Participants

Vivian Cervantes; Investor Relations; Gilmartin Group LLC

Nestor Jaramillo; President & Chief Executive Officer; Nuwellis Inc

John Jefferies; Chief Medical Officer; Nuwellis Inc

Rob Scott; Chief Financial Officer; Nuwellis Inc

Anthony Vendetti; Analyst; Maxim Group

Presentation

Operator

Good day everyone and welcome to Nuwellis third quarter, 2024 earnings conference call.
At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the program over for forward-looking statements. Vivian Cervantes, Investor Relations.

Vivian Cervantes

Thank you. Good morning, everyone and welcome to Nuwellis earnings conference call for the third quarter ended September 30, 2024. 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 the questions. You may press star on your Touchtone pad.
Thank you for joining today's conference call to discuss Nuwellis corporate developments and financial results for the third quarter ended September 30, 2024, in addition to myself with us today are Nestor Jaramillo Nuwellis Inc President and CEO, Director, John Jefferies, Our Chief Medical Officer, as well as Rob Scott, Our CFO at 8 AM Eastern Time today. No released financial results for the third quarter, 2024. If you have not received no earnings release, please visit the investors page on the company's website during today's call, the company will be making forward-looking statements all forward-looking statements made during today's call will be protected under the private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.
All forward-looking statements are based upon current available information and the company assumes no obligation to update these statements accordingly. You should not place undue reliance on these statements. Please refer to the cautionary statements and discussion of risks in the company's filings with the securities and exchange commission including the latest 10-K with that. I now would like to turn the call over to Nestor.

Nestor Jaramillo

Thank you Vivian, and good morning, everyone. Welcome to Nuwellis third quarter, 2024 earnings conference call on today's call. I will provide an overview of our third quarter performance and give an update on our strategic initiatives. Followed by Dr. Jefferies, Our Chief Medical Officer who will provide a summary of the recent publication on the efficacy of new. Well in a real world community hospital setting.
Our Chief Financial Officer Rob Scott will then provide detailed commentary on our financial results before opening up the call for questions followed by my closing remarks.
Nuwellis has generated 2.4 million in revenue for the third quarter of 2024. A 2% decrease year over year. However, sequentially, we grew 8% over Q2.
While the adult category of our business saw a lower volume of patients treated during the summer month. Our pediatric customer category experienced a surge in revenue of 28% compared to the same quarter of last year driven by three new pediatric accounts opened this quarter including one of the largest hospital networks in Florida.
We also experienced a sequential improvement in pediatric senses.
In addition to the pediatric account, we also opened two additional adult accounts.
We are excited to continue to drive market penetration of our differentiated aqueduct ultrafiltration therapy as we leverage our body of clinical evidence.
For the reminder of our customer category, critical care and heart failure were down 25% and 36% respectively on lower consumable utilization and consult sales reflecting the generally lower volume of patients treated during the summer months.
One of our key initiatives for the last three years have been to build our body of clinical evidence in order to make this therapy standard of care and get into the medical society guidelines.
In support of this initiative, I would like now to turn it over to Dr. Jefferies to discuss the latest addition to our growing body of clinical evidence and the impact that this clinical information may have in broad day to day clinical practice. Dr.Jefferies.

John Jefferies

Thank you, Nestor and good morning everyone in August, we announced the publication of a new study and current problems in cardiology demonstrating the effectiveness of aqueducts and significantly reducing 60 day hospital readmission rates for patients with acutely compensated heart failure who are otherwise resistant to diuretic treatment in a community hospital setting.
As a senior author on this paper, I was pleased to see the analysis of an Aquadex program and community based regional hospitals showing how refractory acute decompensated heart failure patients benefited from significant volume loss and weight reduction along with stable renal function and remarkable clinical benefit.
I would like to highlight that the outcomes of community based hospital setting trial demonstrate the broader applicability and effectiveness of the Aquadex therapy. Real world data in some ways is often more powerful than randomized controlled trials because it uses everyday patients that need to be treated rather than a cohort of pre selected patients which typically occurs as a certain group of academic institutions.
The outcome of this study shows that ultra filtration can be very effective for these real world types of patients.
This is vital for new wells strategy as we now have the data to leverage as we expand the use of this therapy to these therapy, to these hospitals in a non academic center setting.
Going deeper into the study's findings, it showed that favorable Aquadex therapy programs can result and achieved early is shown in this hospital system in the form of reduced acute decompensated heart failure readmissions.
There were numerically fewer 30 day acute decompensated heart failure readmissions after aqueduct program initiation compared to pre program initiation with a statistical P value of 0.351. However, at 60 days, there were significantly fewer acute decompensated heart failure readmissions with a statistically significant P value of 0.013.
Additionally, patients experienced significant B reduction with a mean food loss of 9.4 L and a significant weight loss with a mean decrease of 7.4 kg. Notably, ALL 30 patients had stable renal function and no significant change in serum creatinine. A test used to measure kidney function is 72 hours of ultrafiltration therapy.
Finally, the study had important practical implications for heart failure clinics demonstrating that a successful Aquadex program is reproducible and can be coordinated by general cardiologists without the need for a dedicated heart failure unit.
We continue to enroll patients in the reverse HF trial which is designed to help increase awareness and provide the data to support becoming standard of care. The study has enrolled over third of the patients contemplated by the protocol.
I welcome any questions on this new evidence during the Q&A session. And now I'd like to turn to Rob to discuss our third quarter financial results.

Rob Scott

Thank you Dr. Jefferies. And good morning everyone turning to the Q3 financial results revenue for the third quarter was $2.4 million representing an 8% sequential growth and a 2% decline over the prior year period.
Our pediatric customer category surged with a 28% increase compared to a year ago as we expanded our Aquadex offerings to three new pediatric centers. One of which is within is within one of the largest hospital networks in Florida.
Our critical care and heart failure, customer categories were down 25% and 36% year over year respectively. These declines are due to lower consumables utilization in the summer months and also because of console sales, gross margin was 70% for the third quarter compared to gross margin of 57.3% in the prior year quarter. The margin improvement was primarily driven by higher manufacturing volumes of consumables and lower fixed overhead manufacturing expenses selling general and administrative expenses were $2.7 million in the third quarter.
A decrease of approximately 21% as compared to $3.4 million in the third quarter of 2023.
The decrease in SG&A was primarily realized through efficiency initiatives enacted in the second half of 2023.
Third quarter, research and development expense was $486,000 compared to $1.1 million in the prior year period.
The decrease in R&D expense was primarily due to reduce consulting fees and compensation related expenses.
Total operating expenses were $3.2 million in the quarter. A decrease of approximately $1.4 million or 30% as compared to the third quarter of 2023. As we continue to realize savings from operating efficiency initiatives enacted in the second half of 2023 operating loss in the third quarter was $1.5 million compared to an operating loss of $3.2 million in the prior year period, resulting in a $1.7 million period over period improvement, net income attributable to common shareholders in the third quarter was $2.4 million or a gain of a $74 per share compared to a net loss attributable to common shareholders of $3.4 million or a loss of $63.27 per share for the same period in 2023 third quarter, net income improvement was primarily the result of the revaluation of a prior period, warrant liability resulting in a $3.9 million benefit.
We ended the third quarter with $1.9 million in cash and cash equivalents and with no debt on the balance sheet.
Our cash balance in the third quarter includes the August and July registered direct offerings priced at the market under NASDAQ rules with gross proceeds of approximately $892,000*$2million respectively.
As we previously disclosed, we mutually terminated our license and distribution agreement with [Csar] Medical resulting in a settlement in October whereby they agreed to pay Nuwellis $900,000. By the end of the calendar year, we received approximately $500,000 in the month of October.
This concludes our prepared remarks. Operator. We would now like to open the call to questions.

Question and Answer Session

Operator

At this time. If you would like to ask a question, please press star one. Now on your telephone keypad once again to ask a question that is star 1 one moment. While we queue.
If you've press star one before, please press star one. Now star one to ask a question.
We'll take a question from Jonathan Soff. Overall, your line is open.

Thank you guys. Good morning. I would like to ask you to walk us through an economic comparison of the now profitable, given the heightened reimbursement, the now profitable way that hospitals can use aqueduct in the outpatient setting. And the money they would make, you know, versus the money they would make doing ultra filtration a different way for these same outpatients.

Nestor Jaramillo

Very good question, Jonathan. This may take a little long this explanation. Right now, the only way that ultrafiltration is provided is in the inpatient and patients get hospitalized and it takes anywhere from 3 to 5 days to remove the fluid of these patients. If you and then the reimbursement is there are 3DRGs that reimburses the inpatient treatment of heart failure. Any one of those 3DRGs, the hospital incurs a loss because the cost of a patient to be treated for heart failure, for decompensated heart failure in the hospital is about $24,000 and the highest DRG is probably $12,000. So the hospital incurs a loss with this reimbursement. Now, the hospitals can provide ultra situation in the outpatient setting. It could be in an observation unit or even in the and the patient doesn't need to be I admitted in the hospital.
Secondly, the reimbursement now is $1639 per day. So, if the patient needs three days to remove the fluid that the physician recommends, then it would be that amount every day.
So the hospital now given our cost of the circuit, which is $900 the hospital can make $700 a day for treating these patients. And again, the patient can take anywhere from 33 days treating the patient coming in and out of the out of the observation unit. And so therefore the hospital would be, would have more profit from the therapy.

Right. So you would see this totally replacing the impatient population, you know, for those that don't have to be there for some other reason.

Nestor Jaramillo

Right? We envision exactly it could replace admitting the patient in the hospital, decongesting the patient in the or in the observation unit, not needing to admit the patient in the ICU or in the hospital, therefore, will replace the inpatient treatment of using ultra Patient.

Okay. So then, I mean, is there any difference in actual outpatient medical benefit between, you know, these two procedures, meaning Aquadex versus you know, some sort of dialysis machine they might use, you know, because as long as the hospital can justify doing no harm, it's always going to make more money if it can.

Nestor Jaramillo

Correct, we believe that treating patients with decompensated heart failure in the outpatient would be more profitable for the hospitals.
And I forgot to mention one other aspect of treating patients in the inpatient. If the patient gets readmitted within 30 days, then the hospital doesn't get paid by CMS or most private payers. And also it assumes some penalties. So that's another savings because the patient was not admitted.

In terms of the patient, the benefit to the patient. It is well documented that patients that get hospitalized, regardless of what is the condition, the mortality rate goes up.

Nestor Jaramillo

So therefore, by not having to be admitted, you don't are exposed to those high mortality rates.
In addition, the treatment would be anywhere from 4 to 6 hours and the patient after that, the patient can just go home and then schedule the next visit.
So for the patient, it would be much better and also a better quality of life.

Okay, so then, you know, what's the crux of what, what went wrong with DaVita? Why that never matured into what it was, you know, hoping to mature into.

Nestor Jaramillo

Yeah, Jonathan, that's a, that's a good question, you know, and we have internally debated. What were the reasons when we started the conversations with DaVita? We had a champion in that organization as soon as we signed the agreement that champion got promoted and then we were assigned a different team.
So we lost a little bit of momentum there.
Also, at the beginning, we did not target the right centers. We target centers that were good customers of nues and they were happy treating the patients by their staff in the inpatient. They did not need it, the DaVita personnel.
So then we pivot and then we went to accounts that were familiar with ultra filtration. They had issues with capital budgets and personnel and it just took a little too long for them to get ready to use ultra filtration provided by DaVita.

All right, thanks. You know, also when can we expect the reverse HF trial date? I'm sorry, I had con commitment calls. So maybe you said something about the time line and, and enrollment percent already. And if you did, would you please reiterate that.

Nestor Jaramillo

Right at the, at the current rate of enrollment, we expect to finish the enrollment period by the middle of 2026.
And then after that, there is a 90 day followup and then we would have the data analyzed and be ready to submit by the end of 2026.

Okay. You mean, okay, to the FDA, you mean.

Nestor Jaramillo

Correct?
Well, not to the FDA. This is not, I'm sorry not to the FDA, to submit to publications and to submit to the medical societies for them to include this therapy in their guidelines.
Assuming, and we expect the results to be very favorable.

And did you give an update for Vivian progress?

Nestor Jaramillo

Yes, we continue the development phase of BN and we're estimating that by the end of the 2025 we will be ready to start the inhuman clinical study. It would be an IDE trial that will be an FDA trial and we have already agreed on the protocol with the FDA.

Thank you very much, Nestor.

Nestor Jaramillo

Thank you, Jonathan.

Operator

And once again to ask a question that is star one. Now on your telephone keypad, we'll move next to Anthony Vendetti of Maxim Group.

Anthony Vendetti

Thanks. Good morning. So, these new rates which are substantially higher for ultra filtration go into effect 1,125 correct? And, and how are you internally preparing the organization to capitalize on this and in all you know, all three phases, right? Pediatric critical care and heart failure, specifically, how are you addressing this with your customers? You know, what's the you know, go forward plan.

Nestor Jaramillo

Yes, good question. And good morning Anthony. Well, first of all, we're very excited about this new as assigned code that triples the reimbursement. We are preparing by identifying those hospitals, those centers, those accounts that used to do ultrafiltration in the outpatiet setting. And back in 2012, there were about 12 centers that were doing ultrafiltration in the outpatient setting. And it requires a setup requires patients to be able to come in, sit down in the chair and then get the ultrafiltration therapy performed.
And also they need to set up what is called the order set.
And also we going to ensure that those hospitals in those territories, do have coverage from either local, CMS, administrators and also private payers. So, we're getting ready on both, helping the hospitals get set up as well as making sure that the reimbursement is a ready to be, filed.

Anthony Vendetti

Okay. And do, do you feel like at this point you have all the personnel you need in place or do you believe that with this higher reimbursement? You, you may hire a couple of you know, either clinical people or sales people to try to accelerate the adoption.

Nestor Jaramillo

Yeah, good question. Right now. We have nine territories in place with the sales reps and clinical specialists. So we can start with those in those territories, most of these hospitals that we're doing ultra filtration in the outpatient in the past we haven't covered. So we will not need to add anyone in the field to get started with the ultra filtration in the outpatient. We are going to look into bringing some expertise when it comes to reimbursement inside a in the headquarters.

Anthony Vendetti

Okay, great. Thank you very much. I'll back in with you. Appreciate it.

Operator

And once again, that is star one to ask a question, one moment while we queue and it appears that we have no further questions at this time. I'd be happy to return the conference to our host for any concluding remarks.

Nestor Jaramillo

Thank you operator. We continue to see momentum in our business. With new accounts steadily opening on increasing awareness of the efficacy and supporting clinical evidence for all Aquadex ultra filtration in the adult and in the pediatric customer categories. We believe these clinical results as described by Dr. Jefferies will have a positive impact in growing our business and supporting aqueduct in becoming the standard of care for fluid removal when diuretics are ineffective.
As we reported early last week, we were pleased to announce the company received the notice of the from the center of Medicare and Medicaid services also known as CMS.
That the Aquadex ultra filtration code will be reassigned to the outpatient reimbursement level most consistent with the administration of ultrafiltration therapy and cost of treatment.
So effective January 1st, 2025 the facility reimbursement fee will increase 297% from $413 to 1,639 per day.
With this increased reimbursement, we are opening a new chapter for Nuwellis. We anticipate seeing accelerated top line growth from this rate increase as a point of clarification. A prior announcement reflected reim the reimbursement increase as 397%.
Additionally, as reported early last week, the company raised $5.1 million in gross proceeds from warrant exercises and through a warrant inducement solicitation.
I want to thank all the stakeholders as well as employees, stockholders, physicians, nurses and patients and health care workers in the field. Without your support, we would not be able to achieve key advances in transforming the lives of patients suffering from fluid overload.
Thank you for your participation and support.

Operator

This does conclude Nuwellis third quarter, 2024 earnings conference call. You may now disconnect your lines and everyone. Have a great day.