CHF Solutions, Inc. (CHFS) Q4 2019 Earnings Conference Call March 3, 2020 9:00 AM ET
Claudia Drayton – Chief Financial Officer
John Erb – Chief Executive Officer and Chairman
Nestor Jaramillo – Chief Commercial Officer
Conference Call Participants
Jeffrey Cohen – Ladenburg Thalmann
Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Fourth Quarter ended December 31, 2019. [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 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, Josh. Thank you for joining today's conference call to discuss CHF Solutions corporate developments and financial results for the fourth quarter and year ended December 31, 2019. With us today are John Erb, the company's CEO and Chairman of the Board; myself Claudia Drayton, the company's CFO; and Nestor Jaramillo, the company's Chief Commercial Officer.
At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter and year ended December 31, 2019. 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 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 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. John?
Thank you, Claudia, and good morning, everyone. Welcome to the fourth quarter 2019 earnings call and corporate update. Our goal is to grow our global market leadership in fluid management with solutions that change patients' lives. During the past two years, we have steadily leveraged our human and financial assets, expanding beyond our core business serving the needs of the chronic heart failure patients to meeting acute needs in cardiovascular surgery and life-saving needs in pediatric kidney care.
Happily, these two new areas of focus are characterized by much quicker sales cycles than we've experienced in chronic heart failure. As this bodes well, not only for console placements, but also greatly increased demand for our disposable filter circuits. We made a lot of progress in 2019. Going into 2020, we are positioned to leverage important investments made during the past two years in areas that we believe will enable us to meet and exceed the expectations of our stakeholders. Those investments fall into three basic categories: first, we restructured our domestic sales organization from top to bottom to add more specialized firepower in our two new growth segments of cardiovascular surgery and pediatrics, and we more than tripled the size of our clinical support team to serve our growing customer base.
Second, we expanded our internal manufacturing capacity to significantly increase gross margins, which averaged 25 percentage points higher in 2019 than the previous year, and we expect them to climb higher, especially with our disposable filter circuits. Third, we made the investments to get FDA market clearance for both the new Aquadex SmartFlow console and our new pediatric indication, which I will discuss later in more detail. In just a few minutes, Claudia Drayton, our CFO, will review our financial results for the fourth quarter and year.
Before turning the call over to Claudia, I'm going to share more detail about several achievements that set the stage for 2020 and beyond. By moving our manufacturing of Aquadex FlexFlow consoles, and importantly, our disposable blood circuits internally last year, we increased average gross margins to just over 50%, and for 2020, we anticipate a 70% plus margin on the disposable filter circuits. Significant engineering investments led to design changes that improved the performance of our Aquadex console. This quarter, we received FDA clearance and CE Mark for the second-generation console, and we are now in the process of launching it as the Aquadex SmartFlow console in the U.S. and internationally.
The new SmartFlow introduces new integrated diagnostics that help physicians guide therapy. We have applied for five new patents that cover some of the important enhancements, and we expect to file three more in the near future. Many of you will remember that our 510(k) application to allow pediatric use of Aquadex therapy was submitted a quarter later than originally planned. But by taking that extra time, we ended up with a more complete label, which puts us in a much stronger position to provide this therapy to the pediatric market.
So we are very pleased to note that we received 510(k) market clearance for pediatric patients weighing 20 kilograms and above on February 24. Our launch into the pediatric market begins this month with training and servicing the first 20 children's hospitals that contacted us seeking to purchase and implement the Aquadex therapy. We have high expectations for the pediatric market due to the very positive clinical results published last year in the clinical journal of the American Society of Nephrology titled Kidney Support in Children Using an Ultrafiltration Device. It reported on 117 patients in 3 weight classes: below 10 kilograms, 10 kilograms to 20 kilograms and greater than 20 kilograms, suffering from fluid overload, acute kidney injury, end-stage renal disease, all of which experienced high mortality rates.
All patients across the three weight categories were treated with the Aquadex system. The primary outcome was survival to the end of therapy. Patients weighing over 20 kilograms, n of 32, experienced a 97% survival rate; 100% of those weighing between 10 and 20 kilograms and n of 13, survived; and 60% of those weighing under 10 kilograms and n of 72, survived. In a compelling statement, one of the papers author said, 97% of the children under 10 kilograms, who did not receive the Aquadex therapy, had no other alternative treatment. This data supports the opportunity to bring life-saving therapy to patients with the Aquadex system.
In cardiovascular surgery, our growth opportunity is also significant because the Aquadex system is a simple form of ultrafiltration that can be prescribed by any medical specialty for the treatment of controlling fluid overload in patients in the post-surgery intensive care unit. We're expanding our market and sales focus on the acute needs in cardiac surgery, where physicians need a simple and predictable method to rapidly remove the additional four to six liters of fluid put on the surgical patients to compensate for the blood flowing through the heart-lung machine. It is vital to remove this excess fluid immediately post surgery to reduce the time to be extubated from the ventilator, increase the speed to ambulation, shorten the time in the cardiac ICU and properly manage the patient after discharge. Fluid overload is the third highest reason for cardiac surgical patients to be readmitted to the hospital in the first 30 days post discharge and the Number 1 reason a cardiac surgical patient is readmitted to the hospital after 30 days from discharge.
So the Aquadex system not only shows its value in better patient care, but also in cutting costs for hospitals who operate with set reimbursement codes. It also brings another advantage. If excess fluid volume after cardiac surgery is not resolved without a specialist intervention by nephrologists, it is considered an adverse event and could result in a potential hit in surgery quality scores and costly reimbursement penalties.
In my opening remarks, I mentioned the top-to-bottom restructuring of our domestic sales organization, and that included the hiring of Nestor Jaramillo as Chief Commercial Officer. Nestor is leading our transition into the cardiovascular surgery and pediatric markets, where, as I have said, sales cycles are much shorter and uses of our consumable filter circuits are generally much higher. Nestor is providing leadership to our greatly expanded sales and clinical support organizations. We now have a full complement of 13 sales reps filling our 13 U.S. sales territories.
We also increased our clinical specialist team from four to 14, not only to train the talented professionals who use our equipment, but also to encourage increased utilization of the Aquadex consoles in each hospital account. International markets will be increasingly important to our growth, but it wasn't until last year when we obtained our own CE Mark that we could take full advantage of those opportunities.
Last year, we added distributors in Brazil, India, Spain and Greece, joining our long-time partners in Italy, the United Kingdom and Southeast Asia. This year, we have announced new distributors in Germany, Austria and Switzerland, spreading our current international footprint to 13 countries. Much of the impetus for our expansion into new indications has been instigated by physicians who have a deep understanding of the Aquadex system and a passion for better patient care. And as I speak, they are studying even more ways to utilize our technology.
Doctors at Mount Sinai in New York have initiated a clinical evaluation of Aquadex in advanced liver disease, including liver transplant. In another example, we recently announced a presentation of clinical data from an investigator-initiated analysis at the American Society of Nephrology's Kidney Week that highlighted the efficacy and simplicity of the use of Aquadex FlexFlow in treating patients in critical care settings and issues such as cardiogenic shock, anasarca, acute tubular necrosis with fluid overload, end-stage renal disease with bridge ultrafiltration between hemodialysis treatment and postoperative fluid overload.
I will now turn the call over to Claudia, who will walk you through our Q4 2019 results and financial details. Following that, I will provide some closing comments, and we'll open the call to questions.
Thanks, John. Good morning, everyone.
Turning to the P&L. Revenue for the fourth quarter was $1.357 million, an increase of 9.2% from Q3 2019 and a decline of 8.8% from Q4 of 2018. Revenue performance for the quarter was impacted by the sales force realignment we announced earlier in the fall of 2019. For the year 2019, revenue totaled $5.5 million, a 10% growth over 2018. Regarding our operating cost and expenses; total cost and expenses for Q4 2019 were $5.8 million, consistent with the levels of Q4 2018. I will briefly comment about major drivers.
First, regarding our cost of goods sold. We continue to see improvements in our gross margins resulting from the transition to in-house manufactured inventory. Our margins were about 51% for the quarter, 16 percentage points above last year's Q4 margins. For the year 2019, our gross margins were 51.7%, an increase of 25 percentage points over the prior year.
Second, regarding our SG&A expenses, Q4 2019 expenses were $4.2 million, an increase of 10% over Q4 of 2018. The increase results from additional clinical specialists we hired during 2019 to assist in opening and training new accounts. Our R&D expenses were flat in Q4 2019 compared to Q4 2018 and decreased by 14% from Q3 2019. Earlier in 2019, we had reported an increase in product development spending to support a pediatric submission and improvements for the next-generation Aquadex SmartFlow console, which just received FDA clearance and CE Mark.
The net loss for the quarter was $4.4 million or $1.12 per share compared to a net loss in the fourth quarter of 2018 of $4.3 million or $8.37 per share. For the year, the loss for 2019 was $18.1 million or $9.30 per share compared to a net loss of $17 million or $42.14 per share in 2018. Regarding our liquidity position, we used $4.1 million of cash in the quarter to finance our operations, an increase of $300,000 from Q3 2019. During the quarter, we announced the completion of two registered direct financing transactions for net proceeds of $1.7 million.
For the year, we utilized $16.4 million to finance operations, an increase of $1.8 million from the year 2018. The increase was driven by incremental investments in our sales organization and product development activities as discussed previously. We ended the year with approximately $1.3 million in cash and cash equivalents and no debt. Subsequent to year-end, on January 28, 2020, we closed on an underwritten public offering from net proceeds of $8.6 million.
On a pro forma basis, our year-end cash, taking into account the financing after year-end, was $9.9 million. In terms of modeling 2020, we expect the sales force reorganization we announced in 2019 now complete, along with the recently announced FDA pediatric clearance and the launch of our next-generation Aquadex SmartFlow will allow us to resume double-digit growth rates, both sequentially and versus the prior year.
Regarding our gross margins, we expect that it will continue to improve, although more incrementally as our volumes and efficiencies increase. Regarding our operating expenses, in 2020, we expect to see a modest increase in our investments in sales and marketing as we annualize the headcount additions we made in 2019 and have fully staffed territories for the year. In R&D, we expect spending to decrease. It will be at or below the levels we reported this last Q4.
I will now turn the call back over to John.
Thank you, Claudia.
We anticipate further accelerated 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. We are spearheading the growing awareness of the current challenges of using IV diuretic therapy only, and thereby, introducing the clinical value of the Aquadex therapy as an opportunity to improve clinical outcomes, reduce rehospitalization rates, improve patient satisfaction, reduce a major expense to the health care system and save lives of pediatrics. We are at the execution stage of commercialization and growth, and I should reemphasize the opportunity we have moving into 2020 as we leverage our previous investments with only minor incremental costs required in commercialization.
CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing proven solutions that improve the quality of life for these patients and the clinicians who have the passion to treat them.
Operator, please open the call for questions.
[Operator Instructions] Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. You may proceed with your question.
Hey, John and Claudia. How are you?
We are good. Good morning.
Hi. Good morning.
So John, I heard you correctly, you were talking about the rollout into the first 20 pediatric centers as we speak earlier in the call?
Wonderful. So again, congrats on the label expansion. So North America FTE is now about 27 in the field, commercial, 13 reps and 14 specialists, a 27 total. And what's total FTE account now according to company as a whole?
It's just shy of 70 people, about 67 as we speak.
Okay. That’s fantastic. So john, based on some of the kind of past due diligence, it sounds like these pediatric centers could be using hundreds through high hundreds of filters, perhaps depending on the specific vein, which they're using your filter and how long they're using it for. Would you agree with that? Does it sound like – it sounded like we knew of a couple of handfuls of centers that were using product in the pediatric center. So is that inclusive in your number? Would you expect to be at that 20 number, say, over the next two months, by April or May?
Well, I think we have to be careful here. As you – as we've reported in the past, our Q4 revenue, 33% of that revenue came from four children's hospitals. We anticipate growing the business, continuing to grow in heart failure, but growing a bit more rapidly in cardiac surgery, so that overall percent going into 2020, I still expect it to pediatrics or children's hospitals to be in that 30% to 35% total revenue. As these hospitals come online, there's a training period. There's a start-up period.
We're actually using three of our pediatric physicians that – after the paper that I referenced in the talk, that are doing a lot of the training. So as we go through that, it's not going to be a hockey stick in overnight, all 20 hospitals are going to come online, but definitely through 2020, I think we will exceed more than 20 children's hospitals to start implementing the therapy, but the start-up will ramp gradually as they learn how to use it, as they become more comfortable using it.
Got it. Okay, that’s very helpful. And then can you talk about at least with those existing 20s, what kind of overlap do you see between peds and the CV area? And will you be able to use that to your advantage either coming from the CV side, which probably won't be needed for some of these peds, but more from the peds side over to CV and some of these centers?
Well, there will be some overlap. But I would say that those 20 are specific children's hospitals. So they are often a part of a larger hospital system. And as the therapies introduced in the children's or in pediatric use, it will grow to the other portion of those hospitals. So there's – it's not a specific overlap. It's really somewhat distinct in the pediatric care versus cardiac surgery care.
Got it. Okay. Claudia – it looks like the margins are pretty strong. I would expect some pull-through on that. Any thoughts about breaking out G&A for 2020? Or at some point, do you plan on breaking out G&A from sales and marketing?
I have not given that any thought, but it's something that we could certainly look into. Would that be helpful to you as you model out?
Yes, I think it would be moderately helpful. And then lastly for me, John, I saw a couple of blogs, and I got a couple of inbound calls, folks asking about recent action in coronavirus and speaking of CHS and their solutions. Are you aware of anyone out there that's tried Aquadex for any of these patients, U.S. or ex U.S.?
Interesting enough is just this week; we've had a couple of inquiries. And we're pursuing it. We're looking into it. As we look at the World Health Organization announcements around the coronavirus, there isn’t need for fluid management. There is a need for administering a lot of whether it's drugs, antibiotic, whatever it may be, along with a lot of fluid, and they have to balance that. And the World Health Organization has actually put this in these couple of announcements they've put out. So we're pursuing that at this time. We also are pursuing it internationally because we have some strong use of our product in Italy, where there's certainly a large number of patients with coronavirus. So it's at hand, we're looking into it, and I think there'll be an opportunity for us to help.
Got it. But you're not aware of any use to date?
Okay. That’s it for me. Perfect, thanks for taking the questions.
Thank you, Jeff.
Thank you, Jeff.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to John for any further remarks.
Thanks, Josh. I want to thank you for joining our fourth quarter 2019 conference call and I wish you all a great day. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.