Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Second Quarter Ended June 30, 2020. [Operator Instructions]. 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 1 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, Phyllis. Thank you for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the second quarter ended June 30, 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 President and Chief Operating Officer. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2020.

If you have not received CHF Solutions' earnings release, please visit the Investors page at 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 the 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.

The 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 the 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 its other filings with the Securities and Exchange Commission under the titles 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 the 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..

Thank you, Claudia, 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 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 of our business. We are confident that our priorities are clear and focused. Our goal is to grow 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 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 and restrictions on purchasing capital equipment.

We achieved our highest quarterly revenue with growth of 14% over prior quarter and opened 4 new hospital accounts in the quarter. Also in this quarter, we reinitiated Aquadex therapy in 9 additional hospitals that had been abandoned the therapy during Baxter's ownership.

Additional accomplishments included the use of Aquadex by intensivists and nephrologists in treating their COVID-19 patients, demonstrating opportunity to prevent acute kidney injury and mitigating the need for dialysis.

We hosted an interactive clinician-led webinar to discuss cardiopulmonary-renal management in real-world COVID-19 patients moderated by Daniel Goldstein, MD, Professor Vice Chairman, Department of Cardiothoracic Surgery, Montefiore Medical Center in New York.

We submitted a patent application for an adoption to the Aquadex Smartflow system to rapidly clear cytokines, including Interleukin 6 from the blood. Removal of cytokines from the blood may improve the condition of patients suffering from COVID-19 and many other infectious diseases.

We signed a distribution agreement with Transimed Medical Equipment Company LLC, covering the United Arab Emirates, the first distribution partnership in the Middle East region. The company now has distribution agreements covering 14 countries outside the U.S.

Children's Hospital of The King's Daughters in Norfolk, Virginia has initiated ultrafiltration therapy using the Aquadex SmartFlow system in pediatric care.

The company hosted an interactive physician-led webinar to discuss the recent publication, SARS-CoV-2, COVID-19 and intravascular volume management strategies in the critically ill and the role of ultrafiltration in the treatment of patients with COVID-19, moderated by Ravindra Mehta, MD, Professor of Clinical Medicine Emeritus, Division of Nephrology and Hypertension, Department of Medicine University of California, San Diego School of Medicine.

We initiated a pilot distribution agreement with RenalSense, Ltd., to offer complementary solutions for fluid management, the agreement of CHF solutions to market and sell RenalSense's Clarity RMS, real-time monitoring system in certain U.S. territories.

Clarity RMS is a critical care monitoring system that continuously measures urine flow rates and automatically transmits real-time data and fluctuation notifications to medical staff on a 24/7 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, Aquadex SmartFlow ultrafiltration system.

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

Also 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 Aquadex SmartFlow ultrafiltration system in pediatric patients with fluid overload.

During second quarter, our efforts to help physicians and hospitals battle the terrible effects of COVID-19 pandemic did have a positive impact on utilization of disposables in those hospitals where the Aquadex system had been utilized in the ICU setting prior to the pandemic.

The use of Aquadex by intensivists and nephrologists in treating the COVID-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 will now turn the call over to Claudia, 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 $1,863,000, 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 COVID-19 patients.

This increase helped offset the impact of access restrictions that many hospitals have imposed on our sales representatives. For the second quarter of the year, we estimate that 34% of our revenue was driven by hospitals treating patients with COVID-19. Regarding our cost of sales and operating costs, I will briefly comment about major drivers.

First, regarding our cost of sales, our gross margins were about 64.4% for the quarter, a significant increase from Q1 2020 margins of 51.2% and from Q2 2019 margins of 50.2%. The improvement in margins is mainly the result of increased production to support the launch of our new Aquadex SmartFlow and to meet expected future demand increases.

Next, regarding our SG&A 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 training new accounts.

Our R&D expenses were $885,000 in Q2 2020, a 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 Aquadex SmartFlow console, which received FDA clearance and CE Mark during the first quarter of this year.

The net loss for the quarter was $3.9 million or $0.10 per share compared to a net loss in the second quarter of 2019 of $4.4 million or $1.93 per share. Regarding our liquidity position, we used $3.3 million of cash in the quarter to finance our operations or $8.8 million for the first 6 months of the year, which is comparable to 2019.

As previously announced, during the quarter, we announced the completion of 2 registered direct financing transactions for 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 and cash equivalents and no debt. In terms of modeling the rest of 2020, we continue to closely monitor the situation cost like COVID-19 pandemic.

While we have seen increased utilization of our therapies in areas of the country where we have an established presence and where hospitals are seeing an influx of COVID-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 is growing revenue double digits, both sequentially and versus the prior year.

Regarding our gross margins, we expect that Q3 and Q4 will be lower than our Q2 margins and will be more in line with the margins we saw in Q1 as we lower production builds related to the Aquadex SmartFlow launch. Overall, for the year, margins will show improvement versus last year.

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 levels we reported this quarter. Finally, regarding our NASDAQ listing.

As we have previously disclosed, the price of our stock has been below $1 since December 2019, and we are currently under the first 180-day period to regain compliance with NASDAQ's minimum bid requirement. This period expires on August 28.

If we have not regained compliance with the minimum bid price before August 28, we intend to seek a 180-day extension from NASDAQ to regain compliance with the NASDAQ listing requirements, and we believe we are eligible for this extension. I will now turn the call back over to John..

Thank you, Claudia. 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 on-site at our manufacturing facility and most of our team is maintaining business operations by working remotely.

Production of the Aquadex products continue and have been -- have seen minimal disruption of the supply chain for components and materials. We have been able to retain all of our employees, including 30 employees in our field sales organization.

Before the COVID-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 the needed elective procedures, our sales and clinical team have proven ready and have quickly reengaged with hospital accounts. We now have a full complement of 13 sales reps filling our 13 U.S. sales territories.

We also have our clinical specialists team of 13 to not only train the talented professionals who use our equipment, but also to increase utilization of Aquadex consoles in each hospital account when they can return to provide support. We are continuing to support our customers as they strive to manage and control the impact of the COVID-19 pandemic.

Physicians on the front lines of treating patients with COVID-19 have used Aquadex therapy for patients who need fluid removal between dialysis treatments 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 Aquadex therapy. 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.

We have established training protocols using remote video web tools and webinars. We have worked closely via telephone, text, e-mails and web tools with key physicians who are successfully helping patients survive the virus using the Aquadex system.

With the three webinars we have supported, we are finding ways to help these physicians educate their peers on how they have successfully managed excess fluid in the patient's lungs, how they have offloaded stress on the patient's kidneys by removing fluid and how they have supplemented the need for dialysis as so many COVID-19 patients experienced acute kidney failure.

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 health care returns to some level of new normal, we will see accelerating sales growth by continuing to position ourselves as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists, cardiac surgeons, pediatricians and nephrologists who treat fluid overload.

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 specialists, but physician support from 1 of the 3 busy pediatrician physicians that have extensive experience in using the Aquadex system in pediatrics.

In the second quarter, we were able to train 1 children's hospital as all hospital access was stopped due to the fear of the COVID-19 contamination. We have trained the 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.

We anticipate a continued restriction to hospital access for several months. The critical care market opportunity is somewhat on hold 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 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 carried for COVID-19 patients for fear of being contaminated. We continue to see strategizing our business in 3 phases. Phase 1 is designated 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 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 gain 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. Operator, please open the call for questions..

[Operator Instructions]. Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann..

It looks like a pretty good readout for the quarter. I just wanted to probably a few questions. As far as COVID, you talked about 34% from the second quarter.

Can you give us a general sense of number of placements or number of facilities where that was coming from? And was that internal shifting from critical care or from cardiac? Or is new units there as well?.

Well, it's primarily coming from hospitals that were users of our product in their critical care area in the ICU. So as they began to utilize those beds for COVID-19 patients, they increased utilization of Aquadex. So most of those hospitals actually brought in additional consoles for supporting the COVID-19 patients.

We actually would say that, that 34% came from 8 hospitals that were really directly increasing the volume because of COVID, and these were basically in the hotspots in the U.S., such as New York City and Georgia..

Okay. Perfect. Got it. And on the pediatric side, could you give us a little further color? I'm assuming that current pediatric use is on the order of a handful or 2 of units. And you talked about there being a backlog or a queue of 20 or so for March.

So how might that play out over the next 3 or 4 quarters? I know a lot of it is hospital and pandemic dependent.

But do you expect those to get peeled off? And has there been a change since March in the actual number on the queue side of 20?.

We have a pipeline of hospitals that we're trying to move from a Phase 1 where we've identified those hospitals that we want to approach or talk to, to a Phase 2, where those hospitals have actually invited us in and wanting to implement the therapy to Phase 3, where they're actually purchasing it; and Phase 4, where they're actually utilizing it.

I believe right now, we have 5 children's hospitals in that Phase 4 area that are actually using the product. Our revenue in the second quarter, I believe it was just under 20% came from children's hospitals. So still a fair amount of volume from those 5.

And we probably have another 6, 7 that are in that Phase 3 that have purchased the equipment and are just in a queue for training. That training comes not just from us on our clinical specialists team, but also from the key physicians that kind of pioneered the use of Aquadex in treating the COVID patients. So Dr.

Goldstein out of Cincinnati Children's and Dr. Askenazi at Alabama Children's have really been key in helping train their peers in how to utilize it. So there's -- as things loosen up, actually, there'll be additional training that we'll be able to perform and bring more hospitals on.

As I mentioned, we did bring on King's Daughters hospital this quarter. And they're now up and running. So it's going to be a process really as the hospitals open up. They're ready and waiting. I think we have now probably 30 children's hospitals in that -- from Phase I to Phase 4. So the pipeline is full.

It's just a matter of being able to get them trained and up and running..

That's super helpful. And then lastly for me, Claudia, on the margin side, any commentary there? We're still expecting a continual march up for the balance of this year and going forward. It looks like Q2 came in fairly solid.

Are there some further synergies there to derive, both on the cost side as well as the volume side?.

Sorry, Jeff, was that a question? I'm sorry..

Yes, it was a question..

On margins?.

Yes. I think that we had really good margins in Q2 as we built up the inventory for the launch of our Aquadex SmartFlow. Going forward, I think those margins may not be quite as high in the next couple of quarters. But as volume increases, we obviously are 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 60s with our margins in the coming quarter..

Yes. Year-on-year, 2020 versus 2019, for the year, we will see a nice improvement. But like John said, and like I stated in my prepared remarks, Q3 and Q4 will be a bit lower than Q2..

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

Yes. I was just wondering, guys, if you could just comment on the fact that you were able to get 34% of revenues from about 8 hospitals treating COVID-19.

Can you talk about what the impact could be for the Aquadex system in terms of the marketability? The fact that it's being used now at a very critical time and I know your shift from focus on cardiac care to critical care as well as pediatrics. It's part of the business strategy.

But does this, you believe, accelerate the movement into critical care? And do you think that helps set you up for as hospitals open up -- and I know like you've mentioned in the call, there's still relatively closedown for new business, and this was from existing hospitals.

But as we start to reopen, in various phases, and I know it varies by state, do you think this accelerates the potential adoption curve?.

Anthony, this is Nestor. I'll answer that question. It's a very good question. Yes, for sure, all the webinars and education that we have done with our key opinion leaders have helped create an awareness of how effective the Aquadex SmartFlow system has been in treating COVID-19.

And the reason that these COVID-19 patients coming to the ICU is because of a respiratory problem, but also multi-organ failures. That happens quite a bit outside the COVID-19 patients that come into the ICU, so have really strengthened our positioning of the Aquadex system in the ICU setting.

Did I answer your question?.

Yes. No, that's helpful. And then maybe also just talk a little bit -- I know you mentioned the rollout into the children's hospitals and the training in the 6 or 7. Just in terms of your sales force and in terms of the training, I know some of the physicians are helping with the training.

But have you been able to do that remotely, how is the training on? And then in terms of sales, is there -- even though it's tough to get into the hospitals, has there been a way to access new hospitals remotely? Or is that still difficult during this time as their focus has been diverted?.

Okay. Let me answer that question in 2 parts. The first part is that all the training that we have done with the pediatric has been -- the majority has been remotely. We have had a couple of instances where physicians and the nurses in the pediatric hospitals are wanting to meet with us outside of the hospital. And in one instance, was in a hotel.

So we did training there. The -- so the second part is that we will continue to use the remote. We have been very successful in reaching out to physicians remotely.

The question come is when we do the training, and then for that, I believe that we will need to have full access to hospitals to provide training in the large majority of those pediatric centers that are waiting in the queue to be trained..

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 9 -- total actually 13 hospitals online during the quarter, during the COVID-19, I think is -- was very successful. So we will continue to find novel ways to get folks trained and get them up and running.

What's really great is it's not a hard, high sales pitch to get them to use it. It's giving them -- showing them the value that Aquadex therapy provides. And the acceptance is really pretty quick and then getting them trained. 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 pediatric side, 5 children's hospitals are using it, 6 or 7 have purchased it are now training. On the 5 that are using it, it is -- I know it's approved for pediatric patients greater than 20 kilograms.

Any feedback from the hospitals? And I know you're also looking to get approval for pediatric patients less than 20 kilograms.

Where is that in terms of trials? Are some of the physicians already using it and having success with pediatric patients less than 20 programs?.

Well, physicians have the authority and 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 received from the FDA. The restriction is on us that we can't market it for any use off-label. So we only market it for the use in pediatrics 20 kilograms and above.

There is 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 to gather the clinical data that we will need to then look at should we be pursuing or when should we be pursuing pediatrics under 20 kilograms.

So that is not a hinder 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 to, at this point, figure out the timing.

But if you had a general idea of when do you think you might try to put together an application or -- to the FDA for less than 20 kilograms? Is that tough to gauge right now as the focus is on COVID-19? Or is that something that's definitely in the works you'll update us in the future?.

Yes. 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 it's -- clinical data is needed or how the product is used in our 20 kilograms, and we are working on that..

And at this time, there are no further questions. I would 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 a great day. Thanks..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..