the easiest group to treat? You know, I mean, the easiest people to train. I mean, these guys, you know, spend all day, you know, sticking straws into people. And, I mean, wouldn't they kind of be the easiest folks to get to use Aquadex efficiently?

Totally. Absolutely, absolutely. But training is not the issue. Training DaVita personnel is not the issue. The issue is that DaVita has contract with hospitals, and they need to amend that contract, issue letters of understanding, and also creating a new protocol within the hospitals to transfer patients or to have patients treated with DaVita personnel for heart failure patients suffering from fluid overload. That has been the main issue.

Okay, so the very last question is, can you speak to any traction that you're getting with that 50 hospital network relevant to Aquadex?

Yeah, we're getting good traction in that network. It is a network that has been using the adult devices in adults. So they are very familiar. The hospital administration is very familiar with Newellis. And now using it in pediatric hospitals is going to be a very positive event for us.

All right. Thank you very much, guys.

Thank you. And next we'll go to Anthony Vendetti with Maxim Group.

Thank you. On the pediatrics, I know, Nestor, to about 30% of revenues. Can you talk to how many accounts were added this quarter and what your current total is at? And then I have a follow-up. Thanks.

Okay. Yeah. We opened one pediatric account this quarter and total of 41 accounts using the Aquadex for pediatric patients. 41 accounts.

Okay, great. And then... The reverse HF trial, is that still on track to complete site enrollment by the end of 24 and patient enrollment by the end of 3Q25?

Completing patient enrollment in Q3 2025, yes, we believe that we're on track of that. We have seen a slow in enrollment. I believe that is due to the summer months. But in general, it's going well. We are over a third of the patients required to be enrolled in this study.

Okay. And then last on the C-STAR partnership, and I know you need an IRB for each hospital, but can you talk about, you know, how that partnership has been set up and from what I understand, your sales force was trained on it. How that works financially for New Ellis, and then what the sales process looks like, understanding that each hospital has to go through the IRB process. Good question.

Anthony, the C-STAR, by the requirements of the HDE, they are responsible for obtaining the IRB approvals in each hospital, and also there is a requirement to do a registry. So every patient, for the first 300 patients, needs to be in a registry, and that is by requirements of the HDE. So C-STAR is responsible for the IRB, and running the registry. We do everything else. We participate in the training of the hospital, and that is a collaboration between Seastar and New Orleans. And then after that, we take care of everything that has to do with the value analysis committee, getting the purchase order, delivering the product, and shipping the product. and then assisting in the hospitals with our clinical specialists.

Okay, yeah, that's helpful. Yeah, so it's quite a process, and it sounds like it's a shared responsibility.

Right. But I also would like to add, Anthony, if I may, since this is an HDE device and is new to the world, We, meaning C-STAR and us, we made a conscious decision to do a controlled, limited launch of the product. That includes five hospitals that we targeted to get them established and treating patients. And after that five, we're going to do another five. And we hope that we can get to those 10 hospitals by the end of the year. But it is a controlled, limited launch.

Okay, that's very helpful. Thanks for that caller, Nestor. I'll hop back in the queue. Appreciate it.

All right. Thank you.

Thank you. And as a reminder, ladies and gentlemen, that is star one for a question. We'll pause for a moment. At this time, we have no further questions. I'd like to turn the call back over to Mr. Jaramillo for any closing remarks.

Thank you, operator. We continue to see positive momentum in 2024, led by a broadening awareness of the efficacy of Aquadex, thus driving increased consumables utilization and therapy adoption, helped further by new pediatric accounts and as we added revenue from qualimmune cells. I want to thank all our stakeholders as well as employees, stockholders, physicians, nurses, patients, and healthcare workers in the field. Without your support, we would not be able to achieve key advances in transforming the lives of patients suffering from fluid overload. Thank you for your participation and support, and we look forward to a productive second half of 2024.

Thank you for joining us today. This concludes today's conference call. You may now disconnect your lines.