Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Third Quarter Ended September 30, 2020. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions.

[Operator Instructions] Participants of this call are advised that the audio of this conference 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, Bridgette. Thank you for joining today’s conference call to discuss CHF Solutions’ corporate development and financial results for the third quarter ended September 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 September 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.

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 discussions 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 discussion 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 third 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, our business model has not, and we remain optimistic about the durability of our business and the tenacity of our team. We are 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.

The Company achieved very solid performance in the third quarter of 2020 with a 52% revenue growth over prior year. In Q3 U.S. revenue mix was comprised of 46% pediatrics, 31% critical care, and 23% heart failure. Our revenue mix has shifted meaningfully over the last 12 months, given our strategic focus on pediatric and critical care opportunities.

During the third quarter, we were able to grow the utilization of the Aquadex therapy in several pediatric hospitals, while opening six new pediatric hospitals. Our continued growth was fueled by accomplishing several important milestones.

In partnership with the Acute Kidney Injury Critical Care Research Foundation and Watermark Research Partners, we initiated a pediatric registry. The registry will begin enrolling patients next week and will collect real world evidence on the use of Aquadex SmartFlow ultrafiltration system in pediatric patients with fluid overload.

Registry will include data on utilization on ultrafiltration utility, performance and safety profile in pediatric patients from approximately 10 research institutions over an anticipated two and a half year period. The parties anticipate collecting data on up to 500 patients.

We expect the registry will spread awareness within the pediatric community regarding the clinical efficacy of the Aquadex therapy and increase utilization of the Aquadex therapy.

In August, we announced that our Aquadex product line has been added to the Federal Supply Schedule, expanding access to all federal government agencies, including the Department of Veterans Affairs, Indian Health Services, and the Department of Defense medical treatment facilities.

With the Aquadex product line now included on the Federal Supply Schedule, a government agency can implement the Aquadex therapy and purchase product without the multiple approval steps required for products not on the schedule.

We are in discussions with several VA hospitals to implement our therapy, and we believe inclusion on the federal supply schedule will eliminate several months of the fulfillment process. Further, we are seeing increased interest in Aquadex from the federal government.

Most recently, the U.S., International Trade Commission, or USITC convened a hearing on September 23rd to explore ways our nation can be better prepared for this and future pandemics. We are honored that the USITC invited Nestor Jaramillo to testify.

And he described for the commissioners how CHS Solutions rapidly scaled earlier this year to meet increased demand and how we were able to free up dialyzers and CRT machines, which were in critical short supply in COVID-19 hotspot areas.

Key to our success on both counts, of course, is the fact that Aquadex system is domestically sourced and manufactured. So, we were not delayed by any international trade issues. USITC is now preparing a final report for Congress.

And several senators are requesting that the report include a case study on Aquadex as a model for medical supplies security. We expect the USITC to present a report to the U.S. Senate in mid-December. Lastly, we hosted two webinars in the third quarter. The first was held in July, featuring Dr.

David Askenazi, Director of the Pediatric and Infant Center for Acute Nephrology at Children’s of Alabama, the hospital -- the pediatric hospital affiliated with the University of Alabama at Birmingham. The webinar, which was attended by over 300 people highlighted Dr.

Askenazi’s experience and perspective on the treatment of fluid overload in pediatric patients weighing more than 20 kilograms. Dr. Askenazi also stated the Aquadex therapy is a helpful and complementary fluid management tool offering high benefits to a low -- at a low risk for patients.

Pediatric patients can be very delicate and having a gentle and flexible option on hand can improve the quality of care provided to fluid overloaded children. The second webinar was hosted -- that we hosted was attended by over 350 individuals where Dr.

John Jefferies discussed the use of precision medicine for the treatment of fluid overloaded heart failure patients, including alternatives to diuretics, such as ultrafiltration using our Aquadex SmartFlow system.

Increasingly, one of the bright spots related to the pandemic has been the enthusiastic reception by the medical community to attend these webinars. As a result, we are seeing increased efficiency from our sales force, as they have increased touch points leading to more follow-up meetings.

Lastly, our digital web video and webinar capabilities have improved training efforts, which we believe will gradually improve utilization rates.

On October 6th, during the 24th Annual Scientific Meeting of the Heart Failure Society of America, the real world retrospective study of 335 patients treated with the Aquadex FlexFlow system was presented demonstrating the ultrafiltration compares favorably in reducing heart failure rehospitalizations, renal function response and weight and volume loss.

The patients had a substantial mean fluid removal of 3.8 gallons, and no negative changes in renal function, and had a 12% and 24% rehospitalization rate after 30 days and one years from treatment respectively. I would like to emphasize the importance of the reduction reported in this study.

The current national rate for 30-day rehospitalization is 24%, twice as high as reported in the study.

Therefore, with the use of Aquadex system, there’s a significant economic savings to the national health care system, specifically when compared to diuretics, fluid removal by ultrafiltration reduced hospital readmission days, leading to a cost savings of $3,975 per patient at the 90-day follow-up.

The authors of the study stated that the ability to adjust the rate of fluid removal with the Aquadex system is believed to be a major contributor to favorable outcomes.

Also presented at the Heart Failure Society of America meeting was a case study titled Outpatient Ultrafiltration to Prevent Hospital Readmission During COVID-19 Pandemic in Diuretic Intolerant Patient, which detailed the successful outpatient treatment of a 70-year old female with heart failure.

The patient did not respond to outpatient therapies, including diuretics, and experienced multiple hospitalizations due to recurrent congestion. Given the patient’s co-morbidities and high-risk status, the patient received ultrafiltration treatment with the Aquadex SmartFlow system in an outpatient setting to avoid exposure to COVID-19.

Because of ease of use and simplicity of the Aquadex system, over the course of four days, a total of 4,950 milliliters of isotonic fluid was removed. The patient showed immediate improvement in clinical symptoms and was effectively stabilized in the outpatient setting at Advocate Good Samaritan Hospital in Downers Grove, Illinois.

I will now turn the call over to Claudia, who will walk you through our Q3 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 third quarter was $1.9 million, up 52% from Q3 of last year, representing a 2% sequential growth from Q2 2020.

Revenue performance was for the quarter was driven by increased utilization among established pediatric accounts, and the addition of six new pediatric accounts. During the quarter, we saw a positive mix shift in favor of pediatrics, which closely aligns with our long-term strategy.

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 46.1% for the quarter, a decrease from Q2 2020 margins of 64.4%, and from Q3 2019 margins of 56.9%.

Overall, our margins for the quarter were impacted by capital equipment sales and the mix of international distributor revenue where margins are traditionally lower than the U.S. In addition, in the quarter, we offered incentives to existing customers to upgrade consoles to our new Aquadex SmartFlow, which resulted in a gross margin headwind.

We believe these console upgrades will improve the customer experience with the therapy and increase utilization. Next, regarding our SG&A expenses. Q3 2020 expenses were $4.3 million, an increase of 3.8% over Q3 of 2019. The increase results from having fully staffed territories, partially offset by reduced travel expenses.

Our R&D expenses were $871,000 in Q3, 2020, a 22% decrease compared to Q3 of last year. Last year, we had reported an increase in product development spending to support our pediatric submission, an improvement to the next generation Aquadex consoles, which received FDA clearance and CE Mark during the first quarter of this year.

The net loss for the quarter was $4.3 million or $2.08 per share, compared to a net loss in the third quarter of 2019 of $4.5 million or $51.12 per share. Regarding our liquidity position, we used $4.4 million of cash in the quarter to finance our operations or $13.2 million for the first nine months of the year.

During the quarter, we also announced the closing of a public offering for net proceeds of approximately $13 million. Additionally, during the quarter, we received $1.8 million in cash proceeds from the exercise of warrants. We ended the quarter with $17.9 million in cash, cash equivalents, and no debt.

In terms of modeling Q4 2020, we continue to closely monitor the situation caused by the COVID-19 pandemic. While we have seen increased utilization in 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 continue to impact our traditional business. At this point, we expect Q4 revenues to increase mid-single-digits sequentially and double-digits versus prior year.

Regarding our gross margins, we expect Q4 margins will be lower than those reported in Q1 and Q2, and closer to the numbers we saw in Q3 as hospital capital budgets continue to be constrained. Overall for the year, we expect margins to show slight improvement over 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 the levels we reported this quarter. 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 continued to work onsite at our manufacturing facility, and most of our team is maintaining business operations by working remotely. Production of the Aquadex products continues.

And because we are domestically sourced, we have seen minimal disruption of the supply chain for components and materials. We now have a full complement of 13 sales reps filling 13 of our 14 U.S. sales territories. Our 14th U.S. territory in the Northeast U.S. has been filled by a distributor with prior Aquadex sales experience.

We also have our clinical specialist team of 13 to not only train the talented professionals who use our equipment, but also to encourage increased utilization of Aquadex consoles in each hospital account.

Our commercial team has been very resourceful in dealing with limitations with hospital access restrictions and efforts to provide proper training to physicians and nurses. 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, nurses and hospital administration to continue to offer our therapy, services, and products. We are continuing to support our customers as they strive to manage and control the impact of the COVID-19 pandemic.

Physicians on the frontlines 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.

Most hospitals are struggling with the economic impact caused by the COVID-19 due to the reduction of elective surgeries and patients avoiding hospitals for there being contaminated with the virus. Many hospitals have put a complete halt on purchasing any capital equipment to try and manage their losses.

We have initiated multiple purchasing scenarios to help these hospitals acquire the Aquadex console. The pediatric opportunity is growing as more children’s hospitals acquire the Aquadex SmartFlow product and complete training. We had 12 children’s hospitals purchase product in the third quarter.

The rate physicians and nurses treating pediatric patients can be trained is governed by the availability of third-party training courses and access to the hospitals. We anticipate a continued restriction to hospital access for several months.

Growth in the critical care market has slowed due to the reduction of elective surgeries and 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’s also a strong reluctance on the part of patients that may need critical care procedures, but do not want to be in a hospital that is caring for COVID-19 patients for fear of contamination.

We have seen a growing use of ultrafiltration therapy in heart failure since the release of the upgraded Aquadex SmartFlow console with the improved and adequate and Sv02 diagnostics to guide therapy.

We also anticipate increased utilization after several presentations made during the early October Heart Failure Society of America Meeting, describing the clinical and economic value of ultrafiltration, using the Aquadex system and managing fluid overload in heart failure when the standard of care treatment isn’t effective.

We’re 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 a 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 for nephrologists who treat fluid overload.

Operator, please open the call to questions..

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

Hi, John and Claudia and Nestor.

How are you?.

Good. Thank you..

So, first question is, I wanted to drill into a bit firstly on the pediatric front.

If you could expand a little bit upon your commentary? So, it sounded like six centers last quarter, six centers this quarter, I’m trying to get a better sense of access and training as well as receive backlog and backlog as you anticipate fulfilling during the fourth quarter?.

Good question, Jeff. Given the size of the market opportunity, and the number of children’s hospitals interested in using the Aquadex to treat their patients, we’re very optimistic about the future. However, at this point, at this time, we are not in a position to talk about our pediatric pipeline.

We’re very happy with the addition of these six new accounts in Q3. But, given the challenges regarding COVID-19, we’re cautiously optimistic regarding opening new accounts, given the capital constraints in the hospitals. While our goal is to always expand our installed base, our team is also focused on driving utilization in the current accounts.

Did I answer your question, Jeff?.

Yes, okay. Perfect, okay. Next, if you could speak about the Federal Supply Schedule in a little more depth, John.

Is your perception that that’s going to be used at VA hospitals that are predominantly focused upon heart failure or critical care? And then, could you maybe give us a better sense of timing, when you may anticipate that some of these facilities may be ordering some….

Jeff, I’m going to let Nestor respond to that again..

Yes. I’ll be happy to answer that question, Jeff. It has been only a few months since being added to the Federal Supply Schedule. We do have target accounts list that we prefer not to comment at this moment. However, we are in discussions with several VA hospitals to implement this therapy in heart failure, as well as in critical care.

And we believe that this inclusion in the federal supply schedule would be a long-term benefit as it eliminates several months of the fulfillment process that exists in each one of these hospitals and to acquire the Aquadex system and place order regularly. So, we expect to be in discussions with VA hospitals very soon..

Okay, got it. And then, lastly for me, if you could discuss in a little more in depth, any recent trends and utilization specific to critical care and heart failure during October and the balance of the year, as far as access to facilities utilization, et cetera? Thank you..

I’ll answer that question again, Jeff. With critical care, we do expect us to continue opening new accounts as well as driving utilization and penetration in our current accounts.

Regarding heart failure, we’re specifically using the data that was published in the Heart Failure Society of America that John alluded to, specifically to increase utilization in our current accounts -- in our current heart failure accounts..

Okay, got it. And then, one more, if I may.

The registry that you were speaking about earlier in the call, could you discuss with us number of centers that will be participating when those start enrolling and any specifics as to what areas that will be collecting data in?.

Jeff, we anticipate that registry to actually kick off next week. There has been 10 centers identified that will be participating in this. They anticipate enrolling approximately 500 patients. And we think, it will take about two and a half years to complete enrollment..

Okay, perfect. Thanks for taking the questions..

Thanks, Jeff..

Thank you. [Operator Instructions] I’m not showing any further questions at this time. So, I’ll now turn the call back over to John Erb, Chairman and CEO, for closing remarks..

Well, I want to thank you for joining our third quarter 2020 conference call. And I wish you all a very good day. Thank you..

Ladies and gentlemen, this does conclude the program. You may now disconnect. Thank you for participating..