Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Second Quarter Ended June 30, 2020. [Operator Instructions]. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the end of the call. I would now like to turn the conference over to Claudia Drayton, the company's Chief Financial Officer. Please go ahead, madam.

Thank you, Phyllis. Thank you for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the second quarter ended June 30, 2020. With us today are John Erb, the company's CEO and Chairman of the Board; myself, Claudia Drayton, the company's CFO; and Nestor Jaramillo, the company's President and Chief Operating Officer. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2020. If you have not received CHF Solutions' earnings release, please visit the Investors page at www.chf-solutions.com. During the course of this conference call, the company will be making forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of CHF Solutions are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve known and unknown risks and uncertainties that are based on management's beliefs, assumptions, expectations and information currently available to management. Those risks include, but are not limited to, risks associated with the possibility that the company may be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully and the other risk factors described under the caption Risk Factors and elsewhere in the company's filings with the Securities and Exchange Commission. By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements whether as a result of new information, new developments or otherwise. You should review the cautionary statements and discussion of risk factors included in the company's press release issued today, the company's latest 10-K, subsequent reports, as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statements for additional discussion of risk factors that could cause actual results to differ materially from management's current expectations. Those discussions regarding risk factors as well as the discussions of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company's website at www.chf-solutions.com. With that said, I would now like to turn the call over to John Erb, CHF Solutions' Chief Executive Officer and Chairman of the Board.

Thank you, Claudia, and good morning, everyone. Welcome to the second quarter 2020 earnings call and corporate update. This year continues to be a challenge for health care throughout the world due to the ebb and flow of the pandemic. Although the world has dramatically changed, we know our business model has not changed in the long run, and we remain optimistic about the durability of our business. We are confident that our priorities are clear and focused. Our goal is to grow our global market leadership in fluid management with solutions that change patients' lives. As I have described in the past, we are expanding beyond our initial business of serving the needs of chronic heart failure patients to meeting acute needs in critical care, such as cardiovascular surgery, and the life-saving needs in pediatric kidney care. The company achieved very solid performance in the second quarter of 2020 despite hospital access restrictions, elective surgeries dramatically reduced and hospital financial concerns and restrictions on purchasing capital equipment. We achieved our highest quarterly revenue with growth of 14% over prior quarter and opened 4 new hospital accounts in the quarter. Also in this quarter, we reinitiated Aquadex therapy in 9 additional hospitals that had been abandoned the therapy during Baxter's ownership. Additional accomplishments included the use of Aquadex by intensivists and nephrologists in treating their COVID-19 patients, demonstrating opportunity to prevent acute kidney injury and mitigating the need for dialysis. We hosted an interactive clinician-led webinar to discuss cardiopulmonary-renal management in real-world COVID-19 patients moderated by Daniel Goldstein, MD, Professor Vice Chairman, Department of Cardiothoracic Surgery, Montefiore Medical Center in New York. We submitted a patent application for an adoption to the Aquadex Smartflow system to rapidly clear cytokines, including Interleukin 6 from the blood. Removal of cytokines from the…

Thanks, John. Good morning, everyone. Turning to our financial results. Revenue for the second quarter was $1,863,000, an increase of 14% sequentially from Q1 2020, and up 11% from Q2 of last year. Revenue performance for the quarter was driven by increased demand from hospitals treating COVID-19 patients. This increase helped offset the impact of access restrictions that many hospitals have imposed on our sales representatives. For the second quarter of the year, we estimate that 34% of our revenue was driven by hospitals treating patients with COVID-19. Regarding our cost of sales and operating costs, I will briefly comment about major drivers. First, regarding our cost of sales, our gross margins were about 64.4% for the quarter, a significant increase from Q1 2020 margins of 51.2% and from Q2 2019 margins of 50.2%. The improvement in margins is mainly the result of increased production to support the launch of our new Aquadex SmartFlow and to meet expected future demand increases. Next, regarding our SG&A expenses of Q2 2020, expenses were $4.2 million, an increase of 6.6% over Q2 of 2019. The increase results from having fully staffed territories, including clinical specialists we hired during 2019 to assist in opening and training new accounts. Our R&D expenses were $885,000 in Q2 2020, a 32% decrease compared to Q2 of last year. Last year, we had reported an increase in product development spending to support our pediatric submission and improvements for the next-generation Aquadex SmartFlow console, which received FDA clearance and CE Mark during the first quarter of this year. The net loss for the quarter was $3.9 million or $0.10 per share compared to a net loss in the second quarter of 2019 of $4.4 million or $1.93 per share. Regarding our liquidity position, we used $3.3 million of cash…

Thank you, Claudia. CHF Solutions continues to be focused on the health and safety of our employees. Our production and some of our engineering staff continue to work on-site at our manufacturing facility and most of our team is maintaining business operations by working remotely. Production of the Aquadex products continue and have been -- have seen minimal disruption of the supply chain for components and materials. We have been able to retain all of our employees, including 30 employees in our field sales organization. Before the COVID-19 pandemic, almost 100% of our business came from hospitals with close to 70% what are now considered elective procedures. These 30 field sales and clinical employees continue to be restricted from access to most hospitals and face challenges with new hospital rules. As elective procedures come back online and hospitals again start to schedule the needed elective procedures, our sales and clinical team have proven ready and have quickly reengaged with hospital accounts. We now have a full complement of 13 sales reps filling our 13 U.S. sales territories. We also have our clinical specialists team of 13 to not only train the talented professionals who use our equipment, but also to increase utilization of Aquadex consoles in each hospital account when they can return to provide support. We are continuing to support our customers as they strive to manage and control the impact of the COVID-19 pandemic. Physicians on the front lines of treating patients with COVID-19 have used Aquadex therapy for patients who need fluid removal between dialysis treatments as an alternative therapy when dialysis machines or trained dialysis personnel are not available. In addition, patients hemodynamically unstable and fluid overloaded who may not be able to tolerate dialysis but still need fluid removal are being treated with the Aquadex…

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

It looks like a pretty good readout for the quarter. I just wanted to probably a few questions. As far as COVID, you talked about 34% from the second quarter. Can you give us a general sense of number of placements or number of facilities where that was coming from? And was that internal shifting from critical care or from cardiac? Or is new units there as well?

Well, it's primarily coming from hospitals that were users of our product in their critical care area in the ICU. So as they began to utilize those beds for COVID-19 patients, they increased utilization of Aquadex. So most of those hospitals actually brought in additional consoles for supporting the COVID-19 patients. We actually would say that, that 34% came from 8 hospitals that were really directly increasing the volume because of COVID, and these were basically in the hotspots in the U.S., such as New York City and Georgia.

Okay. Perfect. Got it. And on the pediatric side, could you give us a little further color? I'm assuming that current pediatric use is on the order of a handful or 2 of units. And you talked about there being a backlog or a queue of 20 or so for March. So how might that play out over the next 3 or 4 quarters? I know a lot of it is hospital and pandemic dependent. But do you expect those to get peeled off? And has there been a change since March in the actual number on the queue side of 20?

We have a pipeline of hospitals that we're trying to move from a Phase 1 where we've identified those hospitals that we want to approach or talk to, to a Phase 2, where those hospitals have actually invited us in and wanting to implement the therapy to Phase 3, where they're actually purchasing it; and Phase 4, where they're actually utilizing it. I believe right now, we have 5 children's hospitals in that Phase 4 area that are actually using the product. Our revenue in the second quarter, I believe it was just under 20% came from children's hospitals. So still a fair amount of volume from those 5. And we probably have another 6, 7 that are in that Phase 3 that have purchased the equipment and are just in a queue for training. That training comes not just from us on our clinical specialists team, but also from the key physicians that kind of pioneered the use of Aquadex in treating the COVID patients. So Dr. Goldstein out of Cincinnati Children's and Dr. Askenazi at Alabama Children's have really been key in helping train their peers in how to utilize it. So there's -- as things loosen up, actually, there'll be additional training that we'll be able to perform and bring more hospitals on. As I mentioned, we did bring on King's Daughters hospital this quarter. And they're now up and running. So it's going to be a process really as the hospitals open up. They're ready and waiting. I think we have now probably 30 children's hospitals in that -- from Phase I to Phase 4. So the pipeline is full. It's just a matter of being able to get them trained and up and running.

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

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

Yes, it was a question.

On margins?

Yes. I think that we had really good margins in Q2 as we built up the inventory for the launch of our Aquadex SmartFlow. Going forward, I think those margins may not be quite as high in the next couple of quarters. But as volume increases, we obviously are going to see an improvement -- increase in margins. But I think we were at 64%. I would still say we'd be in the low 60s with our margins in the coming quarter.

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

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

Yes. I was just wondering, guys, if you could just comment on the fact that you were able to get 34% of revenues from about 8 hospitals treating COVID-19. Can you talk about what the impact could be for the Aquadex system in terms of the marketability? The fact that it's being used now at a very critical time and I know your shift from focus on cardiac care to critical care as well as pediatrics. It's part of the business strategy. But does this, you believe, accelerate the movement into critical care? And do you think that helps set you up for as hospitals open up -- and I know like you've mentioned in the call, there's still relatively closedown for new business, and this was from existing hospitals. But as we start to reopen, in various phases, and I know it varies by state, do you think this accelerates the potential adoption curve?

Anthony, this is Nestor. I'll answer that question. It's a very good question. Yes, for sure, all the webinars and education that we have done with our key opinion leaders have helped create an awareness of how effective the Aquadex SmartFlow system has been in treating COVID-19. And the reason that these COVID-19 patients coming to the ICU is because of a respiratory problem, but also multi-organ failures. That happens quite a bit outside the COVID-19 patients that come into the ICU, so have really strengthened our positioning of the Aquadex system in the ICU setting. Did I answer your question?

Yes. No, that's helpful. And then maybe also just talk a little bit -- I know you mentioned the rollout into the children's hospitals and the training in the 6 or 7. Just in terms of your sales force and in terms of the training, I know some of the physicians are helping with the training. But have you been able to do that remotely, how is the training on? And then in terms of sales, is there -- even though it's tough to get into the hospitals, has there been a way to access new hospitals remotely? Or is that still difficult during this time as their focus has been diverted?

Okay. Let me answer that question in 2 parts. The first part is that all the training that we have done with the pediatric has been -- the majority has been remotely. We have had a couple of instances where physicians and the nurses in the pediatric hospitals are wanting to meet with us outside of the hospital. And in one instance, was in a hotel. So we did training there. The -- so the second part is that we will continue to use the remote. We have been very successful in reaching out to physicians remotely. The question come is when we do the training, and then for that, I believe that we will need to have full access to hospitals to provide training in the large majority of those pediatric centers that are waiting in the queue to be trained.

Anthony, I would just add a point. In my comments, I mentioned that we actually reinitiated in 9 hospitals that had stopped using the therapy during Baxter's ownership period. They are aware of the product, the training demand is less there. So Nestor and his team have been very successful in being creative in how we continue to drive revenue growth: number one, by going back to accounts where the training requirement is not as demanding and getting them back up and running. And I think to bring 9 -- total actually 13 hospitals online during the quarter, during the COVID-19, I think is -- was very successful. So we will continue to find novel ways to get folks trained and get them up and running. What's really great is it's not a hard, high sales pitch to get them to use it. It's giving them -- showing them the value that Aquadex therapy provides. And the acceptance is really pretty quick and then getting them trained. I kind of wish we had 50 sales team and 50 clinical specialists, and we'd cover a lot more hospitals a lot quicker. But we're growing with the resources we have, and I think the team is executing very effectively.

Excellent. And then just on the pediatric side, 5 children's hospitals are using it, 6 or 7 have purchased it are now training. On the 5 that are using it, it is -- I know it's approved for pediatric patients greater than 20 kilograms. Any feedback from the hospitals? And I know you're also looking to get approval for pediatric patients less than 20 kilograms. Where is that in terms of trials? Are some of the physicians already using it and having success with pediatric patients less than 20 programs?

Well, physicians have the authority and the right to use any medical device that they deem necessary to help their patient. So they're not restricted by the label that we received from the FDA. The restriction is on us that we can't market it for any use off-label. So we only market it for the use in pediatrics 20 kilograms and above. There is a fair amount of usage, though, by physicians in treating patients under 20 kilograms. We initiated this pediatric registry, which we think is going to be significant to not only help physicians understand how it's being used, when it's being used, where it's being used, but also for us to gather the clinical data that we will need to then look at should we be pursuing or when should we be pursuing pediatrics under 20 kilograms. So that is not a hinder to the physicians to be able to utilize the product to help their patients. It's only a requirement we have in how we market the device.

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

Yes. It'd be premature for me to estimate when I think we'd be ready to submit an application to the FDA for that. But we are working on it. We are working on enhancements to help physicians how they're utilizing the product today. We have the registry that's going to help from a clinical standpoint. There are also physician-initiated clinical trials in pediatrics that will be helpful here. So it's -- clinical data is needed or how the product is used in our 20 kilograms, and we are working on that.

And at this time, there are no further questions. I would like to return the call back to management.

Well, I want to thank you for joining our second quarter 2020 conference call, and I wish you all a great day. Thanks.

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