Q2 2020 CHF Solutions Inc Earnings Call

Good morning, and welcome to the CHF solutions <unk> earnings Conference call.

The second quarter ended June Thirtyth Twentytwenty.

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I would now like to turn the conference over to Claudia Drayton, The company's Chief Financial Officer. Please go ahead.

Thank you Phyllis <unk>.

Thank you for joining today's conference call to discuss CHF solutions corporate developments in financial results for the second quarter ended June Thirtyth 2020.

With us today are John or if the company CEO and chairman of the board myself, Claudia Drayton, the company's CFO and Mr. heard me all the company's president and Chief operating Officer.

I am eastern time today, CHF solutions released financial results for the quarter ended June Thirtyth 2020.

If you have not receive CHS solutions earnings release.

Please visit the Investor page Www Dot CHF dashed solutions dotcom.

During the course of this conference call the company will be making forward looking statements.

Except for historical information mentioned during the conference call statements made by the management of CHF solutions are forward looking statements 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, there based on managements 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, maybe unable to build revenue in future quarters, but the company, maybe unable to execute its commercialization strategy.

Possibility that it may be unable to raise the funds necessary for the company's dissipated operations.

But the company may not be able to commercialize its products successfully and the other risk factors described under the caption risk factors and elsewhere in the company's filings with the Securities Exchange Commission.

By providing this information the company under two undertakes no obligation to update or revise any projections or forward looking statements.

Whether I said result of you information new developments or otherwise.

You should review the cautionary statements in discussion of risk factors included in the company's press release issued today. The company's latest 10-K subsequent reports as well as its other filings with the Securities and Exchange Commission under entitled Risk factors or cautionary statements related to forward looking state.

For additional discussion of risk factors that could cause actual results to differ materially.

Managements current expectations.

Those discussions regarding risk factors as well if the discussions the forward looking statements in such sections are incorporated by reference in this call and everybody will be available on the company's website at www Dot CHF solution Dot com.

With that said I would now like to turn the call over to John Urban CHF solutions, Chief Executive Officer in Chairman of the board.

Thank you Cloudier and good morning, everyone welcome to the second quarter 2020 earnings call and corporate update.

This year continues to be a challenge for health care throughout the world due to due to the ebb and flow of the pandemic.

Although the world has dramatically changed we know our business model has not changed in the long run and we remain optimistic about the durability up our business, we're confident that our priorities are clear and focused.

Our goal is to grow our global market leadership and fluid management with solutions that change patients' lives.

As I have described in the past, we're expanding beyond our initial business of serving the needs of chronic heart failure patients to meeting acute needs in critical care citrus cardiovascular surgery, and the life saving needs in pediatric kidney care.

The company achieved very solid performance in the second quarter of 2020, Despite hospital access restrictions elective surgeries dramatically reduced and hospital financial concerns in restrictions on purchasing capital equipment.

We achieved our highest quarterly revenue with growth of 14% over prior quarter and opened four new hospital accounts in the quarter also in this quarter, we re initiated aquilex therapy and nine additional hospitals that had been a bad debt.

The therapy during baxter's ownership.

Additional accomplishments included they use a buck with X by intensive Bush and Nephrologists and treating their cobot 19 patients demonstrating opportunity to prevent acute kidney injury and mitigating the need for dialysis, we hosted and interactive clinician led webinars to discuss cardiopulmonary.

Renal management in real World Cup in 19 patients moderated by Daniel Goldstein, M.D. Professor Vice Chairman Department of Cardio thoracic surgery Montefiore Medical Center in New York.

We submitted a patent application born adaption to the awkward X smart full system to rapidly clear cytokine, including interleukin six from the blood.

Removal of cytokines for the blood may improve the condition of patients suffering from covert 19, and many other infectious diseases.

We signed a distribution agreement with Trans she met medical equipment company, LLC, covering United Arab Emirates. The first distribution partnership in the Middle East region. The company now has a distribution agreements covering 14 countries outside the U.S.

Oh, it's children's hospital of the Kings daughters in Norfolk, Virginia has initiated ultra filtration therapy, using the architect Smartflow system in pediatric care.

The company hosted an interactive physician led webinars to discuss the recent publication Sars Cove to cover 19, and inter Bachelor volume management strategies in the critically ill and the role of both filtration and the treatment of patients with Coke in 19 moderated by Rabindra.

Mehta M.D. Professor of clinical Medicine Emeritus Division of Nephrology and hypertension Department of Medicine University of California, Shandy go school of Medicine.

We initiated a pilot distribution agreement with renal since limited to offer complementary solutions for fluid management.

The agreement Oh, CHF solutions to market and sell renal census, clarity R.M.S. real time monitoring system in certain U.S. territories.

Clarity RMS is a critical care monitoring systems that continuously measures urine flow rates and automatically transmits real time data and fluctuation notifications to medical staff on a 24 seven basis.

This information reflects changes in renal function and provides an early sign of acute kidney injury risk, enabling rapid intervention with therapeutic solutions, such as CHF solutions architects Smartflow Ultra filtration system.

Subsequent to the end of Q2 on July 14th we announced key takeaways from our recent Webinars, where David as Canarsie MD shared his experience and perspectives on the treatment of fluid overload in pediatric patients weighing more than 20 kilograms also sub subsequent.

To the quarter end on July 16, we announced the development of a pediatric registry through a partnership with the acute kidney injury critical care Research Foundation and Watermark Research partners. The registry will collect real world evidence on the use of our codecs Smartflow ultrafiltration system in.

Pediatric patients with fluid overload.

During second quarter, our efforts help physicians and hospitals battle, both terrible effects of Cobot 19 pandemic did have a positive impact on utilization of disposable in those hospitals, where the aquatech system had been utilized in the I see you're setting prior to the pandemic.

They use a buck with X by intensive best and Nephrologist in treating their Soviet 19 patients has demonstrated the opportunity to prevent acute kidney injury and mitigate the need for dialysis.

Although we are very optimistic there is a considerable level of uncertainty for the future. So we are closely managing our cash implementing expense controls and pursuing avenues to fund operations.

I'll now turn the call over to Cloudier, who will walk you through our Q2 2020 results and financial details following that I will provide some additional comments and we'll then open the call for questions.

Thanks, John Good morning, everyone.

Turning to our financial results revenue for the second quarter was a million 863000, an increase of 14% sequentially from Q1, 2020 and up 11% from Q2 of last year.

Revenue performance for the quarter was driven by increased demand from hospitals treating called the 19 patients.

This increase helped offset the impact of access restrictions on many hospitals have imposed on or sales representatives.

For the second quarter of the year, we estimate that 34% of our revenue was driven by hospitals treating patients with Cowen 19.

Regarding our cost to sales and operating costs I will briefly comment about major drivers.

First regarding our cost of sales I was our gross margins were about 64.4% for the quarter is significant increase from Q1 2020 margins of 51.2% and from Q2 2018 margins of 50.2%.

Improvement in margins, it's mainly the result of increased production to support the launch of our new acquiring smartflow.

And to meet expected future demand increases.

Next regarding ours Gionee expenses of Q2, 2020 expenses were 4.2 million.

An increase of 6.6% over Q2 of 2019.

The increase results from having fully staffed territories, including clinical specialists, we hired during 2019 to assist in opening and 20 new accounts.

Our R&D expenses were 885000 in Q2, 2020, or 32% decrease compared to Q2 of last year.

Last year, we had reported an increase in product development spending to support our pediatric submission and improvements for the next generation aquatic Smartflow Council, which received FDA clearance in CE Mark do you in the first quarter of this year.

The net loss for the quarter was 3.9 million or 10 cents per share compared to a net loss in the second quarter of 2019, a 4.4 million or $1.93 per share.

Regarding our liquidity position.

We used 3.3 million inc. of cash in the quarter to finance, our operations or 8.8 million for the first six months of the year, which is comparable to 2019.

As previously announced during the quarter, we announced the completion of to register direct financing transactions.

Our net proceeds of 3.5 million.

Additionally, during the quarter, we received approximately $2 million in cash proceeds from the exercise of warrants.

We ended the quarter with approximately 7.8 million in cash cash equivalents and no debt.

In terms of modeling the rest of 2020, we continue to closely monitor the situation costs like coven 19 pandemic.

While we have seen increased utilization of our therapies in areas of the country, where we have an established presence in where hospitals are seen an influx of called the 19 patients.

Our access to hospitals continues to be limited and thus we believe that it will be it will continue to impact our traditional business.

At this point, we expect to stay on course with our growth plans, which has grown revenue double digits both sequentially in versus the prior year.

Regarding our gross margins, we expect the Q3 in Q4 will be lower than our Q2 margins and will be more in line with their margins. We saw in Q1 as we lowered production bills related to the Aquatech Smartflow launch overall for the year marches will show improvement versus last year.

Regarding our operating expenses, we expect a sales and marketing spend to remain consistent with a core with a current quarter as the impact of having fully staffed territories is offset by reduced travel expenses.

In R&D, we expect spending to remain consistent with levels who've reported this quarter.

Finally regarding our NASDAQ listing as we have previously disclosed the price if our stock has been below $5 to December 2019, and we're currently under the first 180 day period to regain compliance with nasdaq's minimum bid requirement.

This period expires on August 20.

If we have not regained compliance with a minimum bid price before August twentyth, we intend to seek a 180 day extension from NASDAQ to regain compliance within ethic. This this didn't requirements and we believe we are eligible for this extension.

I'll now turn call back over to John.

Thank you Cloudier CHF solutions continues to be focused on the health and safety of our employees our production and some of our engineering staff continue to work onsite at our manufacturing facility and most of our team is maintaining business operations by working remotely.

Production of the Acrodex products continue and have been have seen minimal disruption of supply chain for components and materials, we've been able to retain all of our employees, including 30 employees and our field sales organization.

Before the cobot 19 pandemic almost 100% of our business came from hospitals with close to 70%. What are now considered elective procedures. These 30 field sales and clinical employees continue to be restricted from access to most hospitals and face challenges with new hospital rules.

As elective procedures come back online and hospitals again start to schedule, but needed elective procedures, our sales and clinical team have proven ready and have could be reengage with hospital accounts. We now have a full compliment of 13 sales reps filling or 13 U.S. sales territories. We also have our CLO.

Eco specialist team up there team to not only train the talented professionals, who use our equipment, but also to increase.

Utilization of I could ex console. So each hospital account when they can return to provide support.

We're continuing to support our customers as they strive to manage and control the impact of the Copa 19 pandemic.

Positions on the front lines of treating patients with cover 19 of used aquilex therapy for patients who need fluid removal between dialysis treatment as an alternative therapy when dialysis machines or trained dialysis personnel are not available.

In addition, patients hemodynamically unstable and fluid overloaded, who may not be able to tolerate dialysis, but still need fluid removal are being treated with the off what ex there be.

We have been able to help many hospitals physicians and nurses battle, but koeppen 19 pandemic by providing councils and remote training on the architect system. We have established training protocols using remote video web tools and Webinars. We I've worked closely via telephone text emails and web tools.

With key positions or successfully helping patients survived the virus using the aquilex system.

With the three Webinars, we have supported.

We have supported we are finding ways to help these physician educate their peers on how they have successfully managed access fluid in the patience lungs, how they have offloaded stress on the patients kidneys by removing fluid and now they have supplemented the need for dialysis as so many koeppen 19 patients experience acute kidney fail.

Sure.

I want to reiterate that we are very pleased that we produce a product that is providing a meaningful therapy for treating the coburn 19 patients. We know we're very fortunate to be less impacted than many small medical device companies, but the rest of the year is full of uncertainty we're very optimistic about the value we can bring to our.

Our customers and our investors, we anticipate them when health care returns to some level of new normal we will see accelerating sales growth by can tunein.

Position ourselves as the primary provider of old filtration therapy for cardiologist hospitalist, Intensivists cardiac surgeons pediatricians and apart nephrologists country fluid overload.

After receiving F.D.A. market clearance, where the pediatric indication in late February we began to initiate our training program with a couple of children's hospitals in early March we had 20 children's hospitals in acute to receive training. The training program requires not only our clinical.

Such patients specialist, but physician support from one of the three busy pediatrician positions that have extensive experience in using the acrodex system in pediatrics in the second quarter, we were able to train one children's hospital as all hospital access was stopped due to the fear of the cover 90.

Termination.

We have trained the new children's hospitals physician and nursing staff by using a video web tool and hope to slowly continue with this virtual training capability. We anticipate a continued restriction to hospital access for several months.

The critical care market opportunity as someone on whole during the hospital access restrictions there are limited procedures being done at this time, but we do see some product revenue coming from hospitals that have used architects and do not have all their I see you beds dedicated to covert 19 patients.

There's also a strong reluctance on the part of patients that may need a critical care procedure, but do not want to be in a hospital that is carry for cobot 19 patients for fear of being contaminated.

We continue to see strategizing, our business in three phases.

[noise] phase one is does it need it now our focus now is on liquidity expense control sustained operations employee health and investments in key areas, such as virtual physician support and training.

Phase two is designated through the recovery with a focus on retention of the field sales team inventory supply and maintaining key physician relationships.

Phase three is designated the long game with a focus on continued pipeline investments in product enhancements, adding complimentary products implementing training at children's hospitals for pediatric care and pursuing new market opportunities in critical care like liver disease Ecmo in burn.

Operator, please open the call for questions.

Yes.

As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key please stand by while we've compiled the Q1 a roster.

Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Please proceed with your question.

Oh, Hartshorne, Florida, not sure how are you.

Well. Thank you good morning, Hi Hunter.

It looks like you're pretty crude or retail for the quarter just won't be too.

Few questions as far as cold brewed you talked about 34 person from short quarter. If you do there's journal sense of wrong.

Number placements are number facilities, where that was coming from who understood internal shifting.

From a from critical care from cardiac orders.

Your units there as well.

But it's primarily coming from hospitals that were uses of our product in their critical care area in the I see you.

So as they began to utilize those beds for covert 19 patients they increase utilization of Acrodex. So most of those hospitals.

Actually brought in additional consol's for.

For supporting the covered 19 patients.

We we actually would say that that 34% came from the eight hospitals.

That were really directly increasing the volume because of co bid and these were basically in the hot spots in the U.S., such as New York City and Georgia.

Okay perfect grown in.

Peter exercise or could you just a little further color <unk> current pediatric usage.

For two units can.

You talked about it would be your backlog or too.

Sure sure from March through how much are playing out over the next for four quarters are no longer produce all flash grown.

And does not dependent but you expect to secure fueled often as you've been a true since march of actual number over Q. So I'm just wondering.

Yes, we have a pipeline of hospitals that were trying to move from a phase one where we've identified those hospitals that we want to approach or talk to to a phase two where those hospitals have actually invited us in and.

Wanting to implement the therapy to phase three where they are actually purchasing it and paid phase four where they are actually utilizing it I believe right now we have five children's hospitals in that phase four area that are actually using the product.

Our revenue in the second quarter I believe it was just under 20% came from children's hospital, So still a fair amount of volume.

From those five and we probably have another six seven that are in that phase three data purchase the equipment or just into Q4 training that training comes not just from us.

On our clinical specialist team, but also from.

The key physicians that kind of pioneered the use of acrodex in treating the covered patients of Dr. Goldstein out of Cincinnati Childrens and Dr. Oz Canarsie at Alabama children's.

Really been key in helping train their peers in how to utilize it. So there's a as things loosen up actually they'll be additional training that will be outperform and bring more hospitals on as I mentioned, we did bring on kings, daughter Hospital, this quarter and they're now up and running.

So it's going to be a process really has the hospitals opened up there ready and waiting I think we have now probably 30 hot children's hospitals in that from phase one to phase four so the pipeline as for its just a matter of being able to get them trained and up and running.

Well that's Super helpful. Then lastly from me property on the margin showed any commentary there, we're still expecting or a continual.

March up.

And should be sure going forward and record Q countryman through a very solid are there. Some are some further synergies there to do wrong.

On the cost side as well as New York.

Excellent. Thanks.

Hi, Jeff was that a question I'm sorry, it was a question so.

Yeah, I think that we had really good margins in Q2, as we built up the inventory for the launch our awkward techsmart flow.

Going forward I think those margins may not be quite as high I in the next couple of quarters, but as the volume increases. We obviously, we're going to see an improvement increase in margins, but I think we were at 64%.

I would still say we'd be in the.

Low sixtys with our margins in the coming quarter year on year 2020 versus 2018 for the year, we will see a nice improvement.

But like John said and like I stated in my prepared remarks, Q3 in Q4 will be a bit lower than Q2.

Okay got it that those.

Thanks for taking questions.

You're welcome.

Your next question comes from the line of Anthony Vendetti with Maxim Group.

Thanks.

Yes, I was just wondering guys. If you could just comment on.

You know the fact that you were able to hit 34% or revenues for from about eight hospitals.

Treating coordinate he can you talk about what the impact could be.

For the awkward deck system in terms of.

The market ability the fact that it's been use now.

At a very critical time, and I know you're shift from focus on cardiac care to critical care as well as pediatrics.

As part of the business strategy, but does this do you believe accelerate the movement into critical care and you think that helps set you up for.

As hospitals open up and I know like you've mentioned in the call. There are still relatively close down for new business and this was from existing hospitals, but as.

As we start to reopen.

In various phases and I know it varies by Steve do you think this accelerates the potential.

Adoption curve.

Hi, Anthony This is nester I'll answer that question is a very good question, yes for sure older Webinars on education that we have done without war key opinion leaders have helped create an awareness of how effective the aquatics Smartflow system has been tweeting koby 19, and the reason.

That these colby 19 patients coming to the IC you is because of a respiratory problems, but also multi organ failures.

That happens quite a bit outside the Colby 19 patients that coming to the I see you. So have really strengthened our positioning of the athletic system in the I see you.

Setting.

Did I answer your question.

No. That's helpful. And then maybe also just talk a little bit I know you.

You mentioned the roll out into the children's hospitals and training in six or seven.

Just in terms, what your Salesforce and in terms of the training I know some of the physician to help train.

But I have you been able to do that remotely.

How is the training on and then in terms of Upsells has there even though it's tough to get into the hospitals has there been away assets new hospitals.

Remote.

Is that still difficult during this time as their focus has been.

The Vern.

Okay.

Let me answer the question in two parts to the first part is that.

Only training that we have done with the pediatric has been the majority has been with remotely. We have had couple of instances, where physicians and be nurses in the pediatric hospitals are wanting to meet with us outside the hospital.

And in one instance was that you know hotel so we did training there.

The so these are the second part is that we would continue to use.

The remote.

We have been very successful in reaching out to physicians remotely be question Com is when we do the training.

And then for that I believe that we would need to have full access to hospitals to provide a training in the large majority of those pediatric centers that are waiting into Q2 between.

You know Anthony I would just datapoint didn't in my comments.

I mentioned that we actually re initiated in nine hospitals that had stopped using the therapy during baxter's ownership period.

They are aware of the product the training demand is less there so nestor and his team have been very successful in being creative and how we continue to drive revenue growth number one by going back to accounts, where the training requirement is not as demanding and getting them back up and running and I think to bring.

Nine total actually 13 hospitals online during the quarter during the Cobot 19, I think is goes very successful. So we will continue to find novel.

Ways to get folks trained and get it get them up and running what's really great is it's not a hard hi sales pitch to get them to use it it's getting im showing them the value that architects therapy provides and you know the acceptance is really pretty quick and then getting them trained.

No I kind of wish we had 50 sales team and 50 clinical specialists and we'd cover a lot more hospitals, a lot quicker, but we're growing with the resources, we have and I think the team is executing very effectively.

Excellent and then just on the on the pediatric side.

Our children's hospitals are using it six or 7% are now screening.

Well I'd better that are using that as I know it's approved for.

On.

That's true for.

Paul.

Proof for.

Uh huh.

Hey, pediatric patients greater than 20 kilograms, any feedback from from the hospitals and and.

I know you're also looking to get approval for pediatric patients less then.

2020 kilograms.

Where is that in terms of.

Trials.

Our or some of the physicians already using it.

And having success with pediatric patients less than 20 programs.

Well positions have the authority in the right to use any medical device that they deem necessary to help their patient so they're not restricted by the label that we receive from the FDA. The restriction is on us that we can't marketed for any used off label. So.

The only marketed for the use in PD in pediatrics totally 20 kilograms and above there's a fair amount of usage, though.

By physicians in treating patients under 20 kilograms.

We initiated this pediatric registry, which we think is going to be significant to not only help physicians understand how it's being used when it's being used where it's being used but also for us together the clinical data that we will need to then look at should we be pursuing.

Our when should we be pursuing.

Pediatrics under 20 kilograms, so that that is not a tender to the physicians to be able to utilize the product to help their patients. It's only a requirement we have in how we market the device.

Understood understood.

I know it might be hard too.

At this point.

Hey, good route.

The timing.

But.

If you had an general idea.

When do you think you might.

Oh I try to put together an application.

Or up to the FDA for.

In 2000 kilograms that that.

Talk to gauge right now as the focus is on covert 19 or is that something thats definitely in the works.

You'll update us in the future.

Yes, it it'd be premature for me to estimate when I think we'd be ready to submit an application to the FDA for that but we are working on it.

We are working on enhancements to.

Help physicians, how they're utilizing the product today, we have the registry that's going to help from a clinical standpoint. There are also physician initiated clinical trials in pediatrics that will be helpful. Here.

So its.

Clinical data is needed or how the product is used in our 20 kilograms and we are working on that.

Okay, great Okay.

Okay, guys. Thanks, very much appreciated.

You're welcome Thanks Anthony.

And that is time there no further questions I'd like to return the call back to management.

Well I want to thank you for joining our second quarter 2020 conference call and I wish you all great day. Thanks.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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