Scott Gordon - President, CORE IR John Erb - CEO and Chairman Claudia Drayton - CFO Jim Breidenstein - CCO.

Jeffrey Cohen - Ladenburg Thalmann.

Good morning and welcome to the CHF Solutions Earnings Conference Call for the Third Quarter ended September 30th, 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 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 Andrew and thank you for joining today's conference call to discuss CHF Solutions corporate developments and the financial results for the quarter ended September 30th, 2017.

With us today are John Erb, the company's CEO and Chairman of the Board; Claudia Drayton, the company's CFO; and Jim Breidenstein, the company's Chief Commercial Officer. At 8 AM Eastern Time today, CHF Solutions released financial results for the quarter ended September 30th, 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 not be able to raise the funds necessary for the development and commercialization of its products, that the company may not be able to commercialize the products successfully, 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 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.

John?.

Thank you, Scott, and good morning, everyone. Welcome to our third quarter 2017 earnings call and corporate update. We are very pleased with the results of our quarter. The results of our consistent execution of the strategy we implemented after closing on the acquisition of the Aquadex business in Q3 of 2016.

During the quarter, we made important progress on many fronts. First, we released -- we're pleased with the revenue growth of our Aquadex business. Revenue grew 21% in Q3 2017 over pro forma Q3 2016 and 11% over Q2 2017.

Revenue growth as a result of our focus on increasing the penetration in our largest hospital accounts by increasing utilization of the Aquadex FlexFlow system in multiple locations and clinical disciplines within each hospital and sales to new customers.

We are pleased with our revenue growth during Q3, particularly, because of our largest territory; the southeast was significantly impacted by the devastation of Hurricane Irma in early September. During the quarter, we hired and trained six new experienced sales representatives, increasing our direct U.S.

sales team to 10 sales territories from just four territories in Q2 of 2017. These six new sales representatives became active in their new territories in the last month of Q3. We look forward to their many contributions over the quarters to come.

In addition, during the quarter, we exhibited at two of the world's largest Heart Failure Society meetings with significant attention and lead generation, including the European Society of Cardiology Congress in Barcelona, Spain and the Heart Failure Society of America meeting in Dallas, Texas.

In September, we announced the initiation of our international distribution with the signing of a distribution agreement with one of the U.K.'s premier cardiovascular distributors.

Also in September, we held a Scientific Advisory Board, SAB meeting in Chicago with six leading -- opinion leading physicians participating four heart failure cardiologists and two nephrologists.

The purpose of the SAB meeting was to review and provide guidance on the protocol designs for two important clinical evaluations, a mechanistic study and a registry, which we anticipate initiating in early 2018. On the manufacturing front, our manufacturing implementation is going well.

During the quarter, we transitioned the manufacturing equipment from Baxter to our facility in Eden Prairie, Minnesota successfully commissioned the clean room and validation builds are underway. We are on schedule to begin building our own finished food inventory by year end.

We expect the in-house manufacturing capability to have a favorable impact on our gross margins as it will alleviate the markup over standard cost charged by Baxter for manufacturing product for us.

The timing and magnitude of gross margin improvements will depend upon exhausting our inventory of finished goods produced by Baxter and our volumes and manufacturing capacity utilization beginning in 2018.

Finally, as we announced recently, we received notification from the NASDAQ that the company is again compliant with all listing requirements and the listing matter has been closed.

Looking ahead, we continue to fine-tune growth strategies to optimize the significant opportunity to impact both improved clinical outcomes and healthcare cost reduction by giving healthcare providers an option to diuretics.

Our mission is to improve the quality of life for people suffering from fluid overload primarily associated with heart failure and related conditions.

We provide healthcare professionals with a sophisticated, yet easy to use mechanical pump filtration system to remove excess fluid in fluid overloaded heart failure patients and patients with related conditions.

We believe that our technology will provide a competitive advantage in the fluid management market by providing an alternative solution for decongestion and reducing the cost of care relative to other treatment alternatives. We continue to develop and refine our strategic focus to demonstrate a strong business model by driving revenue.

Growing revenue is the key metric employees, shareholders, and potential investors will use to judge our performance. In addition to revenue's contribution to funding operations, revenue growth is the most demonstrative metric to manifest a significant business turnaround. Management has identified five critical actions to drive revenue.

One is commercial execution; two is enhanced product offerings; three is demonstrate health economic advantages; four, provide important new clinical evidence; and five increased partnerships with key opinion leading physicians.

Number one, commercial execution strategy, we have allocated and planned to continue to allocate resources to build sales and marketing strength and grow the worldwide market for our Aquadex FlexFlow system.

In the third quarter of 2017, we increased our direct salesforce by six experienced employees and plan to further expand our direct salesforce in 2018. Our trained sales team is focused on sales penetration in large hospital accounts.

The Aquadex FlexFlow system can be used in large hospitals in multiple areas including the emergency department, the heart failure telemetry floor, the intensive care unit, and the coronary care unit.

In addition to expanding our direct salesforce, we are implementing high quality customer service support systems at technical servicing to increase support to customers.

We have also initiated international distribution and support for our products by entering into a new distribution and service provider agreement with APC cardiovascular Ltd., a distributor based in the United Kingdom. Number two, enhanced product offerings strategy.

We intend to develop products and product enhancements to improve performance and customer satisfaction. We have several projects currently underway to enhance product performance. We plan to introduce a new peripheral access catheter and enhance the functionality of the hematocrit sensor that is part of the Aquadex FlexFlow system console.

We also are working to identify or develop a diagnostic tool for physicians to use during an Aquapheresis therapy to more precisely determine the amount of excess fluid to be removed, the rate of ultrafiltration, and when to stop therapy. Number three, heath economic strategy.

We plan to support the organization of previously published clinical trial evidence that compares the healthcare cost impact of using ultrafiltration therapy versus diuretic therapy, primarily measuring hospital cost for patients admitted to the hospital and re-hospitalization of patients with fluid overload.

We plan to publish information on the budgetary impacts to hospitals that adopt the Aquadex FlexFlow system into their continuum [ph] of care when treating heart failure patients with fluid overload and whom diuretic therapy has failed. Number four, new clinical evidence strategy.

We plan to expand the body of clinical evidence for Aquapheresis and the Aquadex FlexFlow system to drive adoption and support reimbursement.

We plan to initiate an ultrafiltration mechanism of action clinical study to provide scientific evidence on how ultrafiltration effectively decongest patients without causing clinically significant harm to the kidneys.

We also plan to initiate a registry to build individual account evidence sets, identify use patterns, and attain customer feedback to support marketing claims regarding clinical efficacy, demonstrating weight reduction, reduce length of hospital stays, and reduce readmission rates. Number five, key opinion leaders' strategy.

We plan to partner with key opinion leaders to advance medical understanding of ultrafiltration as a therapy for treating fluid overload. We have recruited a Scientific Advisory Board comprised of six key opinion leading physicians to help us develop and implement both the mechanistic clinical study and the registry.

We are partnering with the Cardio Renal Society of America in a leadership role, increasing our involvement with the Heart Failure Society of America.

In addition we are working with several physicians that are implementing hospital observation unit use of the Aquadex FlexFlow system to provide outpatient care for patients that are fluid overload, but may not require hospitalization.

Before I turn the call over to Claudia, I would 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 who 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 decompensation 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 shown in randomized controlled clinical trials to remove more fluid than diuretics and to reduce repeat hospitalizations. I will now turn the call over to Claudia who can walk you through our Q3 2017 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 quarter was $957,000, a growth of 21% over the third quarter of 2016 on a pro forma basis and 11% on a sequential basis from the second quarter of 2017.

Sequential growth was driven mainly by growth in our top 20 accounts and from accounts that were reactivated in the last three quarters. The year-over-year growth was driven mainly by revenue from both reactivated accounts and from newly opened accounts.

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

As we mentioned previously, earlier in the year, we notified Baxter that they should not initiate new production for us after June 30th, 2017. We are currently in the process of starting up manufacturing activity in-house and we expect to start our own manufacturing during the fourth quarter of 2017.

Included in reported cost of sales are the start-up manufacturing costs related to this manufacturing transition. In addition we're in the process of buying up the remaining raw materials and finished goods inventory from Baxter.

We expect that a margin benefit from the manufacturing transition will begin to materialize in 2018 as we consume the Baxter manufacturer unit in volume -- and production volumes and efficiencies increase.

In terms of other operating expenses for the third quarter, they totaled $3 million, a decrease of about $1.4 million or 31% improvement over the same period last year.

The decrease in expenditures reflect lower clinical spending resulting from the announcement in 2016 that we were no longer enrolling patients in our C-Pulse related clinical studies, lower transaction cost associated with the acquisition of the Aquadex business in 2016 in our efforts -- in our continued efforts to consolidate and streamline activities in all -- all areas of the company partially offset by increased investment in the sales and marketing organization.

The net loss for the period was $2.8 million compared to a net loss of $3.9 million for the third quarter of 2016, a 20% improvement over from last year. Regarding our liquidity position our operating cash utilization for the next nine months of the year was $8.8 million, an improvement of 35% from the same period a year ago.

We ended the quarter with approximately$2.5 million in cash in cash equivalents and no debt. In terms of modeling Q4, we expect revenue to continue to accelerate and expect that our newly hired sales force and 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 sell through the existing inventory and prepare to begin our manufacturing in-house. Gross margins will also continue to include the startup costs associated with running our operations to successfully transition the manufacturing in-house.

Regarding operating expenses, we expect to make some modest investments in Q4 mainly to fine tune investments remaining Q3 in the field and in manufacturing operations. 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 will continue to provide you milestones to track our progress over the coming quarters. Operator, please open the call to questions..

Certainly. [Operator Instructions] And we have a question from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open..

Hi, John, Claudia and Jim.

Can you hear me okay?.

Yes, yes..

Yes..

Good morning, Jeff..

Good morning.

So, could you talk a little bit about number systems, number of facilities? Currently how that outlook looks from your perspective? And also could you give us any flavor as far as any outpatient settings as opposed to inpatient settings?.

Yes, sure. Jeff, good morning. This is Jim. The team is continuing to grow and add new systems and also add new accounts or new customers. Our main focus as you may recall from prior earnings calls is to drive deep account penetration in our existing database, our existing --just existing number of customers that we have out there.

So, we have -- still have approximately 500 systems deployed across the U.S. in nearly 300 different institutions across the country. In terms of the outpatient setting, we are focused currently on the inpatient settings. It is part of our overall account penetration strategy. We do feel that there's an opportunity for us in the future.

We're optimistic and enthused about it and we feel with the right research and the right healthcare economics, the market may expedite that for us in the future..

Okay, got it.

And could you talk more specifically about what floors or what critical areas of cardiac and hospitals where you're seeing commercial use in -- utilization? Can you talk a little bit about utilization trends at existing facilities?.

Yes, sure can Jeff. Thanks and a great question. One of the benefits of our technology is that it's portable. Number one so it can be used in different clinical settings in the hospital.

We are currently focused primarily in the heart failure setting and we're also being currently utilized in the post-operative care where patients fail -- have failed to continue to fail diuretics. But we're also can be used in the telemetry or stepped down units if you will and even in the emergency room or emergency departments.

And we're seeing utilization increase as the numbers reflect in all those departments where each individual institution is specializing or utilizing our technology..

Okay, got it.

And could you guys discuss a little bit about the manufacturing and the equipment transition and the validation process so that will be concluded in the fourth quarter or the first quarter and the ramifications upon margins, ramifications upon money spend? And could you also discuss the new catheter that you're talking about and will you be manufacturing that and what would the time frame be on that as well?.

Well, let me start off with the manufacturing transition from Baxter to our facility went very, very smoothly. It was really a matter of notifying Baxter to shut down production. They took two weeks basically to decommission equipment. Then we put it on trucks brought it, it's only about a 15-minute drive to our facility.

We set it up and began the commissioning process on our side. So it's been basically right on schedule. The schedule was basically to begin producing finished product in the fourth quarter and we will be definitely doing that. So we're on board there.

The inventory, we've actually purchased inventory from Baxter to take this into the first quarter of next year to make sure we had a cushion of finished goods to cover that transition. And as we begin to manufacture our product and put it into inventory in the fourth quarter we use up the Baxter as a first-in first-out process.

We use up the Baxter inventory first and then try to go through sometime beginning in the first quarter of 2018. And that's when we'll see the margin improvements basically because of the reduced cost of manufacturing again. So right on schedule and things have gone very, very well.

Got a great team that's been very, very efficient and effective in that transition. We actually have gone out and looked that off the shelf catheters basically catheters manufactured by others that may be able to improve the peripheral access for our system over the catheter that Baxter had been producing had been producing.

Basically the conclusion at this point after testing many catheters is that there's not a single catheter out there that we would say is better than the existing catheter. So, although there are certain situations in certain hospitals we will recommend the use of another manufacturer's peripheral access catheter.

We will also begin developing our own new catheter that we are just now in the kind of the design phase. The catheter that Baxter has been producing is been around for a several years. There's a lot of new technology that's been introduced into catheter production and we would utilize into new technologies and a new design.

I would say that it's probably going to be a ballpark six months before we have our new proprietary catheter available. In the meantime, we will continue to provide tips and tricks to our accounts how to utilize our existing catheter, will also support accounts that we want to use another manufacturers catheter.

So, the idea from our standpoint is let's get the customer the best possible product we can so they can have a successful therapy as possible whether that's our catheter, somebody else's catheter. Fortunately for the company, we make most of the money on the disposable blood circuit.

So being able to use another catheter is not costly to us but actually aging our benefit because we'll utilize more blood circuits with peripheral catheters. Is that makes sense..

Absolutely.

Do you expect that you'll be manufacturing your catheters six months or more or it'll be outsourced?.

It will be outsourced. The expense of extrusion -- extruders' plastic, the science it's involved in that we're not catheter specialists. We're console pump and blood circuit specialists and we can go to outsource that makes catheters all day long and it'll be much cheaper and much more effective..

Got it. So, back to margins, John. So, this quarter or Q2, Q3 and maybe a little bit in Q4 would be kind of the bottoming out if you will.

And are you still pretty comfortable on the margin expansion upwards of 10% or 20% over the next year or two?.

Yes, this is Claudia. Jeff, it will be into Q1 because we will need to consume that Baxter inventory. So, in essence, you can imagine we're doubling up the cost because we're paying for that -- we paid for that inventory from Baxter and we have our own team internally also in manufacturing.

So, Q4 -- Q1 should be better than Q4, and it should continue to improve from there as volumes go up and we begin to see the benefits of our own inventory production versus using the Baxter inventory. So, I think Q4 is a bottom -- may be Q1, we need to see exactly how that works..

But Jeff we're very confident. The gross margins are going to improve considerably as we produce our own product and put it into inventory.

I think we actually will -- I guess I should be careful here, but I think we'll come up with a standard cost that's actually less than what the Baxter's standard cost was that they started with and then put their mark-up on it. So, I'm feeling really good about our capability in manufacturing this product and improve margins..

Got it. Next question, as far as our distribution channels, you have one set in the U.K., I believe you did have already a few installs there prior to the agreement.

Are there other territories up for grabs or other territories that you're looking into, perhaps Western Europe for some partnerships for some new channels?.

We absolutely are doing that. Again, our goal here is to get back to those customers that have used Aquadex in the past that lost access to it when Baxter basically was closing down that business.

We've had customers, users, physicians, hospital systems in Singapore, Germany, France, Italy, Spain that have been in contact with us saying we'd like to get this therapy back and reengaged and being able to utilize it.

How do we do that? We basically have to pace ourselves because it's expensive to get out there, get distribution agreements put in place. We're working on that.

And I do believe that we will, first and foremost, meet the current needs of customers that have been treating patients, that want to continue to treat patients, and then we'll grow the business from there internationally as those distributors come online.

They joint not just to treat existing patients or to provide product to existing customers, but to grow their business and thereby grows it for us..

Perfect. Okay. Lastly -- last question I promise.

Could you discuss studies and registries which you mentioned, what will we see and when within the next zero or four quarters?.

Yes, I would expect the registry and the mechanistic study to begin enrolling in the first quarter of 2018. We're right now working through the protocols for both of those with our Scientific Advisory Board. They've been hugely helpful.

We feel much more confident using -- having their clinical input into what those results should be, what the end point should be and we're kind of fine-tuning that now. So, I think they'll both be initiated in the first quarter..

Perfect. Those are for me. Thanks for taking the questions..

Thank you, Jeff..

[Operator Instructions] I'm showing no further questions at this time. So, with that said, I'd like to turn the call back over to CEO of CHF Solutions, Mr. John Erb for any closing remarks..

Thank you, Andrew. I really just want to say thank you very much for joining our third quarter conference call and I wish you all really very good day. Thank you..

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