Good day and welcome to the Nuwellis Inc Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] I would now like to turn the conference over to your host Mr. Matt Bacso..

Thank you, operator. Thank you for joining today's conference call to discuss Nuwellis' corporate developments and financial results for the fourth quarter ended December 31, 2021. In addition to myself with us today, are Nestor Jaramillo, the company's President and CEO; and George Montague, the company's CFO.

At 8:00 AM Eastern today, Nuwellis released financial results for the quarter ended December 31, 2021. If you have received Nuwellis' earnings release, please visit the Investors page on the company's website. During this conference call, the company will make forward-looking statements.

Except for historical information mentioned during the conference call, statements made by the management of Nuwellis 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 not be able to successfully commercialize its products, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations and the other risk factors described under the caption risk factors and elsewhere in the company's filings with the Securities and Exchange Commission.

The company believes that these forward-looking statements are reasonable as of today's date. However, you should not place under reliance on forward-looking statements because they speak only as of the date when made.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether because of new information, new developments or other circumstances that might subsequently arise.

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 for 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 the call and are readily available on the company's website. With that said, I will now turn the call over to Nestor Jaramillo, Nuwellis' CEO..

Thank you, Matt, and good morning everyone. Welcome to Nuwellis fourth quarter 2021 earnings call. 2021 was another challenging year for the global healthcare system due to the ebb and flow of the COVID-19 pandemic. Although the world has dramatically changed, our business model and fundamentals have not.

We remain optimistic about the potential of our business and the value we can bring to our customers, investors and patients we serve.

Despite the fact, the setback experience in the third and fourth quarter, we generated 2021 total revenue of $7.9 million representing growth of 6 – 6.5% compared to 2020 and 44% relative to the pre-pandemic period of 2019.

We believe our growth relative to pre-pandemic levels provides a useful representation of the progress implementing our strategy as we have expanded meaningfully into the pediatric and critical care markets as we advance the Aquadex therapy towards the standard of care in treating fluid overload, which is the leading cause of hospitalizations for heart failure and re-hospitalizations after cardiac surgery.

Despite the volatility that the COVID pandemic has introduced into the healthcare market, our growth over the last two years illustrates the strides we have made positioning Nuwellis as a primary provider of ultrafiltration therapy for cardiologists, nephrologists, hospitalists, intensivists, cardiac surgeons and pediatricians, who treat patients suffering from fluid overload.

Now turning to our quarterly results. The company reported fourth quarter total revenue of $1.6 million, representing a decline of 19.6% compared to the prior year and 11% below the third quarter of 2021. Compared to the fourth quarter of 2020, the decrease was primarily due to lower U.S.

sales of circuits, hospital, budgetary constraints, and a reduction in elective procedures due to COVID headwinds. When looking at the sequential trends, pediatric posted positive growth due to increase in patient census in numerous accounts following an uncharacteristically low third quarter.

Heart failure also show up modestly while critical care was down due to a combination of fewer new accounts, order timing, cancellation of elective procedures and reduced utilization.

While circuit sales are ultimately tied to utilization, order timing can play a role in growth comparisons, more specifically the 49.5 revenue growth versus prior year reported during the fourth quarter of 2020 came from a near doubling of U.S. circuit's revenue due to large orders from key customers. U.S.

circuit sales during the fourth quarter of 2021 fell short of this record level, but were still 45% above the fourth quarter of 2019.

During the quarter, various customers have expressed concerns regarding supply chain disruptions, forcing them to use more of their budget dollars to stockpile higher volume supplies with longer leads, leaving less funding for items used less frequently, which we believe could also impacted order timing.

We also believe performance in the fourth quarter was negatively impacted by ongoing hospital staffing shortage, which has impacted the scheduling of elective procedure volumes.

And last COVID prompted some hospitals to limit non-essential public access either to decrease the risk of COVID transmission or to focus efforts on treating critically ill patients. This restricted our ability to meet with customers, which is consistent with prior surges in COVID cases.

We believe once elective procedures volumes recover and hospital budget constraints ease, positive sales growth will resume. We recently implemented a new sales management system aim at increasing sales force productivity and customer success through improved account selection, adoption, utilization and retention.

We have successfully applied this approach in our largest accounts, which we believe contributed to increased utilization and faster overall revenue growth compared to our broader account base.

Moving forward, we are looking to extend this strategy to our broader customer base and are confident in our approach given our proven success at some of the most prestigious hospitals in the country. The sales organization has been trained on this approach and we look forward to sharing our progress that it gets implement.

There are three other growth catalysts that should positively impact performance in 2022 while also advancing Aquadex to the standard of care over the long-term. This growth catalyst relate to reimbursement, clinical evidence and product development.

I will start with reimbursement, a Category III CPT code for the use of therapeutic ultrafiltration became effective in January of 2022.

This CPT code expands reimbursement to include facility and professional fees for outpatient procedures and it supplements DRG based reimbursement for inpatient care by allowing healthcare providers to also seek reimbursement under a professional fee.

We anticipate that this new code will lead to increased utilization of the Aquadex therapy for heart failure patients. And in so doing, we'll capture health economic data to obtain a permanent CPT reimbursement that adequately and fairly compensates healthcare providers and facilities when using ultrafiltration.

In January, our sales organization started meeting with physicians, clinicians and reimbursement coders at accounts to inform them of these changes and to provide them with our new updated reimbursement guide.

In addition, we continue to work with a third-party knowledge partner to implement a patient access program hotline to assist customers with prior authorizations, claim denials and educational use of a new Category III CPT code.

Regarding our clinical efforts, we are making progress on a number of fronts as we continue to build a dossier of evidence demonstrating our products, therapeutic and economic value and drive recognition in the medical society guidelines. Specifically, we recently announced the initiation of the REVERSE-HF randomized controlled multi-center trial.

This trial is designed to validate clinical outcomes and economic value of the Aquadex therapy for the treatment of fluid overload in patients with worsening heart failure.

We are confident that the results of this trial will help this therapy be considered as the first-line treatment option and standard of care for rehospitalized heart failure patients. We expect to obtain institutional review board, also known as IRB approvals and begin enrolling patients in this pivotal trial during the second quarter.

Additionally, abstracts covering the use of the Aquadex in pediatric patients who suffer from kidney disease have been accepted for presentation at next week's International Conference on advances in critical care nephrology and in next month's Pediatric Academic Society meeting.

Lastly, we're very excited about an upcoming peer-reviewed journal article demonstrating the benefit to mortality and morbidity when using Aquadex early in the treatment pathway for critical care patients undergoing open heart surgery. The third growth catalyst is on the product development front.

You may recall that our development partner, Koronis Biomedical Technologies Corporation was awarded a $1.7 million grant from the National Institute of Health during the third quarter of 2021 to support the co-development of a pediatric continuous renal replacement therapy device.

Development of this product began in earnest during the fourth quarter, and we achieved our initial product development milestones during which we demonstrated the feasibility of our initial design. When put it all together, we are encouraged by our progress in executing our strategy throughout 2021. We obtained Category III reimbursement.

We have strengthened the clinical evidence demonstrating improved health and economic outcomes, and we have a compelling design for a pediatric dedicated device to expand our current pediatric indication.

Our organization and its employees continue to show adaptability and resilience amid changes, market conditions and customer requirements, and we ultimately succeeded in helping more patients benefit from our therapy during the year.

We expect that once the healthcare environment begins to normalize, our strategy will yield a resumption of positive revenue growth.

Moving forward, we will continue to execute on our growth strategy by expanding commercial relationships, building additional support in clinical evidence, establishing a firm foundation for a permanent reimbursement and launching differentiated products to ultimately drive sustainable growth.

Now I would like to turn the call over to George to discuss the financial statements..

Thank you, Nestor, and good morning, everyone. Turning to our financial results. Revenue for the fourth quarter was $1.6 million, down 20% from the fourth quarter of last year and 11% below the third quarter of 2021. Most of the sequential decline versus the prior quarter is attributable to lower U.S.

console sales, a seasonal pattern that we have seen in three of the past four years. In fact, this year's fourth quarter console sales were above Q4 of last year.

However, unlike last year, this year's sequential decline in console sales was not offset by a sequential increase in circuit sales, which, as Nestor mentioned, we primarily attribute to customer order timing, budgetary constraints and a reduction in elective procedure volume from COVID headwinds.

Gross margin was 54.4% for the fourth quarter compared to 56.1% in the prior year period, with a decrease due to volume, product mix and geographic mix. For the full year 2021, gross margin increased 2.2 percentage points to 56.7%. This improvement in gross margin relative to 2020 was driven primarily by increased volume and favorable mix.

We are encouraged by the progress we are making in our operations in support of gross margin improvement. Selling, general and administrative expenses were $4.1 million during the fourth quarter which was 7% below prior year and 12% below prior quarter as we increased cost vigilance amid the uncertain market environment.

And that led to our lowest quarterly SG&A spending in more than two years. For full year 2021, SG&A expenses were $19.0 million, a 9% increase from the prior year due to sales and marketing investments plus non-recurring management transition and administrative costs earlier in the year.

Fourth quarter R&D expenses were $1.1 million compared to $1.0 million in the fourth quarter of 2020 and $1.7 million in the third quarter of 2021.

Higher spending compared to prior year reflects increased investment toward our dedicated pediatric device, although a decrease from prior quarter when we recognized a license fee associated with that device.

The net loss for the quarter was $4.4 million or $0.41 per share compared to a net loss in the fourth quarter of 2020 of $3.1 million or $1.13 per share based on an adjusted share count.

The primary difference in net loss compared to the prior year period is due to a foreign currency translation gain of $1.2 million from the decision to dissolve an inactive Australian subsidiary. Regarding our liquidity position, we ended 2021 with approximately $24.2 million in cash and cash equivalents.

Following our most recent financing in September, where we raised approximately $10 million in gross proceeds, we believe we have sufficient cash on the balance sheet to provide a meaningful runway to fund operations through the second quarter of 2023 while we execute our growth strategy.

Looking forward to our 2022 projection, we are cautiously optimistic as we continue to closely monitor the situation caused by the COVID pandemic and availability of healthcare workers. We remain focused and determined on winning new business and increasing utilization among our existing customers.

However, we have also scaled back spending in areas not critical to our topline growth or key strategic initiatives, thereby decreasing the cash burn until market conditions improve. Given this macro uncertainty, we're not providing specific first quarter guidance at this time. I will now turn the call back to Nestor for some final remarks..

Thank you, George. As I reflect on 2021, I'm encouraged by our considerable progress in executing our strategy. This includes securing reimbursement for ultrafiltration, initiating a pivotal clinical trial and improving our product portfolio.

This sound strategy and execution helped us secure $31 million of financing during the year, putting us on a much stronger financial footing as we exited the year than when we enter it.

Based on recent clinical evidence and the publications we expect to release in the next few months, we are excited and highly motivated about the value that the Aquadex therapy can provide to patients, customers, payers and investors, and we thank you for your continued support. We believe Nuwellis is poised for meaningful growth for 2022 and beyond.

Operator, you can open the call to questions..

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

Hi, Nestor and George, how are you?.

Hey..

Good morning, Jeff..

So firstly, could you talk a little bit about the REVERSE-HF trial as far as number of patients, number of centers, some type of start date, et cetera, duration of the study, readout time frame, et cetera?.

Yes. Good question, Jeff. The REVERSE-HF trial has been designed to improve the economic and clinical value of our therapy. We have enrolled or signed up two key principal investigators. One is a cardiologist, heart failure cardiologist, Dr. Sean Pinney and the other one is a nephrologist, out of Lenox Hill, New York City, Dr. Maria DeVita.

The trial, we expect to enroll or is powered to superiority for and to enroll less than 400 patients. And we are planning to use a statistical analysis called win ratio that has helped us bring the sample size down. And we expect to enroll these patients in the next two years, anywhere from 15 to 20 sites.

And we're expecting submission to IRB this week, and we expect to start enrolling in the second quarter..

Okay.

So what’s the comparator, is this head to head?.

Good question. Yes, I forgot to mention that, Jeff. The control arm is going to be to diuretics, IV, intravenous diuretics, which is currently considered the standard of care..

Okay. Perfect. Got it. And could you recap – you had some commentary about budgetary issues, just prior to talking about staff.

Could you recap what you're referencing to?.

Yes. We have conversations with a lot of hospitals who have given the supply chain circumstances due to the pandemic, they are utilizing their budgetary funds to buy and stockpile products that they use with higher frequency.

So they have not bought products that are lower that are using lower frequency, therefore, having an impact on the products that we sell and also having an impact on order timing..

Okay. That makes further sense.

So what was the product development milestone that you referenced that was received in the fourth quarter?.

Yes, in our process development, we have a step which is a design validation. And as just to validate the design that we have on the product, and we completed successfully that milestone, therefore, having a good – we're confident that we have a very good initial product design..

Okay. Got it.

And can you tell us a little more about the sales management team? What type of system is that or what company manages the system?.

Right. Late last year, we started a training program for our sales organization to help them manage, involve and retain cost accounts that will have a meaningful impact in our business. And we started that with our top prestigious accounts in the United States, and it has worked.

We have seen an increase in utilization in those accounts, and we feel confident that as we roll that program to a broader customer base that we're going to have the same successes..

Got it.

And then lastly for us, can you walk us through 06922 [ph] as far as what type of average dollar amounts you're seeing on that code and what the range is currently?.

The Category III code is usually a sign when CMS doesn't have a database of the cost or the true cost of implementing this therapy. Therefore, they assign Category III codes, so hospitals and healthcare providers can start building against that code to obtain the database. And right now, they have assigned close to $500 on that code.

But we have engaged with the learner – a knowledge partner that is creating a hotline or have already established a hotline for customers to call in and to help with questions on pre-authorizations, claim denials and they are the ones that are going to encourage the customers to build the true cost of implementing the therapy.

With that information, then CMS can establish a permanent code for this therapy..

Okay.

Nestor, you said $500, is that per circuit or per day?.

That's per – hey Jeff, this is George. That's per treatment. And that is the facility fee.

And you may recall that with the CPT code, there's also a practitioner fee and the practitioner fee they've crosswalked, this – from Nestor's point, they get the information to determine what level of effort is involved and therefore, what fee is provided in the third-party partner that we're using will work with practitioners to provide the necessary information and work them if there is a denial of the claim or help them work through the denial of the claim to again, to help the system, if you will, capture the information so they can set the ultimate reimbursement at the appropriate level..

Okay. So, but the $500 currently is a national average daily, I should think of it as..

Yes..

Right. I got it.

The average filter duration is how many hours or how many days, 72 hours?.

The – if I understood your question, yes, the circuit is approved for 72 hours..

Yes. Okay. Got it. Perfect. That is it for us. Thanks for taking the questions..

Thank you. The next question is from the line of Brooks O’Neil with Lake Street Capital Markets. Your line is open..

Good morning guys. I got on a few minutes late, so I'm going to keep my questions limited hopefully. Just following on with Jeff's question, in general, I know there's not necessarily a prescribed time to move from the Category III to a permanent code.

But what would you expect in ballpark terms, the timeframe to be before we could get to a permanent code?.

The timing together permanent code depends on how much information CMS obtains to make a determination. And we expect that, that number should be somewhere between $1,200 and $1,500 is what we have discussions with CMS that is the true cause of delivering this therapy..

Yes. But you may know, Brooks, the code – the temporary code is valid for five years. It may be renewed thereafter. And our initial aim is to get the utilization of the code, so we can get the information.

And if we get that then in two to three years, there may be sufficient information to pursue the permanent code, but we could continue to use the T-code for at least five years..

Yes. And I probably don't understand this correctly yet, but would you estimate the number that the range that Nestor just mentioned is the likely range that doctors might build in the – during the Category III time horizon..

That is the idea. The idea is that health providers, both facility and professionals will bill the true cost of this therapy. Okay. So if we're discussing them $1,500, that's what they're going to be billing. That's what the purpose of the Category III code, yes..

I mean, that seems like a reasonable amount to encourage doctors to use your superior therapy.

Do you not agree?.

No, for sure. Yes. And we have seen that already. The preliminary feedback that we are getting from physicians, especially those that have a private practice, they are very encouraged by this code by the steps that CMS is taking to providing the reimbursement, has been very encouraging so far..

Yes, very encouraging. So, again, just following on with Jeff's questions, I appreciate the detail you gave about the sites and the patients and whatnot.

But I'm not sure I heard you say roughly how long you think it might take to enroll these patients and gather the data such that you could make some kind of a submission to whomever regarding the results you found from the clinical trial..

Yes. Okay. I'll answer your question and then I'll give you more color. We expect enrollment to take about two years. Okay..

Okay..

But we need to remember that for the Aquadex therapy, the ultrafiltration therapy to become the standard of care, reimbursement needs to be established and we are moving towards that.

And secondly is the clinical evidence to provide sufficient evidence that this therapy indeed is better than what is considered the standard of care, which is diuretics. And we have done a statistical analysis on the avoid trial data that would lead us to believe that this is going to be a highly successful trial.

As I mentioned, there is a two year estimation that we have for enrollment. And then we also have factor in, in the statistical power and intermediate review of the data to see how the study is going..

Perfect. That's very helpful. And then let me just ask one more if I could. Obviously with you guys making all this progress and it sounds like you're on very thoughtful and very methodical plan to advance Aquadex towards standard of care.

Have you seen any, let's call it, response for lack of a better term from the diuretics players as they should seems to me recognized that there's some risk that Aquadex will take over, but tell me what you're seeing out there in the marketplace now..

We have not – Brooks, we have not seen any response from any of the companies that provide diuretics. Again of the entire heart failure patient population, which is about a million heart failure hospitalizations a year, 60% of them respond very well to diuretics.

It's the 40% that don't respond well to diuretics and they are rehospitalized, those are the target patients that we are going after..

Right..

So there is plenty of patients for diuretics that are responding well to diuretics..

Great, sure, sure. And just to refresh my memory, I mean, I have a sense that some of these patients that don't respond well to diuretics have serious complications related to heart failure..

They do. They are what they are called the frequent flyers into to the ICU, into the emergency room, long-term use of diuretics also have a renal system implication, so have some renal function complications. So yes, diuretics is not the solution for many patients suffering from fluid overload due to heart failure..

Okay. Thank you very much. Congratulations on the progress. I'm looking forward to 2022..

Thank you. Thank you, Brooks..

Thank you. The next one we have the line of Anthony Vendetti with Maxim Group. Please go ahead..

Hi. Yes, this is Matt on Anthony. Thanks for taking my questions. I just had a quick follow up on the new specific CPT code.

You mentioned you had received some positive feedback, but have you seen a tangible increase in utilization since the code went to effect on January 1st? And are you doing anything else to educate customers in addition to that that hotline you mentioned?.

Well, no, we believe that's still early in the implementation of the CPT code. The feedback that we have received qualitatively has been very positive and we do expect to see an impact and utilization.

I don't know George went out for anything?.

No – and - I asked – we asked the exact same thing. We actually don't get visibility of the claims that are actually processed of real-time, if you will. What we have visibility of is the call volume into the hotline that we've established and we are encouraged by that.

We're also encouraged in effect this gives our sales reps a good – really good reason to talk with our customers. And the feedback that we've got from those discussions has been very positive.

The customers are eager to learn about this, which to me signals intent, intent to use it, which is critical to ultimately converting it to Category I in permanency because there is effort to submit the claim under a T code particularly with squeezing [ph] of crosswalk for the physician services.

So, it's important for us to help them understand what's required..

Right. Especially from those physicians that do not work for the hospitals, that they have the private practice that they serve in those hospitals, they have been varying encouraged by the news of this new code, right..

Understood. Thank you. And then just a quick follow up on the pediatric CRRT device. Congratulations on the design validation.

Can you just give us an outline of what we should expect in terms of next steps and then maybe at a high level the development timeline we should expect?.

Yes. You're very familiar with what does it take to develop a med tech device and is anywhere between two, three years development before you ready to start an IDE study or a regulatory trial to get the approvals. So we are about one third into that time..

Okay, excellent. Thank you. I'll hop back in queue..

Yes. And the only thing that I would add is that you may recall that we created a pediatric registry to start capturing information. And pretty quickly thereafter there have been two studies that have resulted and are going to be presented at conferences one next week in San Diego and another one next month.

And so, I think that there's – that information becomes public. It will start to give a better indication of the potential of the therapy and that's even using today's device, right, which is not optimal, but it's the best there is, the best many physicians think there is.

So – but in terms of kind of wedding your appetite regarding a therapeutic benefit of this therapy, we're encouraged by that and look forward to seeing those results ourselves..

Yes. This data that George mentioned that is going to be presented is off-label. So the promotion of this product has been peer to peer.

And the success that we have had in that respect has been very significant when we received the indication for 20 kilograms and above in 2022 – early 2020 we have 10 active centers, now we are over 30 active centers using our product. So the benefit both the clinical benefit of that therapy is real..

Got it. Thank you..

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Nestor Jaramillo..

Well, thank you everyone for your participation and we look forward to continue sharing with you our progress in implementing our growth strategy. Thank you. Have a good day..