Scott Gordon - President of CORE IR John Erb - CEO and Chairman of the Board Claudia Drayton - CFO.

Jeffrey Cohen - Ladenburg Thalmann.

Good morning and welcome to the CHF Solutions Earnings Conference Call for the Second Quarter ended June 30, 2017. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Participants of this call are advised that the audio of this conference is being broadcast live over the internet and is also being recorded for playback purposes. A transcript and 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 Scott Gordon, President of CORE IR. The Company's Investor Relations firm, please go ahead sir..

Thank you Amanda and thank you for joining today's conference call to discuss CHF Solutions corporate developments and the financial results for the second quarter ended June 30, 2017. With us today are John Erb, the company's CEO and Chairman of the Board and Claudia Drayton, the company's CFO.

At 8 AM Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2017. If you have not received CHF Solutions' earnings release, please visit the investors page at www.chs-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 unequal to raise the funds necessary for the development and commercialization of its products 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 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 a discussion of forward-looking statement in such sections are incorporated by reference in this call and are readily available on the company's website at www.chs-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 Scott and good morning everyone. Welcome to our second quarter 2017 earnings call and corporate update. We are very excited about our revitalized and growing Aquadex business. During the quarter we made important progress on many fronts.

Revenue grew 18% in Q2 2017 over pro-forma Q2 2016 as we focus on increasing the penetration in our largest hospital accounts by increasing utilization of the Aquadex FlexFlow system in multiple locations within each hospital.

During the quarter, we announced that Stanford University received approval from the FDA for an IDE clinical trial using the Aquadex FlexFlow system to treat pediatric patients.

In addition during the quarter, we changed our company name from Sunshine Heart Incorporated to CHF Solutions Incorporated and received positive feedback from our customers who related very positive memories and brand recognition from the original launch and growth of the Aquadex FlexFlow system by CHF Solutions in 2003 to 2009.

We also announced the hiring of Mr. Jim Breidenstein as Chief Commercial Officer to begin building a US direct sales force. We increased our direct sales team from four reps in Q2 of 2017 to 10 reps today.

On the manufacturing front, we recommissioned our own manufacturing clean room in June of 2017 and transferred manufacturing equipment from Baxter at the end of July of 2017. We are currently in the process of installing and validating the equipment in our Eden Prairie facility.

We expect the manufacturing transfer to ultimately have a favorable impact on our gross margins by alleviating the markup over standard cost charged by Baxter for manufacturing product for us. The timing and magnitude of gross margin improvements will depend upon the manufacturing capacity utilization. With Mr.

Breidenstein's experience and leadership, we have modified our sales strategy to focus on key accounts and drive penetration to increase utilization. This strategy is designed to achieve greater efficiency in our sales efforts by sales reps spending more time in the larger key accounts and less time on the road trying to touch many accounts.

Many of the hospital accounts that went dormant during the year Baxter owned the Aquadex business, did so because they did not receive service and training. To revitalize this business we are focused on bringing the accounts back to use in the aquapheresis therapy by providing excellent service and training.

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 in the past few years due to lack of sales support or training.

Now with increased sales team, we can expand the number of key hospital accounts and will work to increase penetration by our commitment to calling on them regularly and providing the service 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 several different technologies that are FDA market cleared that can provide important hemodynamic data to our physicians and nurses.

We are planning to initiate a clinical evaluation of one or more of these technologies in the near future. Deeper account penetration is the third area of focus, by expanding the use of the Aquadex FlexFlow system into other clinical 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 help manage fluid overload in patients who have failed diuretic therapy recovering from cardiac surgery.

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 physicians and hospital initiated clinical evaluations treating fluid overloaded in heart failure patients in the outpatient setting. We see significant opportunity for growth at the Aquadex product line in the large under-served heart failure market identified in six key strategic areas.

Number one is the existing installed base. There is a large established customer base to reengage in revitalized and over 300 US hospitals that have already implemented the aquapheresis therapy at some point in the past. Number two is the underpenetrated inpatient market.

There is a large underpenetrated inpatient market with over 1 million US hospital admissions each year for heart failure and over 5,000 US hospitals treating heart failure patients. Number three is the 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, but yet need to avoid the costly Medicare penalties assessed when a heart failure patient is readmitted within 30 days of the initial hospital discharge. Number four is the untapped large OUS market.

There is a market for the Aquadex system outside the US that is significant and we have only recently begun to reengage these efforts. Number five is our differentiated technology, Aquadex FlexFlow system is a very differentiated technology with published clinical trials showing many clinical benefits over the current standard of care, IV diuretics.

And number 6 is the hospital economic drivers. We are well aligned with the market dynamics created by the Affordable Care Act that is forcing hospitals to reduce the heart failure patient length of stay while reducing readmission rates.

Before I turn the call over to Claudia, I'd like to 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 set 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 how have failed diuretic therapy. 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 can lead to de-compensation resulting in lengthy and costly hospitalizations. Again, there are over 1 million patients hospitalized per year in the US for acute heart failure and approximately 90% of these patients present with symptoms of fluid overload.

Aquadex has been shown in randomized controlled clinical trials to remove more fluid than diuretics and to reduce both the length of stay in hospitals and repeat hospitalizations. I will now turn the call over to Claudia who can walk you through our Q2 2017 results and financial details.

Following that, I will provide some closing comments and will open the call to questions..

Thanks, John. Good morning, everyone. Turning to the P&L, revenue for the quarter was $864,000, a growth of 18% over the second quarter of 2016 on a pro forma basis. The growth was driven mainly by a 22% growth in the sales of circuit sets and consoles, which make up about 85% to 90% of our sales on any given period.

Our cost of sales reflect the prices paid for inventory under manufacturing and services agreement we signed with Baxter at the time of acquisition. Under this pricing structure, our standard margins are around the mid-60s.

As John mentioned previously, during Q2, we notified Baxter that they should not initiate new production for us after June 30, 2017. We are currently in the process of transitioning the manufacturing activities in house and will continue to buy the remaining inventory held by Baxter.

Included in cost of sales are startup manufacturing costs related to this manufacturing transition. We expect to start our own manufacturing during the fourth quarter of 2017 and expect that the margin benefits from this transition will begin to materialize in 2018, as production volumes and efficiencies increase.

In terms of other operating expenses for the second quarter, they totaled 2.7 million, a decrease of about 1.2 million or 31% improvement from the same period last year.

The decrease in expenditures reflects our continued efforts to consolidate and streamline activities in all areas of the company, 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, offset by increased investment in our sales and marketing organizations.

The net loss for the period was 2.5 million compared to a net loss of 4.2 million for the second quarter of 2016, a 40% improvement from last year. Regarding our cash position, as previously announced, in April 2017, we closed on an unwritten public offering for net proceeds of approximately $8 million.

Our operating cash utilization for the first six months of the year was 5.7 million, an improvement of 38% from the same period a year ago. We ended the quarter with approximately 5.6 million in cash and cash equivalents and no debt.

In terms of modeling the remainder of 2017, we expect revenue to accelerate during the year and expect that our efforts to revitalize the business will begin to payoff. Regarding our gross margins, they will continue to reflect the inventory pricing paid to Baxter, as we burn the existing inventory and prepare to begin our manufacturing in-house.

Gross margins will also continue to include the startup cost associating - associated with running our operations to successfully transition the manufacturing in-house. Regarding our operating expenses, we expect to make some modest investments the remainder of 2017 in our Aquadex business, mainly to augment our presence in the field.

I will now turn the call back over to John..

Thank you, Claudia. Before opening the call for questions, let me reiterate that we continue to be very optimistic about our future. We know we have a lot of work ahead of us, but we 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'll continue to provide you milestones to track our progress over the coming quarters. Operator, please open the call for questions..

[Operator Instructions] Our first question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead. Your line is open..

So just a number of questions I wanted to run through. Claudia based on your previous comments, you would anticipate that margins for the balance of the year will remain down in the, call it, 20% or 30% range prior to an uptick in the beginning of 2018.

Is that how we should think about it?.

Yes..

Okay. And John, could you tell us any further information about the number of activated units [indiscernible] you had 140.

Did those numbers change very much during the second quarter?.

Yeah. They've gone up a bit, but again as I mentioned in my comments, we're really refocusing and rather than continue to strive to touch everybody, we're looking at penetration in some of the larger accounts. So I would really define it now as probably in the 90, 95 accounts that our reps are focused in to build the sales volumes.

So last quarter, we really were looking at getting out and identifying which accounts would - we could reengage and revitalize and get going. This second quarter, we really identified some key ones and now spending more time in those accounts to increase penetration into different areas of the hospital..

And so you increased the size of the sales force during the quarter, you're now up to 10 in total, is that correct? Does that include any territory managers?.

We do have one Director of Sales. With 10, I think that's the most we would ask for that individual to handle. When we get into 2018 and look to add additional territories, we will add probably a regional manager, but at this point, through 2017, we'll go with the 10 and with the one Director of Sales..

And Claudia on the financials, the number of shares, I guess, were fairly accurate on their estimate for the second quarter, roughly about 0.5 million or so.

What would you estimate on Q3 and Q4? Are you using approximately 9 million for the third quarter and 10 million for the fourth quarter, give an opinion about that?.

You said 9 million for the third quarter?.

Yes..

Well, we have 12 million outstanding at the end of June and really the answer, how much will be outstanding will depend on a number of warrants that get exercised..

Okay.

So are you saying, we'd be better off closer to 12 million, then 10 million for the second half?.

Yeah. You must have been using weighted average shares and I think that was appropriate for Q2, but for Q3, I would use around 12 million. Yeah. The preferred conversion and, that happened at the end of Q2..

Okay.

And lastly, John, can you extrapolate a little bit upon the announcement about the Stanford University IDE trial? Is that still yet on clinical trials? Is this protocol locked down and what kind of primary endpoints and number of patients do you expect in follow-up periods?.

Yeah. I believe it was a relatively small number of patients, I believe it was 30 patients in a couple of different sites. And it's really just to provide the evidence that the Aquadex FlexFlow device can safely and effectively help manage fluid in these neonatals and babies basically.

Actually because of the gentleness of the fact that you can also filtrate at such low blood volumes, that's why it's being utilized in pediatrics..

Okay.

Do you have any expectations as far as data presented or published and what kind of time period?.

Are you talking about the Stanford study?.

Yes..

Yeah. I have to leave that to Stanford to make those pronouncements..

[Operator Instructions] I would now like to turn the call back over to John Erb for any closing remarks..

Well, I want to thank you all for joining our second quarter conference call and I wish you all a very good day. Thank you..

Thank you for joining our second quarter conference call. And we wish you all a good day..