John Erb - President and CEO Claudia Drayton - CFO.

Tom Gunderson - Piper Jeffery Jason Mills - Canaccord Genuity Suraj Kalia - Northland Securities Jan Wald - Benchmark Company Lin Yu - Cowen and Company.

Thank you. Before we get started, I would like to remark briefly about forward-looking statements.

Except for historical information mentioned during the conference call, statements made by the management of Sunshine Heart 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’s clinical studies do not meet their enrollment goals, meet their endpoints or otherwise fail that regulatory authorities do not accept the company’s application or approve the marketing of the C-Pulse System, the possibility that the company may be unable to raise the funds necessary for the development and commercialization of its products that the company may not be able to commercialize its products successfully in the EU 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 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 and 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.sunshineheart.com.

During this call, management will also discuss non-GAAP financial measures as defined by the SEC Regulation G. Reconciliations of these non-GAAP financial measures to the accompanied GAAP financial measures, are included in the company’s earnings press release and supplemental information.

In addition, a replay of the call is provided through a link on the Investor Relations section of the company’s website. With that said, I would now like to turn the call over to John Erb, Sunshine Heart’s President and Chief Executive Officer. Sir, you may proceed..

Thank you, operator. Good morning and welcome to Sunshine Heart’s fourth quarter 2015 conference call. With me today is Claudia Drayton, Sunshine Heart’s Chief Financial Officer. Following our remarks, we'll be happy to answer your questions.

Let me begin by stating that I am very excited to have formally assumed the full-time role of CEO here at Sunshine Heart. Over the past 90 days during my time as Interim CEO, I've had the chance to roll my sleeves, really good to know the team has build a broader and deeper understanding of the state of affairs here at Sunshine Heart.

First, I can tell you that I am impressed by the management team and employees at Sunshine Heart. They are talented, passionate and driven by the opportunity to help heart failure patients. Over the last 90 days, I've been focused on learning as much as I can and accomplishing the four primary objectives that I had as interim CEO.

Those objectives were one, finding a new CEO. Two, reducing the company's cash burn. Three, reviewing the COUNTER-HF clinical trial strategy and four, assessing the resources being allocated to the company's next generation product CP2. In terms of my first objective, I can honestly say that I did not have an initial desire to become CEO.

However, what I can tell you is that the more I dug in and learned about Sunshine's technology and the significance of how it will benefit the heart failure market, the more excited I became about the chance to help execute a strategy that realize its full potential of C-Pulse therapy and create significant shareholder value.

In terms of the second objective, we've made significant progress on slowing the cash burn. Claudia will provide financial summary in a moment. This is of course -- this of course has not solved all of our challenges, but it does give us more time to address our financial situation. I'll say more on this in a moment.

In terms of the last two objectives, the company's clinical strategy and R&D pipeline are clearly the two areas where I focus the majority of my time, reviewing our COUNTER-HF clinical strategy and assessing the progress of our next generation device.

In addition to meeting with our management team, I spent considerable time meeting directly with our engineers, clinical specialists, physicians and our clinical investigators.

I've learned a lot over the past 90 days and at this point I would summarize my thoughts into three main observations which are one, the clinical experience so far continues to give us confidence that extra-vascular counterpulsation therapy represents a significant opportunity for heart failure patients.

Two, the company's current clinical strategy is not working and will not get us where we need to be and three, not enough resources have been invested in our next generation fully implantable product. As I mentioned, I have not reached these conclusions in a vacuum.

I believe there is general consensus amongst our clinical and regulatory experts as well as many of our physician customers and clinical investigators on all three of these points.

After resuming enrollment in the COUNTER-HF clinical trial in the third quarter of last year, we stood behind our clinical investigators and their enthusiasm for enrolling patients in the trial. Our clinical investigators have been surprised at their difficulty in enrolling patients.

We've been mindful and diligent in our evaluation but it is clear to me that we need to make some changes in order to realize a significant potential C-Pulse therapy represents. Based on this we're announcing today that the company has stopped enrollment in the COUNTER-HF IDE trial and the OPTIONS-HF post-market study in Europe.

Let me be very clear, we are not stopping these clinical trials because we do not believe in the therapy, it is exactly the opposite. We very much believe in the potential of C-Pulse therapy.

However, we're taking these steps in order to ensure that we focus our precious resources on pursuing a more effective and efficient clinical strategy that will help patients, physicians and shareholders realize the full potential of this unique therapy as soon as possible.

In terms of next step, I'm working diligently with our team and our investigators to lock down the specifics on what are revised clinical and product strategy needs to be and while we are not in a position to share specifics with you today, we do realize that we need to determine and communicate more specifics with you as soon as possible.

As we work out the details, I can give you a high level sense of the basic tenants around our thinking and how best to revise our strategy. First, as I evaluated the enrollment progress of COUNTER-HF and heard from physicians and investigators, it quickly became apparent to me that the complexity of the current procedure was simply too invasive.

The need to cramp the patient's chest as well as the need for a long-term drive line or major inhibitors for patients. On top of that, there were also strong concerns around the clinical trial design.

Understanding this we had to acknowledge that we were in no position to drive adoption in Class III heart failure patients, which is what we believe is a key target population for C-Pulse therapy. I don't believe our efforts until now have been wasted. The company has learned a great deal over the past two years.

For instance, one of the key learning so far from these efforts is that we believe the optimal benefit from C-Pulse can be reached in the first six months of therapy. Thus we do not need a trial which lasts five years to demonstrate the efficacy of C-Pulse therapy.

We've also preserved early signals that demonstrate the potential for clinically, meaningful improvement in remodeling the heart, which translates to improvement in ejection fraction. Improvements in ejection fraction has been shown to correlate to improvement in long-term patient outcomes.

A shorter duration therapy will also limit the time of patient has a driveline thus increasing acceptance of the therapy while minimizing risk of infection. Based on these and other assumptions we believe the best way to revise our clinical strategy at this point is to pursue dual pass, a near term path and a longer term path.

The first clinical path involves optimizing and modifying our current surgical approach making it minimally invasive in order to enroll a short term clinical study to provide further evidence of recovery or restating, further demonstration of the benefits the CP1 becoming a short term therapy and demonstration that we can use a minimally invasive procedure to perform the implant.

The second clinical path involves accelerating the development of a fully implantable version, which we believe will be critical to driving the adoption of C-Pulse therapy. I fully realize that revising clinical strategies and modifying products is not easy and can often be complicated -- can be more complicated than anticipated.

But based on the in-depth look seen so far, I believe Sunshine Heart has the team in place and the capability to execute the strategy that creates significant shareholder value by gaining access to a larger part of the heart failure market. As I mentioned, in terms of general timing for the first clinical path, we're still working out those details.

But I am driving the team to have an improved clinical protocol before the end of the calendar year. I believe this is achievable as we will be reaching out to FDA shortly to begin discussions in a very transparent and efficient manner.

We anticipate the revised clinical strategy will get us to regulatory approval in a shorter timeframe than could been achieved with continuing the COUNTER HF trial. As for the timing of CP-2, we will not be in a position to begin first demand this year.

However, I believe that our revised clinical and product development pathway will actually position us to be able to commercialize a fully implantable version sooner than what would have been possible under the previous pathway.

We're also at the early stage -- early research stage with evaluating the recovery capabilities of counterpulsation and this neuromodulation effects. Many of you may be aware of the scientific investigation that our Chief Scientific Officer, Jim Georgakopoulos is conducting.

Based on some hemodynamic measurements, we have collected on C-Pulse patients the response seems to be indicative of some neuromodular effect.

As you know heart failure patients have elevated sympathetic drive, which results in fluid retention by the kidneys, increase susceptibility to erythemia and enhances constriction of blood vessels, the latter of which contributes to their poor functional capacity. I'm happy to announce, that we're beginning a study in collaboration with Dr.

Benjamin Levine, Dr. Kai Fu of the University of Texas, South Western. Dr. William Cornwell of Texas Health Resources Presbyterian Hospital and [Dr. Fi Win] of Dallas VA Medical Center where we're conducting a study that directly measures the effect of C-Pulse of sympathetic nerve activity. Dr. William and Dr.

Fu's lab specializes in techniques that directly measure activity from a sympathetic nerve and assess the impact of post-utility on baroreceptor stimulation. I realize that our clinical and product challenges are not the only pressing issues we need to address.

Let me now give you a sense of our current financial situation and what we're thinking in terms where we go from here. First, we ended 2015 with $23 million in cash. As I mentioned before, the team has been focused on reducing cash burn in order to extend our cash needs into the back half of the year.

However in full transparency, we know that we will need to raise additional capital in the next 6 to 12 months. In that regard we are actively exploring our financing options.

One of the benefits of extending our window out into the second half of the year is that it gives us time to optimize our strategy, communicate it with shareholders and establish near term milestones that you can use to track our progress.

I believe this will help us rebuild credibility with investors, which in turn will help us identify better financing options. At this point, I'll turn the call over to Claudia who can walk you through our Q4 financial results. Following that, I'll provide some closing comments before taking your questions..

Thanks John. Good morning, everyone. Turning to the P&L, we did not record any revenue during the fourth quarter of 2015. During the quarter, we enrolled 11 patients in COUNTER-HF, randomized five patients and implanted two patients. However, those implants were not eligible for reimbursement because they were not covered by their patient's insurance.

Operating expenses in the fourth quarter of 2015 totaled $6.4 million compared to $6.8 million in the fourth quarter of 2014. Operating expenses for the quarter reflected lower spending resulting from the consolidation of certain management positions.

Net loss from operations for the period was $6.6 million compared to a loss of $6.7 million for the fourth quarter of 2014. At the end of the fourth quarter we had $23.1 million in cash and cash equivalence and $8 million in short and long-term borrowings.

As we previously announced, in December 2015 we amended our $8 million debt facility with Silicon Valley Bank.

The amended agreement will placed the requirement that would raise $20 million in cash by the end of the first quarter of 2016 with our liquidity covenant that requires that we maintain cash and cash equivalents of at least eight times our monthly cash burn. For the remainder of 2016, we do not expect to generate revenue.

However, we also expect our operating expenses to meaningfully decline for the full year, reflecting the steps that we have taken to reduce our cash burn going forward and the impact of the revised clinical strategy that John discussed earlier. In terms of modeling 2016, Q2, Q3 and Q4 should reflect a lower cash burn.

In Q1 it will remain on the higher side primarily due to the timing of severance payment that were accrued for in Q4. Looking ahead, as we consider our financing options we're carefully analyzing our capital needs based on our revised clinical strategy. I will now turn the call back over to John..

Thanks Claudia. Before opening the line up for questions, let me provide a few closing comments. First, I realized that our clinical announcements today maybe frustrating to some of our shareholders who have supported and hung-in with the company over the past couple of years.

Making these kinds of decisions is never easy, but in assuming the role of CEO, my job is to make the tough decisions that will drive a strategy that can create shareholder value over the long term.

Our former clinical pathway was not working and while it was difficult to confront, we needed to have the strength, discipline and conviction to take one step back in order to take two steps forward. I also know that financial capital is scarce precious resource and while the CEO wears many hats I am ultimately a steward of the shareholder's capital.

Knowing that, I can assure you that we are going to be very disciplined in executing our strategy as effectively and efficiently as possible.

I can't change the past, but I took the role of CEO because I believe in the future of Sunshine Heart and speaking with physicians, I continue to be struck by their interest in C-Pulse therapy and their belief that when we get this right, C-Pulse therapy can help address a significant unmet medical need for many heart failure patients.

We know we have a lot of work ahead of us, but I believe we have the team in place to rise to the challenge and deliver results. I also know that we are a Show Me a Story.

Over the coming months, we will endeavor to be as transparent as we can be about laying out our roadmap and more importantly giving you the milestones that you can use to track our progress over the coming quarters. We know this will be critical for us to begin rebuilding credibility. With that, we're now here to try to answer your questions.

And I'll turn it to the operator..

[Operator Instructions] Our first question comes from the line of Tom Gunderson of Piper Jeffery. Your line is now open..

Hi. Good morning, everybody. So, John or maybe Claudia, looking over the capital situation, you went through this with some detail, but I am wondering if we can dig in a little bit more. My experience is that in a company your size, the main cash expenses are for personnel and in your case in particular, clinical trials.

You're stopping the two clinical trials for now or the registry on the clinical trial for now and you mentioned severance, but what did headcount go to from late November when you came on to March 3?.

I am going to give you [approximate] [ph] time because I don't have them precisely in front of me, but I think when I started including some contract employees we had were around 45. Today we're at about 38..

And does that feel right to John or does it go lower?.

Tom, what I need to do is finalize on this clinical strategy how quick we will need to reach out to our investigators and put this plan together. So I am not ready to commit that it's going to go a lot lower. I think a lot of the cash burn savings are besides the people other than the people that we've already reduced..

Got it. And then on the clinical trial side, you had stopped COUNTER-HF, but I assume the patients that have been implanted, continue to be followed.

Is that true and is there expense to them?.

That is true and yes, there is expense. So as part of that clinical staff that has been out helping to recruit patient will remain in place following patients..

Got it and then on the basic tenants that you described of clinical strategy going forward, you talked about near term and getting effects after six months in short term evaluation, did the patients then get weaned off the device or is it just that you're looking at six month results in order to ascertain the benefits of the device..

Well, the results we've seen to-date have indicated that a lot of these patients show a fair amount of benefit and recovery within that first six months. We have not completed the design of that shorter trial, but the goal is that the patient would not have the exposure of the driveline beyond 12 months.

Again we need to finalize that, but that’s what we're considering at this point. And by reducing that we believe we will have greater patient acceptance into the trial.

We also limit the risk that these patients currently have with the COUNTER HF protocol with having the risk of infection most of the infection we've seen has been longer term than 12 months..

And the longer driveline I assume..

That’s correct..

And then just a smaller question to finish up here, stopping two trials and then announcing that you're just starting another with University of Texas Southwest several physicians that you named, is that very expensive or is a that preliminary support of research they're already doing?.

It’s not expensive and it is preliminary and this is truly, when you talk about R&D, this is really our side. Jim Georgakopoulos has identified some real benefit that we're seeing. We need to understand it better and so we're going to the experts in the field to help us determine the value here..

Got it. That’s it for me, John. Thanks..

Thanks Tom..

Thank you. Our next question comes from Jason Mills of Canaccord Genuity. Your line is now open..

Good morning, folks. Good morning, John and Claudia.

How are you?.

Good morning..

Good morning..

So thank you for the transparency and John I appreciate you have a tough job to do and you're evaluating your options. Let’s start with the financing options. Obviously that can be most important at this point for investors so that you can move forward with your initiatives over the longer term.

So in spirit of transparency which you've engaged thus far in this call, could you give us at least a lay of the land as to what your financing options, what the financing options that are available to you are now and if not now as you -- since you reduced your cash burn, what you think maybe available to you over the next 12 months.

And I guess it’s part and parcel of that if M&A is an option you're serious considering as well, obviously you have some corporate partners already and they're engaged and just curious, what your thinking is on that John?.

Well let me start with the opportunity that we have to reduce the cash burn gives us a greater runway with existing cash and it’s been very, very important to the Board and the management team is to not go raise equity at this time. We wouldn’t want to be that dilutive.

So we’ve been able to push it out into the back half of the year, which again strategy is let’s put the new strategy in place. Let's get some milestones out there. It gives investors greater confidence in our ability to execute on those and expect the share price to improve and then take a look at what options are available.

As far as M&A, definitely we would not consider M&A for us to be acquired at this point by any means. I think there is huge upside value here for shareholders and our job is to grow that value and demonstrate it..

Fair enough. Thank you for that. You also mentioned the minimally invasive implant techniques the LVADs have been implanted via thoracotomy for quite some time now with [Harvard's H pads]. So it's always struck me somewhat curious that the C-Pulse has not been -- the thoracotomy has not been ubiquitous in the C-Pulse procedure.

So, I guess my question is how close are you to making that a standard implant technique what are the thoracotomy or other minimally invasive technique, how close are the company to refining that?.

I would say we’re very close. We will include that change in this next clinical protocol that we're working on. So it will be part of the future and near term..

So, 2016 right John, you talked about having a clinical trial protocol completed by the end of the year.

So that’s included in that?.

Yes, it is..

Great and then lastly for me on fully implantable, we've been fairly can speak within our writing that we thought that that was the future of the C-Pulse technology especially for Class III heart failure patients.

How do you think about the fully implantable version of C-Pulse in terms of its market opportunity relative to what you're terming now the short term C-Pulse, which would I suppose continue to have a drive line? How do you think about how the market segments over the longer term and thank you for taking the questions?.

Sure, there is no doubt that the fully implantable is the future of Sunshine Heart. That’s really the market that we're focused on and I think that we have some good development going on that’s going to get us there quicker than originally we thought we might be able to achieve.

So it’s important, its critical, it really gives us a much bigger play in the market or a larger piece of the market. So, that’s where we're headed..

John, if I could sneak a follow-up in, can you give us any details with respect to your development at this point on the fully implantable?.

I would not at this point. We're working on plans and as soon as we can, we will divulge those..

Fair enough, thanks guys..

Thank you. And our next question comes from Suraj Kalia of Northland Securities. Your line is now open..

Good morning, everyone.

Can you hear me, okay?.

Yes thanks, Suraj..

So John before I ask my questions, let me just thank you for -- you’ve been extremely transparent in the state of affairs at Sunshine and on your call and while appreciating it’s a tough transition. I do want to thank you for being completely transparent.

That having said John, first of all let me start out with the six months trial, I guess what I’m trying to understand John the six months is based on what data or what backup analysis led you all to believe that six month is the right timeframe? And I thought I heard about heart recovery.

So I guess what I’m trying to understand John is six months enough or am I complaining the issues here, any color would be great?.

Sure. I’m not saying that this trial will be focused on six months. We still are early in developing that trial and the protocol on working with our physicians and investigators to determine what it should be.

What I was referring to is that in looking at the feasibility study, looking at OPTIONS HF we've seen improvements in ejection fraction within the first six months of the patients being on the therapy. So if we're seeing that improvement the need to have a three, five, seven year trial is silly and that's the opportunity.

So I’m saying we have seen improvements. We need to further investigate it. We need to design a trial a new trial that has not been finalized and we will try to again once we get to that point we will provide that..

So I presume it’s pretty early right now to ask about whether this trial will be based on functional or physiologic markers understood. John, I presume you will stop this trial.

Have you already gone to the FDA and floated some of these ideas in terms of a short term trial and has there been any feedback from that front?.

We have had discussions with the FDA. First step was to notify them that we were stopping enrollment and to give them our pathway to continue to follow those patients that have been enrolled in the COUNTER-HF trial.

And then second we talked about in a skeleton and a bullet point kind of approach, our ideas about a follow-on trial not to the point that we gave them protocols or anything like that. We need to develop that yet, but we did get positive feedback from the FDA on the approach that we’re looking at..

And Finally John one last question and I’ll jump back. Actually two question and then I’ll hop back in queue, John what’s the status on the Medtronic’s wireless tech system..

The status basically we have done some testing. We think its viable product to be incorporated in our fully implantable device and we’re continuing down that. I’m not sure what other part of question you may have..

And I guess one question for Claudia, looks the current cash run Claudia pardon me if I missed that, you already mentioned that. Thank you for taking my questions..

Hi, Suraj we have not disclosed that at this point, the going forward cash burn rate..

Thank you..

But it will -- we're just saying that it will decline in Q2, Q3, Q4..

Thank you. And our next question comes from Jan Wald of Benchmark Company. Your line is now open..

Good morning, everyone. Good luck on the changes that you're making.

I guess a lot of my question have been answered, but one of the things I just trying to make sure I understood was in the first path where you're looking at a short duration implant and you said that in the old days without option to HF and there is a five-year study, is this -- did you think -- was that because of follow up and those kinds of things.

How do you think you're going to shrink the time with a shorter duration trial that's going to require less patients, shorter follow-up or the end points likely to be different.

What’s going to be different about the trial that you think you can shorten it?.

Well, again we are still in the process of developing what that trial is actually going to look like. Meeting with our investigators we had a very positive call last night with all the investigators in the COUNTER-HF trial and it was a very engaged call. They really threw out all kinds of ideas and really want this therapy.

So we're exciting about using those -- that input to finalize this protocol and develop it further. So, there is work to be done yet Jan. So I don’t really have a good answer to that question. As soon as we do, we certainly will let you guys know.

I think one of the main things is that we want to avoid the long-term requirement for the drive line until our fully implantable is available..

And do you think a lot of the time you're going to get is just in taking people to come into the trial. So it won't take as long to enroll. Is that when you think the primary benefit is going to be.

I can see what is going to be on the end may in follow-up, but do you think a lot of it is going to come from the front end?.

Right. We will -- we’re pretty positive about the fact of making it minimally invasive not having to as we’ve said crack the chest for a patient and not have a long-term drive line has appeal to a lot of patients that have actually been enrolled in the trial.

But there has been a lot that have said, maybe I don’t want to go to extent at this point in time, even though their physician may recommend it, it’s still a patient decision whether they want to enter the trial.

So by minimizing the length of time in the driveline and by reducing the invasiveness of the procedure, we feel very confident that enrollment will be quicker and I’m hesitant to use the work quick in that because it's a clinical trial, but it will be faster..

Just one last question on the fully implantable I realize that you're probably going to a process of figuring out what to do here, but in terms of resources you're going to require more resources there than before.

Could you talk a little bit about what you think that resource requirement is going to be for this fully implantable or is it too early for that as well?.

It's probably better for me to say it's too early as we're really looking at a different pathway for this. I think it's obviously engineering resources and outside expertise. We don’t need to try and reinvent the wheel and working with some of our partners more extensively is going to benefit us..

Okay. Thank you very much..

You’re welcome..

Thank you. Our next question comes from Lin Yu of Cowen and Company. Your line is now open..

Thanks John for taking the question. Just two quick one for me. In terms of implantable system, what work remains to be done to get to the point that you can have a first invent trial, just want to get some color on it..

Well, we’ve had successful animal work done down in Texas with Dr. Billy Cohn and it's worked well up to the 90 days in a cow, but the systems are a bit large yet to put to work well in a cow and forward to well in a human. There is a bit of work to be done.

So probably one of the key things we're looking at is minimizing the size a bit more and there is technology out there today. We all know how fast technology changes and we're seeing some of that in our ability to miniaturize some of the components of the fully implantable. So again there is engineering work to be done.

We want to work with our outside partners. We want to bring some of these available new technologies into the development process and end up with what we think will be a much better product..

All right. Got it. Just one last one for me, in terms of the design optimizing current surgical approach, what is involved, is it just approach tweak or it would involve the tweak that the current CP system and the timeline how long it would take to get this level work done. Thanks..

Sure, I don’t think it will take long. Again as we said, we want to include this minimally invasive approach in the protocol that we want to have approved before the end of the year. Now we really have to have the design finalized to be included in the submission study FDA.

So when you back that up a quarter at least, so that alone should tell you that we think we can get this all relatively quickly.

Again and I go back to my point that technology has changed rapidly and the ability to place a lead epicardial on the heart, which is one of the key features we need to be able to do that without the invasive surgery is available. We just need to incorporate it..

Okay. Thank you very much..

Welcome..

Thank you. And at this time I’m showing there no further participants in the queue. I would like to turn the call back to management for any closing remarks..

Okay. Thank you and thank you everyone of joining us today. As I mentioned, we have a lot of work ahead of this year, but I’m excited about the opportunity. Our next quarterly call is only two months away and we look forward to updating you on our progress. I hope you all have a great day. Thanks..

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may now disconnect. Everyone have a great day..