John Erb - Chief Executive Officer and Chairman Claudia Drayton - Chief Financial Officer.

Jeffery Cohen - Ladenburg Thalmann.

Good day, ladies and gentlemen and welcome to the Sunshine Heart First Quarter 2017 Earnings Conference Call.

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 risk associated with the possibility that the company maybe unable to raise the funds necessary for the development and commercialization of its products that the company may not be able to commercialize its product successfully, that the company may not be able to successfully integrate acquired businesses that the company may not realize anticipated synergies and benefits from acquired businesses 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 and those discussions regarding risk factors as well as 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.

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 Chief Executive Officer and Chairman of the Board..

Thank you, operator. We are very excited about our revitalized and growing Aquadex business. We are increasing the number of hospitals using the Aquadex FlexFlow system. Revenues are growing double-digits with 21% revenue growth in Q1 2017 over Q4 2016. There is increased use of Aquadex in hospital observation units and outpatient clinics.

We have successfully completed our financing to fund operations through Q1 of 2018 and we have received NASDAQ compliance to termination last week.

Let me remind you that the Aquadex FlexFlow system consists of three primary components the console pump, which has a $28,500 list price, a one-time use disposable blood circuit with a list price of $900 and a small dual-lumen peripheral catheter that simultaneously withdraws blood and returns filtered blood to the patient’s arm.

Aquadex is a unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload. Ultrafiltration is a process that removes water and salt from a patient in a manner similar to how the kidneys function.

Fluid overload is a condition that is prevalent in heart failure patients, which could lead to de-compensation, resulting in lengthy and costly hospitalizations. There are over 1 million patients hospitalized per year in the U.S. for acute heart failure and approximately 90% of these patients present with symptoms of fluid overload.

Aquadex has been showing randomized controlled clinical trials to remove more fluid than diuretics and to reduce both the length of stay in hospitals and repeat hospitalizations.

Sunshine Heart acquired the Aquadex business from Baxter International approximately 9 months ago, although there is a large install base of Aquadex consoles with over 500 consoles owned by over 300 U.S. hospitals. At the time of the acquisition, there were only about 55 hospitals that were providing the therapy to their patients.

By the end of Q4 of 2016, we had reengaged and increased the number of U.S. hospitals ordering Aqadex products and services to 95 hospitals. Today, we have 135 U.S. hospitals that have ordered Aquadex product and services. Claudia will discuss the details of our Q1 financial results in a moment.

But I am pleased to let you know we saw 21% increase in revenue for product and services in Q1 2017 over Q4 2016. I am also very pleased with the April 24 addition of our new Chief Commercial Officer, Mr. Jim Breidenstein. Prior to joining Sunshine Heart, Mr.

Breidenstein was President and Chief Operating Officer of Surgical Theater, a medical virtual reality software company. Prior to Surgical Theater, Mr.

Breidenstein was Senior Vice President of Sales at Cardiovascular Systems Incorporated, a company focused on developing and commercializing innovative solutions for treating peripheral and coronary vascular disease, and Director of Sales at Kpyhon, a startup company specializing in spine surgical instruments that was acquired by Medronic in 2007.

While at CSI and Kyphon, Mr. Breidenstein was instrumental in helping these companies achieve rapid revenue growth and increased market valuation. Looking ahead, our growth strategies remain focused on four main areas.

The first area of focus is to continue to reengage and revitalize the many hospitals that have already invested in the Aquadex therapy, but have been dormant for the past few years due to the lack of sales effort to provide service and training.

We are renewing a commitment to these hospitals to call on them regularly and provide the services and training necessary to ensure quality patient care. The second area of focus will be providing our customers with better diagnostic tools to enable them to improve patient selection and optimize fluid removal.

We have identified two FDA market cleared [indiscernible] products that can provide important hemodynamic data to our physicians and nurses. We are also exploring the potential utilization of an approved device that measures pulmonary artery pressure to help manage heart failure and fluid levels.

The third area of focus is expanding our use of the Aquadex FlexFlow System in other areas within the hospital environment. Heart failure patients with fluid overload can be treated in the emergency department on the hospital telemetry floor and then the intensive care unit.

Aquadex can also manage fluid in patients recovering from cardiac surgery and in burn units. The fourth area of focus is to generate economic evidence to help optimize reimbursement to drive increased utilization in hospital observation units and outpatient clinics.

We are collaborating with several hospital systems to support physician and hospital initiated clinical evaluations treating fluid overload at heart failure patients in the outpatients setting.

We see significant opportunity for growth of the Aquadex product line in the large underserved heart failure market and we have identified six key strategic areas. First is existing installed base. There is a large established customer base to reengage and revitalize in over 300 U.S.

hospitals that have already implemented the aquapheresis therapy at some point in the past. Number two is the under-penetrated in-patient market. There is a large under-penetrated in-patient market with over a million U.S. hospital admissions each year for heart failure and over 5,000 U.S. hospitals treating heart failure patients.

The third area is underserved outpatient market. There is a significant and growing need for outpatient treatment to prevent hospital readmissions due to fluid overload.

Hospitals are under financial pressure to reduce the length of stay of the heart failure admission and yet need to avoid the costly Medicare penalties associated or assessed with the heart failure patient who is readmitted within 30 days of the initial hospital discharge. Fourth area is the untapped large o-U.S. market.

There is a market for the Aquadex system outside the U.S. that is significant and we have not yet engaged these efforts. Five is the differentiated technology we represent. Aquadex FlexFlow system is very differentiated technology, with published clinical trials showing many clinical benefits over the current standard of care IV diuretics.

And sixth, hospital economic drivers, we are well aligned with the market dynamics created by the Affordable Care Act that is forcing hospitals to reduce heart failure hospital length of stay while reducing readmission rates.

Before I turn the call over to Claudia, I would like to update you on two important issues; our successful capital raise and the status of our NASDAQ listing. I will start with our NASDAQ listing.

On May 4, 2017, we have received formal notification from NASDAQ that we have regained compliance with all criteria for continued listing on the NASDAQ capital market including the minimum stockholders equity requirement and that the NASDAQ timing matter – I am sorry the NASDAQ listing matter has been closed.

In terms of capital, we have raised gross proceeds of approximately $9.2 million before deducting underwriters’ discounts and commissions and offering expenses in the successful underwritten public equity offering in April, which includes the full exercise of the underwriters’ over-allotment option to purchase additional shares and warrants.

With this financing Sunshine Heart expects to have enough cash to fund our operations through Q1 of 2018. I will now turn the call over to Claudia, who can walk you through our Q1 results financial details, following that I will provide some closing comments..

Thanks John, good morning everyone. Turning to the P&L revenue from our newly acquired Aquadex business was $901,000 for the quarter, a sequential growth of 21% over the fourth quarter of 2016. The growth was driven mainly from a 23.5% sequential growth in the sale of circuit sets which make up 85% to 90% of our sales on any given period.

Also, during the period our tech services revenue grew sequentially by about 71% as more and more customers send us their consoles for recalibration services. Our cost of sales reflects a priceless state for inventory on their manufacturing and services agreement we signed Baxter at the time of acquisition.

Under this pricing structure, we expect our standard margins to be around 60% or a bit higher. Included in cost of sales are also startup manufacturing costs related to our planned manufacturing transition from Baxter.

In terms of other operating expenses for the first quarter a total of $2.7 million, a decrease of about $1.9 million from the same period last year, the decrease in expenditures reflects lower clinical spending resulting from the announcement in the first quarter of 2016 that we were no longer enrolling patients in our C-Pulse related clinical studies from the consolidation and streamlining of activities in all areas of the company and from reduced stock compensation expense.

In terms of non-operating expenses, they reflect an unrealized gain of approximately $1.4 million related to the change in fair value of the warrants that were issued in connection with our July and November equity raises.

Those warrants were classified as liability on our balance sheet as of December 31, 2016 and required fair market valuation on each of reporting period, mostly included in our non-operating expense is a charge to earnings for $67,000 related to the incremental fair value of the new warrants provided to investors as part of the Q1 warrant exchange.

I will say more about this transaction in a moment. Continuing down the P&L, our net loss for the period was $940,000 compared to a net loss of $4.8 million for the first quarter of 2016.

Now on to the warrant exercise agreement, as we have previously disclosed during Q1, we enter into a warrant exercise agreement with the investor that was holding the majority of those warrants to induce the cash exercise of the warrants. The motivation for this agreement was two-fold.

First, to encourage the cash exercise of the warrants as a weight secure short-term financing. And second to remove the warrant liability from our balance sheet and avoid future fair value adjustments and volatility in our P&L.

As a result of this exchange agreement, we have received approximately $1.8 million in net cash proceeds from the warrant exercises and we issued approximately 868,000 replacement warrants. These warrants are considered equity instruments based on their terms and do not contain re-pricing or under-dilution clauses that trigger variable accounting.

In terms of our cash position, we ended the quarter with approximately $1.6 million in cash and cash equivalents and no debt. Our operating cash utilization improved by 71% from the same quarter a year ago.

During the quarter in addition to the warrant exercises for cash, we closed on the second close of the November financing after we obtained shareholder approval for the November equity financings. Net proceeds to the company were approximately $0.2 million.

Subsequent to quarter end as John mentioned earlier, on April 24, 2017, we closed an underwritten public equity offering that provided us with net proceeds of approximately $8.1 million. In terms of modeling 2017, we expect revenue to accelerate during the year and expect that our efforts to revitalize the business will begin to payoff.

Regarding our operating expenses, we expect to make some modest investments in our Aquadex business mainly to augment their presence in the field. I will now turn the call back over to John..

Thank you, Claudia. Before opening the phone line for questions, let me reiterate that I continued to be very optimistic about our future. We know we have a lot of work ahead of us, but I believe we are headed in the right strategic direction. The entire management team is rising to the challenges and we are focused on delivering results.

We will continue to provide you with milestones to track our progress over the coming quarters.

Operator, are there any questions?.

[Operator Instructions] Our first question is from the line of Jeffery Cohen of Ladenburg Thalmann. Your line is open..

Hi John and Claudia. Thanks for taking my questions..

Good morning Jeff..

So could you talk about some of your selling channels specific over the next 1 year or 2 years and in particular outside U.S., what’s current revenue outside the U.S.

and what you planned for OUS as far as your short-term and near-term revenue drivers?.

Sure. First to address the challenges we have in front of us in the U.S. There is tremendous amount of opportunity just bringing back online the over 300 hospitals that have already committed to the therapy. We had a relatively small sales force at this time with eight reps now.

We plan to increase that to 12 reps here in the next couple of months and really with bringing Jim Breidenstein on-board as our Chief Commercial Officer really putting that strategy together to accelerate the utilization within those hospitals and the penetration into additional areas in the hospital.

So it’s – we are in a good position that we are not out hold calling trying to open new accounts. We have a wealth of accounts in front of us that we believe we just need to get back in and support these folks. On the OUS side today our revenue was very small. We have a couple of accounts in the UK and an account in Germany that are utilizing.

But basically for the last 2.5 years Baxter abundant that business totally and they have not been supported. We will look back to grow the OUS market in the second half of this year. I was at the European Society of Cardiologists Meeting in Paris a week ago.

And I was very surprised and pleased to hear the number of presentations that were made around ultrafiltration and the value of ultrafiltration. And it made it clear to me that we should probably step our strategy – step-up our strategy to get into the o-U.S. markets.

I think it’s just going to be a matter of having the resources to do that and having the bandwidth, but they will be important step for us..

Okay, got it.

And Claudia or John, how should we think about OpEx for 2017, do you expect it to be fairly in level with Q1 levels coming in at around $11,000 annual basis or will that be increasing from Q1 number?.

We expect some modest increase as we continue to ramp up our distribution channel. We want to invest in the sales force and getting our presence out there, but nothing dramatic or out of line..

Okay, got it.

And lastly John, could you talk about some of the clinical work that you are involved with thus far as far as some studies and trials for this year that are planned?.

number one, wanting to avoid these heart failure patient admissions if possible and number two, to make sure that they manage the length of stay under the DRG within the hospital, but have the outpatient or observation unit available to them to treat these patients to avoid the readmission..

Perfect. Thanks for taking the questions..

You are very welcome..

Thank you. And I am not showing any further questions. I would like to turn the call back over to Mr. John Erb for any further remarks..

Very good. Thank you. If there are no questions, I want to thank you all for joining our first quarter conference call and wish you all a very good day. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a good day..