Good morning and welcome to the CHF Solutions earnings conference call for the first quarter ended March 31, 2020. 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 telephone keypad. To withdraw your question, please press pound or hash key on your telephone keypad. Participants of this call are advised that the audio for 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 Claudia Drayton, the company’s Chief Financial Officer. Please go ahead, madam..

Thank you Crystal. Thank you for joining today’s conference call to discuss CHF Solutions’ corporate development and financial results for the first quarter ended March 31, 2020.

With us today are John Erb, the company’s CEO and Chairman of the Board, myself, Claudia Drayton, the company’s CFO, and Nestor Jaramillo, the company’s Chief Commercial Officer. At 8:00 am Eastern time today, CHF Solutions released financial results for the quarter ended March 31, 2020.

If you have not received CHF Solutions’ earnings release, please visit the Investor page of www.chf-solutions.com. 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 management of CHF Solutions are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that are based on management’s beliefs, assumptions, expectations, and information currently available to management.

Those risks include but are not limited to risks associated with the possibility that the company may be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company’s anticipated operations, that the company may not be able to commercialize its products successfully, and other risk factors described under the caption Risk Factors and elsewhere in the company’s filings with the Securities and Exchange Commission.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements whether as a result of new information, new developments or otherwise.

You should review the cautionary statements and discussion of risk factors included in the company’s press release issued today, the company’s latest 10-K, subsequent reports, as well as other filings with the Securities and Exchange Commission under the title Risk Factors or cautionary statements related to forward-looking statements for additional discussion of risk factors that could cause actual results to differ materially from management’s current expectations.

Those discussions regarding risk factors as well as discussions of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company’s website at www.chf-solutions.com.

With that said, I would now like to turn the call over to John Erb, CHF Solutions’ Chief Executive Officer and Chairman of the Board. John, you might be on mute.

John, can you unmute your line? Operator, can you look into John Erb’s line?.

Claudia, I don’t know if anybody is hearing you. I can hear you..

You may begin..

Great, thank you. Sorry for that disruption. Thank you Claudia and good morning everyone. Welcome to the first quarter 2020 earnings call and corporate update. This year has been a challenge for the world, for the United States, and certainly for CHF Solutions.

We are very pleased that we are less impacted than many small medical device companies, but the rest of the year is full of uncertainty and optimism. Although the world has dramatically changed for the time being, we know our business model has not changed in the long run and really we remain optimistic about the durability of our business.

We are confident that our priorities are clear and focused. In the nearest term, CHF Solutions will be focused on the health and safety of our employees. Our production staff continues to work onsite at our manufacturing facility and the rest of our team is maintaining business operations by working remotely.

While this may translate into less than optimal use of resources, human capital will remain critical to weathering the storm and ensuring shareholder value in the medium to longer term. Also, we will continue to do all we can to support our customers as they strive to manage and control the impact of the COVID-19 pandemic.

With a considerable level of uncertainty for the future, we are closely managing our cash, implementing expense controls, and pursuing avenues to fund operations. We have been able to help many hospitals, physicians and nurses battle the COVID-19 pandemic by providing consoles and remote training on the Aquadex system.

In the past six weeks, we have provided over 20 Aquadex consoles as loaners to several hospitals in the COVID-19 hotspots. We have established training protocols using remote video web tools and webinars.

We have worked closely via telephone, text, emails and web tools with key physicians who are successfully helping patients survive the virus using the Aquadex system.

We are also finding ways to help these physicians educate their peers on how they have successfully managed excess fluid in their patients’ lungs, how they have offloaded stress on the patients’ kidneys by removing fluid, and how they have supplemented the need for dialysis as so many COVID-19 patients experience acute kidney failure.

Production of the Aquadex products continues and we have seen minimal disruption of the supply chain for components and materials. When we applied for the Small Business Administration’s Payroll Protection Program, we were uncertain of our ability to maintain our sales growth due to the restrictions on elective procedures.

We were uncertain if we could actually help with the treatment of COVID patients in a meaningful way. We were uncertain if we were able to continue to raise money from the equity markets and we were uncertain if we would be able to maintain our workforce.

As the past 30 days have unfolded, we have been able to maintain our sales volumes as the Aquadex systems became an important therapy to help physicians to treat COVID-19 patients. We needed to increase the production rate of our new Aquadex SmartFlow console and we have been able to raise small amounts of additional capital from the equity markets.

Although there is still a lot of uncertainty about the future, we remain optimistic and have decided to return the $1.66 million we received from the SBA Payroll Protection Program, allowing these funds to be used to help another small business survive during this time.

At this time, we believe we will be able to retain all of our employees, including the 30 employees in our field sales organization. Before the COVID-19 pandemic, almost 100% of our business came from hospitals with close to 70% from what are now considered elective procedures.

These 30 field sales and clinical employees have been restricted from access to most hospitals and face great challenges with these new hospital rules.

The cost to furlough this team would be enormous due to the high cost of replacing them in the not-too-distant future with recruiting costs, training expense, and the four to six months of time required in a new territory to become proficient.

As elective procedures come back online and hospitals again start to schedule the needed elective procedures, our sales and clinical team will be ready to hit the ground running. Two-thirds of the first quarter was in the books prior to the overall impact of the COVID-19 pandemic. First quarter was an excellent quarter for our foundational business.

Accomplishments included in January, we issued a press release on the filing of four new patent applications for product enhancements to the Aquadex console and one additional patent was filed in April. In February, we received the CE Mark and 510K market clearance for the new Aquadex SmartFlow console.

We received FDA market clearance for the use of Aquadex SmartFlow in pediatrics for children weighing over 20 kilograms, we expanded international distribution in Germany, Austria and Switzerland, and received regulatory clearance to market Aquadex in India.

In March, we launched our marketing strategy to children’s hospitals for the use of Aquadex in pediatrics. We sponsored a webinar moderated by Dr. Amir Kazory on volume management in COVID-19 patients. We supported the initiation of treatment using Aquadex in COVID-19 hotspots in New York and Georgia.

We’ve doubled our production of new Aquadex SmartFlow consoles and ordered raw materials to further increase production if required. Revenue was strong for the quarter at $1.6 million, representing a 19.2% increase over prior quarter and a 34.2% increase over prior year.

I will now turn the call over to Claudia, who will walk you through our Q1 2020 results and financial details. Following that, I will provide some additional comments and will open the call to questions..

Thanks John. Good morning everyone. Turning to our financial results, revenue for the first quarter was $1,630,000, an increase of 34% from Q1 2019 and up 19% sequentially from Q4 of 2019.

Revenue performance for the quarter was driven by strong performance in our critical care segment where the demand of our products was favorably impacted by hospitals treating COVID-19 patients. Regarding our cost of sales and operating costs, I will briefly comment about major driers.

First regarding our cost of sales, our gross margins were about 51.2% for the quarter, which represented an increase of 150 basis points from last year’s Q1 margins and 40 basis points from Q4 2019 margins. Margins were favorably impacted by a high mix of disposable sales.

Next regarding our SG&A expenses, Q1 2020 expenses were $4.5 million, an increase of 12.9% over Q1 2019. The increase results from having fully staffed territories, including clinical specialists we hired during 2019 to assist in opening and training new accounts.

Our R&D expenses were $864,000 in Q1 2020, a 34% decrease compared to Q1 of last year and a 9% decrease from Q4 of 2019.

Last year, we had reported an increase in product development spending to support our pediatric submission and improvements for the next generation Aquadex SmartFlow console, which received FDA clearance and CE Mark during the first quarter.

The net loss for the quarter was $4.6 million or $0.37 per share compared to a net loss in the first quarter of 2019 of $4.7 million or $11.47 per share.

Regarding our liquidity position, we used $5.5 million in cash in the quarter to finance our operations, an increase of $600,000 from Q1 2019 mainly as a result of higher inventory purchases and decreases in our outstanding payables.

During the quarter, we announced the completion of an underwritten public offering for net proceeds of $8.6 million and a registered direct financing transaction for net proceeds of $1 million. We ended the quarter with approximately $5.7 million in cash and cash equivalents and no debt.

Subsequent to quarter end, we closed on two registered direct offerings for net proceeds of $3.5 million and announced that we had received cash proceeds of approximately $1 million from warrant exercises. In terms of modeling the rest of 2020, we continue to closely monitor the situation caused by the COVID-19 pandemic.

While we are seeing increased utilization of our therapies in certain parts of the country where hospitals are seeing an influx of COVID-19 patients, our traditional business and our pediatric launch will likely be impacted.

At this point, we expect to stay on course with our growth plans and that we will continue in our current trajectory of growing revenue double digits, both sequentially and versus prior year. Regarding our gross margin, we expect that it will continue to improve as our volumes and efficiencies increase.

Regarding our operating expenses, we expect our sales and marketing spend to remain consistent with the 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 the levels we reported this quarter. I will now turn the call back over to John..

Thank you Claudia. I want to reiterate that we are very pleased that we produce a product that is providing a meaningful therapy for treating the COVID-19 patients. We know we are very fortunate to be less impacted than many small medical device companies, but the rest of the year is full of uncertainty.

We are very optimistic about the value we can bring to our customers and our investors.

We anticipate that when healthcare returns to some level of the new normal, we will see accelerating sales growth by continuing to position ourselves as the primary provider of ultra filtration therapy for cardiologists, hospitalists, intensivists, cardiac surgeons, pediatricians, and nephrologists who treat fluid overload.

Our goal is to grow our global business, our global market leadership in fluid management with solutions that change patients’ lives.

As I have described in the past, we are expanding beyond our initial business of serving the needs of chronic heart failure patients to meeting acute needs in critical care, such as cardiovascular surgery and the lifesaving needs in pediatric kidney care.

The use of Aquadex by intensivists and nephrologists in treating their COVID-19 patients has demonstrated the opportunity to prevent acute kidney injury and mitigate the need for dialysis.

After receiving FDA market clearance for 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 a queue to receive training.

The training program requires not only our clinical education specialist but physician support from one of the three busy pediatric physicians that have extensive experience in using the Aquadex system in pediatrics.

Training was completed in two additional children’s hospitals before all hospital access was stopped due to the fear of COVID-19 contamination. We anticipate a continued restriction to hospital access for several months.

We have trained a new children’s hospital’s physician and nursing staff by using a video web tool and hope to slowly continue with this virtual training capability. Once access is open to the hospitals, we will continue training as soon as possible with the children’s hospitals in queue.

The critical care market opportunity is somewhat on hold during hospital access restrictions. There are limited procedures done at this time, but we do see some product revenue coming from hospitals that have used Aquadex and do not have all their ICU beds dedicated to COVID-19 patients.

There is 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 caring for COVID-19 patients for fear of being contaminated.

As the pandemic subsides and hospitals reengage in their surgery centers, we anticipate that utilization of Aquadex will pick up, then a bit further in time when hospitals again open their doors to sales and clinical teams, we can make calls and we expect our utilization will rebound. We now have a full complement of 13 sales reps filling our 13 U.S.

sales territories. We also have our clinical specialist team of 14 to not only train the talented professionals who use our equipment but also to encourage increased utilization of Aquadex consoles in each hospital count when they can return to provide support. We are now strategizing our business in three phases.

Phase 1, designated now, our focus is on liquidity, expense control, sustained operations, employee health, and investments in key areas such as virtual physician support and training. Phase 2 is designated through the recovery with a focus on retention of the field sales team, inventory supply, and maintaining key physician relationships.

Phase 3 is designated the long game with a focus on continued pipeline investments and product enhancements, adding complementary products, implementing training at children’s hospitals for pediatric care, and pursuing new market opportunities in critical care like liver disease, ECMO, and burn.

As I mentioned earlier, as elective procedures come back online and hospitals again start to schedule the needed elective procedures, our sales and clinical team will be ready to hit the ground running. Operator, please open the call for questions..

[Operator instructions] Your first question comes from the line of Jeffery Cohen from Ladenburg Thalmann..

Hi John and Claudia and Nestor.

How are you?.

We’re well, thank you..

I guess I wanted to ask some questions specific to two areas, obviously. Firstly on the pediatric side, you spoke about having about 20 facilities in the training queue, which a couple were accomplished and the rest were held off on for the time being.

As I recall, you had about 12 or 14 centers that were using the system in a pediatric setting, so would they have overlap with the 20 you referenced or would that have been an additional 20, and from your standpoint that would have gotten the total up into the mid-30s?.

Yes Jeff, just to provide a little correction there, we actually would have six children’s hospitals that were using Aquadex on a regular basis. We had several phases as we were bringing children’s hospitals online once we received FDA market clearance to actually be able to do the necessary training.

There’s probably another six or eight that actually had bought equipment and waiting for training, the training was really governed by our ability to get in and the ability of the three primary pediatric physicians that have been doing now for some period of time working with these children, so their availability to do the training is also part of the governor.

There’s probably now eight children’s hospitals that are using the product and another 20 that are in queue to be trained.

Does that help?.

Yes, so one would anticipate hopefully those get accomplished in 2020..

Correct, and we are actually working on a process where we can do training via video conference. Actually, a couple of the physicians have been willing to set up training at their facility. It’s been pushed out a little bit to get a little bit further past the height or the peak of the pandemic, but definitely there will be ongoing training in 2020..

Okay. Then on to the traditional business being used in the COVID setting, can you give some indication of how many placements were made, at least year to date approximately? I think you talked about 20 placements.

What’s the size of the fleet now, and amongst the fleet out there, how many facilities or placements do you think are specifically being used in COVID settings in ICUs?.

Yes, I would estimate that we have approximately 10 hospital sites today that are using Aquadex to fight the battle with the COVID-19 virus. We probably have 25 consoles, 20 that we’ve put out there as loaners, some being rentals. There has actually been five or six that have been purchased that are being dedicated specifically for the COVID-19.

The VA in Tampa, as you probably remember historically, we have a clinical trial that’s been going on there, but they are actually going to be purchasing machines to--or consoles, I should say, to specifically treat COVID patients, so it’s still expanding out there but at this point in time, I’d say we have approximately 25 consoles that are dedicated to COVID-19..

Okay, then can you discuss a little bit further about the manufacturing and assembly? I see the inventory is up about $400K, which is about 20% for the quarter.

Can you give us a sense of where we stand on actual circuits, circuit production and throughput, and how you’re seeing margins as well as Aquadex machines and what the situation is there with parts in inventory and assembly?.

Yes, as I’ve mentioned, we have doubled our production capability of producing consoles, and a lot of the raw material purchases were for components required for console production, so have increased our purchases of components considerably just to meet the anticipated demand for the consoles.

Production of circuits have continues to be pretty steady. We right now have approximately three months of inventory on circuits, a forecasted three months, so we’re pretty much steady as it goes on circuit production. That will be increasing as the demand obviously increases once those consoles get put in place..

Okay, and can you give us any sense of during the past six weeks in the second quarter, any general trends you’re seeing as far as the traditional heart failure, cardiologist setting?.

Well, it’s been slow because of they are considered procedures that are not emergent. There have been some, obviously, but until those ICU beds become available with the slowdown of COVID-19 of taking up everything, it will remain minimal for a period of time..

Okay, got it. That does it for me. Thanks for taking the questions..

You’re very welcome. Thanks Jeff..

Again ladies and gentlemen, if you have a question at this time, please press star then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

At this time, I would like to turn the conference back to John Erb, the company’s Chief Executive Officer and Chairman of the Board..

Thank you Operator. I want to thank you all for joining our first quarter 2020 conference call, and I wish you all a great day. Thanks..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..